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Impact on taxes of buying a new car as business expense?

jbloggs 9,643 4,515 September 27, 2011 at 06:33 AM
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I have an LLC setup and work on a 1099 basis. I'm currently looking at buying a new car that would go as a business expense. The price of the car will be around $35k.

My understanding is that for 2011, 100% of the car purchase price can be deducted as business expense. I'm still looking into confirming this unless someone who already knows can confirm.

Scenario 1:
If I finance 100% of the 35K, would only the payments made in 2011 be allowed to be deducted as business expense or can you still deduct the whole 35K?

Scenario 2:
If I paid $5K cash (out of pocket) and financed $30K, would the amount deducted on the taxes be $5k + the payments made in 2011 or the whole 35K?

Is there anything else I need to be aware of when buying a car for Business?

Thanks in advance for any input provided.

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#2
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#3
Well heres what i can help you with... note this is all just information i have gathered while looking around for my own personal situation.

First things first, from what i have been reading the vehicle must be titled in the corporate name, in some states you can register the vehicle personally (which would give you the option to personally insure vs paying for commercial insurance) however they say that insurance companies can get out of paying you for some reason that way (i didnt completely understand it, something to do with since its a personal policy the business is not payout eligible or something).

Business use of the vehicle must be over 50% or it doesnt qualify for anything.

Second, the only way to can deduct the full amount of the purchase price of the vehicle is if the GVWR is over 6000lbs, in that case you take the standard 25000 deduction for heavy trucks and the rest is covered by this years 100% bonus depreciation which will let you write the rest of it off (Note from what i read it is unlikely that the 100% bonus depreciation will continue past this year.)

For vehicles weighing under 6000, the max amount you can deduct including bonus depreciation is somewhere around 11,000... so im assuming your car is not going to make the cut here.

If your still reading, you must keep detailed logs of all use of the vehicle so that it can be verified that the vehicle was used 100% for business, any personal use of the vehicle must be subtracted from the business portion and only the remaining business percentage can be written off. For example, you drive your car 100 miles a year, 90 for business and 10 personal, you can only deduct 90% of the purchase price.

There are all sorts of complicated rules on top of this too, such as recapture, if you sell it before i think 5 years which is normal deduction period for vehicles you will owe taxes on something,, i didnt completely understand this...the article i read just said, plan on never selling the vehicle.

Anyways, if you want to read more look up section 179 on vehicles.
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#4
Quote from mykah89 View Post :
Well heres what i can help you with... note this is all just information i have gathered while looking around for my own personal situation.

First things first, from what i have been reading the vehicle must be titled in the corporate name, in some states you can register the vehicle personally (which would give you the option to personally insure vs paying for commercial insurance) however they say that insurance companies can get out of paying you for some reason that way (i didnt completely understand it, something to do with since its a personal policy the business is not payout eligible or something).

Business use of the vehicle must be over 50% or it doesnt qualify for anything.

Second, the only way to can deduct the full amount of the purchase price of the vehicle is if the GVWR is over 6000lbs, in that case you take the standard 25000 deduction for heavy trucks and the rest is covered by this years 100% bonus depreciation which will let you write the rest of it off (Note from what i read it is unlikely that the 100% bonus depreciation will continue past this year.)

For vehicles weighing under 6000, the max amount you can deduct including bonus depreciation is somewhere around 11,000... so im assuming your car is not going to make the cut here.

If your still reading, you must keep detailed logs of all use of the vehicle so that it can be verified that the vehicle was used 100% for business, any personal use of the vehicle must be subtracted from the business portion and only the remaining business percentage can be written off. For example, you drive your car 100 miles a year, 90 for business and 10 personal, you can only deduct 90% of the purchase price.

There are all sorts of complicated rules on top of this too, such as recapture, if you sell it before i think 5 years which is normal deduction period for vehicles you will owe taxes on something,, i didnt completely understand this...the article i read just said, plan on never selling the vehicle.

Anyways, if you want to read more look up section 179 on vehicles.
Most of this is good information and correct. The 179 deduction plus bonus depreciation for 2011 is $11,060 for a non-qualifying vehicle.

