2012 Practical Tax Planning: Business Vehicles

November 29, 2012Comments Off on 2012 Practical Tax Planning: Business Vehicles

Do you need a new or replacement vehicle? To achieve any purchase benefit from a vehicle this year, you need (before midnight on December 31) to both own the vehicle, and have placed the vehicle in service for your business.

Ready to take the plunge? Here are how tax matters are handled for the various vehicles you may be looking at.

Convert Personal Vehicles to Business Use. Here’s a simply strategy that costs you nothing but can produce solid deductions. Do you and/or your spouse have a personal vehicle that you purchased new? If so, consider converting that personal vehicle to business use before December 31, 2012, to qualify it for 50 percent bonus depreciation, which is

  • unlimited on qualifying SUVs and crossover vehicles with a gross vehicle weight rating (GVWR) of more than 6,000 pounds
  • limited to $11,060 on cars with curb weights of 6,000 pounds or less; and
  • limited to $11,260 on SUVs, crossover vehicles, and pickup trucks that do not have a GVWR greater than 6,000 pounds.

Sell Loss-Deduction Vehicles. Every business vehicle you or your corporation sells gives rise to gains and losses when sold to a third party. This is true for both IRS-mileage-rate vehicles and actual-expense-method vehicles. Ask yourself: if I sold this vehicle today, what would be my gain or loss? If you purchased the vehicle, it works like this:

  1. The original purchase price is your beginning basis.
  2. You allocate beginning basis to business and personal based on your percentage of use.
  3. Depreciation reduces your business basis.
  4. Depreciation comes from either the depreciation tables or the IRS mileage rates.

When you sell (or your corporation sells) the business vehicle, you compare net business sales proceeds with adjusted business basis to find your gain or loss. If you have a gain, trade in the vehicle or otherwise do a Section 1031 exchange (that is, a trade-in) to defer the taxes to the next vehicle. If you have a loss, sell now. And by selling we do not mean trade-in, sell the vehicle and then replace it at a later time to avoid an involuntary exchange.

Do not give your children old Business Cars. Where is your old business car? Is your teenager driving it? Does this car or another of your vehicles have a big tax loss embedded in it? If so, take the vehicle and sell it to a third party so that you have a deductible loss. Your loss deduction depends on your percentage of business use – that’s one reason to sell this vehicle now. The longer you let your teenager use it, the smaller your business percentage becomes. Before doing anything, run the numbers to make sure that you have a tax-deductible loss on the sale.

Buy a New SUV or Crossover. Before midnight on December 31, 2012, buy and place in service a new SUV or crossover vehicle that the manufacturer classifies as a truck and that has a Gross Vehicle Weight Rating (GVWR) of 6,001 pounds or more. This gives you three big benefits:

  • Section 179 expensing of up to $25,000
  • 50 percent bonus depreciation
  • No luxury limits on vehicle depreciation deductions

To ensure compliance with the “placed in service” rule, drive the vehicle at least one business mile before midnight on December 31, 2012. In other words, you want to both own and drive the vehicle to ensure that it qualifies for the big deductions.

Buy a Used SUV or Crossover. The used SUV or crossover vehicle with a GVWR of 6,001 pounds or more does not qualify for bonus depreciation. Bonus depreciation on vehicles applies to new vehicles only. That said, you can still get a big deduction because the used qualifying SUV or crossover vehicle qualifies for Section 179 expensing of up to $25,000 on the business cost. And then, on top of the $25,000, you deduct either 20 percent or 5 percent MACRS depreciation. The 5 percent applies when you place in service more than 40 percent of your personal property assets in the last three months of your taxable year.

Buy a New or Used Pickup. If you or your corporation buys and places in service before midnight on December 31, 2012, a qualifying pickup truck (new or used), you may deduct up to $139,000 of its cost ($139,000 is the 2012 limit for expensing of all Section 179 assets placed in service during the year). To qualify for Section 179 expensing, the pickup truck must have

  • a GVWR of more than 6,000 pounds; and
  • a cargo area (commonly called a “bed”) of at least six feet in interior length that is not easily accessible from the passenger compartment.

Buy a New or Used Qualifying Van. To qualify for expensing of up to $139,000, a new or used van must
have a GVWR of more than 6,000 pounds

  • fully enclose the driver compartment and load-carrying area
  • not have seating behind the driver’s seat
  • have no body section that protrudes more than 30 inches ahead of the leading edge of the windshield.

If your van passes the GVWR test but fails one of the other qualifying tests, the law deems it an SUV. Again, that’s not bad. It’s eligible for expensing of up to $25,000, and if it’s new, it’s also eligible for bonus depreciation.

Buy a New Car. In addition to the luxury limited depreciation, you or your corporation can claim up to $8,000 in bonus depreciation on a new car purchased and placed in service before midnight on December 31, 2012. Here’s how this works: You add the $8,000 in bonus depreciation to the $3,060 luxury limit, for a 2012 limit of $11,060. To get to this limit, you can use a combination of Section 179 expensing and depreciation. You reduce the $11,060 limit by personal use.

Buy a New or Used Business Motor Home. If you have been thinking about buying a motor home to transport yourself to conventions and other business activities, this could be a good year for it. Both new and used business motor homes with a GVWR of more than 14,000 pounds qualify for expensing of up to $139,000 of the business cost.

About author:

Darrel serves as the Executive Director of Darrel Whitehead CPAs, an accounting practice performing tax, accounting, and administrative services. Beginning his career at Arthur Andersen, Darrel moved on to a regional CPA Firm, Singer Lewak in business management developing expertise in taxation and managing the business affairs of high profile clients in the music and entertainment industries.

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