End of Year Tax Planning - Automobiles

If you plan on purchasing an auto in the coming weeks, I recommend you schedule your end of year tax planning phone call as quickly as possible - discussing specifics is essential for an automobile purchase.

First things first - the auto must be owned and driven with at least one business prior to the end of the calendar year to ensure compliance with the “placed in service” rule. As a result, autos on backorder will qualify next year, but not this year.

1. Buy a New or Used SUV, Crossover Vehicle, or Van

Let’s say that on or before December 31, 2021, you or your corporation buys and places in service a new or used 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 newly purchased vehicle gives you four big benefits:

1. The ability to elect bonus depreciation of 100 percent (thanks to the Tax Cuts and Jobs Act)

2. The ability to select Section 179 expensing of up to $26,200

3. MACRS depreciation using the five-year table

4. No luxury limits on vehicle depreciation deductions

Example. On or before December 31, 2021, you buy and place in service a qualifying used $50,000 SUV for which you can claim 90 percent business use. Your business cost is $45,000 (90 percent x $50,000). Your maximum write-off for 2021 is $45,000.

2. Buy a New or Used Pickup

If you or your corporation buys and places in service a qualifying pickup truck (new or used) on or before December 31, 2021, then this newly purchased vehicle gives you four big benefits:

1. Bonus depreciation of up to 100 percent

2. Section 179 expensing of up to $1,050,000

3. MACRS depreciation using the five-year table

4. No luxury limits on vehicle depreciation deductions

To qualify for full 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.

Short bed. If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, tax law classifies it as an SUV. That’s not bad. The vehicle is still eligible for either expensing of up to the $26,200 SUV expensing limit or 100 percent bonus depreciation.

Not buying an a new auto? Here are a couple of other interesting things to consider:

1. Take Back Your Child’s or Spouse’s Car and Sell It

We know—this sounds horrible. But stay with us.

What did you do with your old business car? Do you still have it? Is your child driving it? Or is your spouse using it as a personal car?

We ask because that old business vehicle could have a big tax loss embedded in it. If so, your strategy is easy: sell the vehicle to a third party before December 31 so you have a tax-deductible loss this year.

Your loss deduction depends on your percentage of business use. That’s one reason to sell this vehicle now: the longer you let your spouse or teenager use it, the smaller your business percentage becomes and the less tax benefit you receive.

2. Cash In on Past Vehicle Trade-Ins

In the past (before 2018), when you traded vehicles in, you pushed your old business basis to the replacement vehicle under the old Section 1031 tax-deferred exchange rules. (But remember, this rule doesn’t apply any longer to Section 1031 exchanges of vehicles or other personal property occurring after December 31, 2017.)

Regardless of whether you used IRS mileage rates or the actual-expense method for deducting your business vehicles, you could still find a big deduction here.

Check out how Sam finds a $27,000 tax-loss deduction on his existing business car. Sam has been in business for 11 years, during which he:

• converted his original personal car (car one) to business use;

• then traded in the converted car for a new business car (car two);

• then traded in car two for a replacement business car (car three); and

• then traded in car three for another replacement business car (car four), which he is driving today.

During the 11 years Sam has been in business, he has owned four cars. Further, he deducted each of his cars using IRS standard mileage rates.

If Sam sells his mileage-rate car today, he realizes a tax loss of $27,000. The loss is the accumulation of 11 years of car activity, during which Sam never cashed out because he always traded cars. (This was before he knew anything about gain or loss.)

Further, Sam thought his use of IRS mileage rates was the end of it—nothing more to think about (wrong thinking here, too).

Because the trades occurred before 2018, they were Section 1031 exchanges and so deferred the tax results to the next vehicle. IRS mileage rates contain a depreciation component. That’s one possible reason Sam unknowingly accumulated his big deduction.

To get a mental picture of how this one sale produces a cash cow, consider this: when Sam sells car four, he is really selling four cars—because the old Section 1031 exchange rules added the old basis of each vehicle to the replacement vehicle’s basis.

Examine your car for this possible loss deduction. Have you been trading business cars? If so, your tax loss deduction could be big!