Form 2106 will work you through the depreciation of the vehicle.
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#5
Quote from mykah89 View Post :
Well heres what i can help you with... note this is all just information i have gathered while looking around for my own personal situation.

First things first, from what i have been reading the vehicle must be titled in the corporate name, in some states you can register the vehicle personally (which would give you the option to personally insure vs paying for commercial insurance) however they say that insurance companies can get out of paying you for some reason that way (i didnt completely understand it, something to do with since its a personal policy the business is not payout eligible or something).

Business use of the vehicle must be over 50% or it doesnt qualify for anything.

Second, the only way to can deduct the full amount of the purchase price of the vehicle is if the GVWR is over 6000lbs, in that case you take the standard 25000 deduction for heavy trucks and the rest is covered by this years 100% bonus depreciation which will let you write the rest of it off (Note from what i read it is unlikely that the 100% bonus depreciation will continue past this year.)

For vehicles weighing under 6000, the max amount you can deduct including bonus depreciation is somewhere around 11,000... so im assuming your car is not going to make the cut here.

If your still reading, you must keep detailed logs of all use of the vehicle so that it can be verified that the vehicle was used 100% for business, any personal use of the vehicle must be subtracted from the business portion and only the remaining business percentage can be written off. For example, you drive your car 100 miles a year, 90 for business and 10 personal, you can only deduct 90% of the purchase price.

There are all sorts of complicated rules on top of this too, such as recapture, if you sell it before i think 5 years which is normal deduction period for vehicles you will owe taxes on something,, i didnt completely understand this...the article i read just said, plan on never selling the vehicle.

Anyways, if you want to read more look up section 179 on vehicles.
Thank you all so much. This is great info.

The vehicle I'm intending to purchase is the Honda Pilot EX-L (4365 LBS).

How do these deductions get affected based on financing vs some down payment & financing?
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#6
Sure, i dont believe the deductions are affected at all with financing.

However, keep in mind if you decide to purchase the vehicle through the business, the bonus depreciation and deduction will be limited to the first year you put the vehicle in service...

What im saying is if you went out and purchased this vehicle between tomorrow and december and put it in service this year, you would be able to deduct up to 11,060 (that being 100% business use) this year only. You would not be able to depreciate (write off any depreciation) it any further for the next 5-7 years..

It gets tricky when you finance though too, because you can write off a portion of the interest you pay (based on the percentage of vehicle used for business) as far as i know... as well as gas, maintenance etc (also based on the business use percentage). Keep in mind though that if you itemize the expenses to write off, you are not eligible for business use mileage rate deduction... it is one or the other.

To me, this simply came out as not being worth it, in my opinion if you are going to buy a passenger vehicle... (vehicle < 6000lbs) you are better off just buying it personally and documenting + deducting the mileage used for business than having to deal with all of the other crap involved.

Anyways, keep in mind im not an accountant or anything.. this is just crap that i came across when investigating buying a business use vehicle.




Quote from jbloggs View Post :
Thank you all so much. This is great info.

The vehicle I'm intending to purchase is the Honda Pilot EX-L (4365 LBS).

How do these deductions get affected based on financing vs some down payment & financing?
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#7
Quote from mykah89 View Post :

What im saying is if you went out and purchased this vehicle between tomorrow and december and put it in service this year, you would be able to deduct up to 11,060 (that being 100% business use) this year only. You would not be able to depreciate (write off any depreciation) it any further for the next 5-7 years..
.
This isn't accurate. It's governed by Section 280F and the bonus for 2011 has no effect on future year depreciations other than your adjusted basis.

Here are the limits:
Year 1: $11,060 ($3,060 limit + Bonus of $8,000)
Year 2: $4,900
Year 3: $2,950
Year 4 until auto is completely depreciated: $1,775

Here are the %
Year 1: 20%
Year 2: 32%
Year 3: 19.20%
Year 4: 11.52%
Year 5: 11.52%
Year 6: 5.76%

After year 6 you can take the $1,775 limit until the auto is fully depreciated.

You must take the lower of the limit or Depreciation %. The exception being year 1 where you get an $8,000 bonus over the limit.
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#8
Thanks for correcting me, i read for days and still couldn't come up with that information.

