Remember the good old days when you could write-off 100% your new SUV or Truck under the 179 deduction? That was the wild wild west (pre-2006), and then we all became quickly familiar with the $25,000 cap on writing off these gas guzzling vehicles.
However, the game has changed with possibly an unintended loophole under the new Tax Cuts and Jobs Act (TCJA). The silver bullet: Bonus Depreciation.
A little history lesson first
Section 179 allows certain assets to be deducted in one year if a section 179 election is made, but places a maximum deduction of $25,000 on what it classifies as sport utility vehicles (any four-wheeled passenger automobile between 6,000 and 14,000 pounds). This deduction was formerly known as the Hummer Deduction as business owners flocked to buy large SUVs as soon as it was enacted. However, most large SUVs cost a lot more than $25,000, so the benefit was limited.
In order to jumpstart current investment, the government will at times enact rules that speed up depreciation. Two such rules are found in Sections 179 and 168(k) of the Internal Revenue code.
That’s where Section 168(k) steps in and is referred to as Bonus Depreciation! In years past, Section 168(k) allowed SUV purchasers to write off 50% of the value of their new vehicle over and above the $25,000 Section 179 deduction.
This meant that if a business owner purchased a Tesla Model X (weighing over 6,000lbs) for $100,000 before September 27, 2017, the first year depreciation would be $62,500.00.
2017 SUV/Truck Purchase (new off the lot)
|Remaining basis under MACRS||$37,500|
|Total 1st Year write-off||$62,500 + actual expenses|
The total write-off in 2017 is $62,500, plus actual expenses (gas, fuel, repairs & maintenance). The rest of the expense would then be depreciated following MACRS going forward. That is a pretty big incentive for a business owner to invest in an SUV, but it gets better.
The Big News under new legislation
Late last year, when the TCJA was signed into law, bonus depreciation was increased to 100%, AND it is allowed on new or used equipment purchases (which a SUV/Truck falls under). Now, under 168(k)(6)(A) this allows you to write-off 100% of the SUV or Truck purchase (assuming it is 100% business use). You heard me, right … 100%!
2018 SUV/Truck Purchase (new or used)
|Remaining basis under MACRS||zero|
|Total 1st Year write-off||$100,000 + actual expenses|
This means that a business owner can deduct 100% of the cost of a new SUV or Truck (with less than a 6ft bed), and it’s all through the ‘back door’ of Bonus Deprecation.
A few cautionary points
Remember to keep in mind that you need to substantiate the business use percentage. In the examples above, it was assumed the business owner could show 100% business use. Historically the best method to prove your business use is through a mileage log. Many business owners think that when they go to the ‘actual method’ they can roll down the window and throw out the ‘mileage log’- wrong. Make sure you can prove the business use versus the personal use of your SUV or Truck.
Also, keep in mind that the Section 179 expense can only be taken up to the amount of profit in your business. For example, in the scenario above, if you had $20,000 in profit, you could only take $20,000 in Section 179 expense (not the entire $25,000).
However, the bonus depreciation amount is NOT limited by profit. Thus, you could take an additional $80,000 loss in your business and deduct against other income on your 1040 (presuming you had basis, it wasn’t a hobby and had active participation, just to name a few).
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Business Owner’s Guide to Financial Freedom- What Wall Street Isn’t Telling You”, and “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com. [Written in collaboration with Deven Munns, Attorney, KKOS- Rexburg, Idaho]