You should know the IRS’s tax rules
Click here to review the best trucks of 2021, because it might just be worth your while for your business to buy a truck or SUV for tax purposes. There are a few things you should take note of first, however. These include the USA’s tax-deduction rule for vehicles, what Section 179 of the Internal Revenue Code entails for any car that has a gross vehicle weight of between 6,000 pounds and 14,000 pounds, and how to avoid depreciation recapture.
You should also be aware of which vehicles actually qualify for this type of tax incentive; because of the weight requirements, this would normally be a full-size truck or big SUV, not something light like a coupe or crossover.
Purchasing Vs Leasing
When should a business purchase a vehicle and when should it lease it instead? The general tendency is for large businesses to lease in order to avoid the administrative burden of having to deal with inventory management. This can be true if they run a large fleet of vehicles.
Small businesses tend to rather finance our buy outright. Keep in mind that small businesses are audited and screened and if your small business only brings in $35,000 per year, buying a truck or SUV with an MSRP of $85,000 over four years will probably set off alarm bells at the IRS.
Depreciation Recapture – And Avoiding It
Here, it’s also important to understand depreciation recapture. This is what the IRS calls their method of collecting income tax on a taxpayer’s gain upon selling an asset – provided this asset was an offset to the taxpayer’s ordinary income by way of depreciation.
Avoiding depreciation capture is, of course, an argument in favor of leasing. The rental installments can still be expensed under your business name. Once the lease period is over, you simply return the vehicle. The benefits are numerous:
- You conserve capital. You did not spend a large amount upfront to acquire the vehicle.
- You prevent losses. You suffer no loss when you sell the vehicle as you otherwise would have when selling a depreciating asset.
- Maximum tax write-off. This is due to having written off 100 percent of the rental installments.
- You avoid obsolescence. In the end, you don’t have an obsolete, old vehicle to deal with.
- Positive cashflow. As long as the vehicle was an asset that actually generated revenues for your business, having written off the costs of acquiring and using the vehicle would have generated a positive cash flow, bolstering your business’s financial performance.
Doing Vehicle Tax Deduction Right
Remember, there are certain rules. The proportion of the write-off depends on the proportion of the vehicle’s business use and because it is basically impossible to use a vehicle 100 percent for business, you’re unlikely to be able to deduct 100 percent of its value.
So you have to keep a mileage log – if the business use is 70 percent, there will be a 70 percent deduction/depreciation schedule. Also, the vehicle must be bought new from a dealer. Up to $25,900 up-front depreciation is allowed for by the IRS and more than 50 percent of the miles driven must be for business purposes.
Vehicles That Qualify
Remember, only vehicles with a gross weight of more than 6,000 pounds qualify and you have to keep in mind that there might be models within the ranges below that fall below the threshold. Always check the vehicle’s gross weight.
Although some of the SUVs listed below weigh less than 6,000 pounds, all that’s important is that their gross vehicle weight should exceed 6,000 pounds. Currently, the standard mileage rate allowed by the IRS for expensing vehicles that fall under the 6,000-pound limit is 56 cents per mile (for business driving only). The list of over-6,000-pound SUVs includes the following:
- Mercedes-Benz G-Class and GLS-Class
- Audi Q7 3.0T Premium
- Buick Enclave
- Chevrolet Suburban
- Lincoln Navigator
- Lexus LX570
- Cadillac Escalade and Escalade ESV
- BMW X5
- Land Rover Range Rover
- Jeep Grand Cherokee
- Ford Expedition and Expedition EL
- Toyota Land Cruiser
- Porsche Cayenne
These trucks also qualify, regardless of which engine options or drivetrain configurations you select at purchase time, or whether it is the top or base model:
- Chevrolet Silverado 1500, 2500HD, and 3500 HD
- Ford F-150, F-250, F-350, and F-450
- GMC Sierra 1500, 2500HD, and 3500HD
- Ram 1500, 2500, and 3500
- Nissan Titan
It’s a lot to take in, but do some additional research and talk to your dealership. They have an incentive to sell you a truck or SUV and know what taxes you can claim on such business expenses.
You can depreciate over 90 percent of an SUV over four years for business use in comparison with a sedan that won’t get much over 30 percent. Keep in mind that you can deduct based on the cost of operating your vehicle if you prefer not to base it on mileage – but you can only choose one.
You might be surprised how much you can gain by writing off the expenses allowable according to tax laws when you buy 6,000-pound vehicles under your business.