So how does that work with a vehicle over the GVWR of 6000?

You cant depreciate anymore because you do it all in the first year, correct?

Quote from PiratesSayARRR View Post :
This isn't accurate. It's governed by Section 280F and the bonus for 2011 has no effect on future year depreciations other than your adjusted basis.

Here are the limits:
Year 1: $11,060 ($3,060 limit + Bonus of $8,000)
Year 2: $4,900
Year 3: $2,950
Year 4 until auto is completely depreciated: $1,775

Here are the %
Year 1: 20%
Year 2: 32%
Year 3: 19.20%
Year 4: 11.52%
Year 5: 11.52%
Year 6: 5.76%

After year 6 you can take the $1,775 limit until the auto is fully depreciated.

You must take the lower of the limit or Depreciation %. The exception being year 1 where you get an $8,000 bonus over the limit.
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#9
Quote from mykah89 View Post :
Thanks for correcting me, i read for days and still couldn't come up with that information.

So how does that work with a vehicle over the GVWR of 6000?

You cant depreciate anymore because you do it all in the first year, correct?
There is nothing left to depreciate...if you sell the car you will have some recapture items though (Section 1245). Depreciation is just recovering the cost over a longer period of time...the idea is matching the expense to the revenues it generates. Because you are recovering the cost over a longer period you should look at the present value.
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#10
How long do you intend to keep this car? If not for at least 6 years, consider a business lease.
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#11
Quote from wmelnick View Post :
How long do you intend to keep this car? If not for at least 6 years, consider a business lease.
The only reason I need to buy a another car is because the last one I bought in 1998 (it was 2 years old at the time) just broke down on me couple weeks ago and the cost of repair is too much to justify. So in short, I intend to keep it at least 6 years, most likely a lot more. Big Grin
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#12
All this assuming 100% business use of vehicle.

If i decide to purchase a used vehicle weighing > 6000 lbs for say $30,000 which qualifies for this years section 179 adjustment of 25,000....it is not eligible for the bonus depreciation however since it is a used vehicle.

I would be able to write 25,000 off of my income for this year, and then i would be able to depreciate the rest percentage wise over the next few years, correct?

Also if that is correct, whats to stop someone from "over paying" for a used vehicle for write off purposes... For example, i find a buyer looking to sell their used 2010 Chevy Tahoe, they want 30k for it... i pay 30k for it and report i paid 35k for it, then i could depreciate an extra 5k over the remaining years? (Not saying i would just curious how thats handled.)

Also, how is sales tax handled with business vehicle purchases? Is that also eligible to be written off?


Edit: Also sorry to semi thread jack OP.

Quote from PiratesSayARRR View Post :
There is nothing left to depreciate...if you sell the car
you will have some recapture items though (Section 1245). Depreciation is just recovering the cost over a longer period of time...the idea is matching the expense to the revenues it generates. Because you are recovering the cost over a longer period you should look at the present value.
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#13
Quote from mykah89 View Post :
All this assuming 100% business use of vehicle.

If i decide to purchase a used vehicle weighing > 6000 lbs for say $30,000 which qualifies for this years section 179 adjustment of 25,000....it is not eligible for the bonus depreciation however since it is a used vehicle. It applies to SUV type vehicles over 6,000 lbs

I would be able to write 25,000 off of my income for this year, and then i would be able to depreciate the rest percentage wise over the next few years, correct? Correct

Also if that is correct, whats to stop someone from "over paying" for a used vehicle for write off purposes... For example, i find a buyer looking to sell their used 2010 Chevy Tahoe, they want 30k for it... i pay 30k for it and report i paid 35k for it, then i could depreciate an extra 5k over the remaining years? (Not saying i would just curious how thats handled.) There is nothing to stop someone committing fraud, it can, does and will continue to happen. It doesn't mean you should do it though.

Also, how is sales tax handled with business vehicle purchases? Is that also eligible to be written off? Sales Tax becomes part of the basis of the asset. So if you bought a truck over 6,000lbs or Van or SUV it would be Sales Price + Tax = Basis of Asset. In 2009 you were able to write off the tax immediately.


Edit: Also sorry to semi thread jack OP.
See Comments above.

Also for Trucks and Vans the depreciation limits are slightly higher than for passenger vehicles:

For 2011:
Year 1: $3,260 (unless new then it is $11,260)
Year 2: $5,200
Year 3: $3,150
Year 4 and after: $1,875
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#14
Thanks, i wasn't condoning fraud, i was just curious if it was a "we take your word on how much you paid for it" thing, or if there was a concrete method which was used to determine the price.

I am glad that you mentioned basis, as that was my next line of questioning...

Assume this year i purchase a qualifying used 179 SUV for say 30,000.. for simplicities sake, assume 10% sales tax of 3000.

My cost basis would be 33000 assuming 100% business use, i put this vehicle into service this year and i can write off 25000 as per section 179, which leaves the remaining 8000 to depreciate through years 2-however many years it takes to depreciate.

Year 1- 25000 + 3,260
Year 2- <5200

So it will be completely depreciated by the end of year 2.

Am i correct so far?

(Ignoring recapture for the time being)
Now, how do i calculate reduction of my cost basis...or rather how do i reduce it. I guess my confusion is, although the purchase price of the vehicle has been depreciated... say in year three i decide that i'm not going to be in business and longer and i want/need to sell the vehicle. What is my basis in the asset going to be?

I read about the SMR (standard mileage rate) which supposedly had depreciation built in?(but we already depreciated the vehicle?). Or alternatively the actual expense method (gas, insurance, registration, tires etc). However, i dont understand how that works in reducing cost basis.

Also, i appreciate you taking the time to inform/look in to this stuff for me.




Quote from PiratesSayARRR View Post :
See Comments above.

Also for Trucks and Vans the depreciation limits are slightly higher than for passenger vehicles:

For 2011:
Year 1: $3,260 (unless new then it is $11,260)
Year 2: $5,200
Year 3: $3,150
Year 4 and after: $1,875
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Quote from mykah89 View Post :
Thanks, i wasn't condoning fraud, i was just curious if it was a "we take your word on how much you paid for it" thing, or if there was a concrete method which was used to determine the price. But you are more than willing to claim more than you paid for it...that would be fraud. It's pretty cut and dry.

I am glad that you mentioned basis, as that was my next line of questioning...

Assume this year i purchase a qualifying used 179 SUV for say 30,000.. for simplicities sake, assume 10% sales tax of 3000.

My cost basis would be 33000 assuming 100% business use, i put this vehicle into service this year and i can write off 25000 as per section 179, which leaves the remaining 8000 to depreciate through years 2-however many years it takes to depreciate.

Year 1- 25000 + 3,260
Year 2- <5200

So it will be completely depreciated by the end of year 2.

Am i correct so far?

(Ignoring recapture for the time being)
Now, how do i calculate reduction of my cost basis...or rather how do i reduce it. I guess my confusion is, although the purchase price of the vehicle has been depreciated... say in year three i decide that i'm not going to be in business and longer and i want/need to sell the vehicle. What is my basis in the asset going to be?

I read about the SMR (standard mileage rate) which supposedly had depreciation built in?(but we already depreciated the vehicle?). Or alternatively the actual expense method (gas, insurance, registration, tires etc). However, i dont understand how that works in reducing cost basis.

Also, i appreciate you taking the time to inform/look in to this stuff for me.

I'm fairly certain for year one you would only get the 179 not both.

So it would look like following:

Year 1: $25,000 Adjusted Basis: $8,000
Year 2: $5,200 Adjusted Basis: $2,800
Year 3: $2,800 Adjusted Basis: $0

Your basis is $0 since you fully depreciated the asset. It no longer has any book value. When you make the disposition of an asset it is the Amt Realized (Sale - Selling Costs) + Basis (Which was $33,000) + Improvements - Depreciation. Since you full depreciated the asset you are going to be recapturing the Amount Realized.

Your cost basis has been reduced to zero since you completed depreciated the asset. The mileage would come into play if you purchased a cheaper automobile, because it is still subject to the limits on depreciation. There are also some rules about when you can use the mileage deduction (like you can't take a 179 deduction).
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