September 24,
2003
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*********READ THIS
FIRST*********
The SUV Tax Deduction has been radically
changed and reduced - READ HERE
*******************************
HEY SMALL-BUSINESS OWNERS: How'd you like to use pretax
dollars to buy an SUV or pickup?
Thanks to the 2003 Tax Act, many small businesses can
instantly deduct up to $100,000 worth of new and preowned equipment in
the year it's first placed in service ($102,000 for 2004 after adjusting
for inflation). The new $100,000 allowance is for tax years beginning in
2003 through 2005. The name of this generous break is the Section 179
depreciation deduction, and it can reduce both your federal income
tax and self-employment tax bills. (You may get a state-tax deduction
too.) Without it, you'd have to depreciate most business equipment over
five to seven years. (Before the 2003 Act, the maximum Section 179
write-off for tax years beginning in 2003 and beyond was a mere
$25,000.)
New and preowned "heavy" SUVs, pickups, and vans used
more than 50% for business purposes are eligible for the $100,000
Section 179 write-off (as is, for that matter, most other small-business
equipment, such as home-office furniture or software). So say you spend
$60,000 to buy a superdeluxe heavy SUV that's used 100% in your
self-employed business activity (meaning you conduct your operation as a
sole proprietor, LLC member, or partner). Provided you make the vehicle
purchase before year-end and start using it for business before then,
you can probably deduct the entire $60,000 cost on this year's business
tax forms. (This assumes you don't run afoul of the net business income
rule explained below.)
The catch? Only that your newly acquired vehicle must
be used more than 50% of the time for business purposes. But as I'll
explain below, setting up a business office in your home can give you a
big leg up in meeting this requirement. Before we get to that key point,
however, here's a little more background so you'll understand how the
Section 179 break works in this context.
First, Pick Out a Suitably Heavy
Machine
The Section 179 deduction is available only when your SUV, pickup or van
has a manufacturer's gross vehicle weight rating (GVWR) above
6,000 pounds. (First-year depreciation deductions for lighter vehicles
are subject to much skimpier limits2.) Fortunately, it's very
easy to find attractive vehicles with GVWRs above the magic 6,000-pound
figure. Most machines that look big enough to qualify do qualify.
Examples include the Hummer H2, the Chevy Suburban and Dodge Ram
pickups. You can verify a vehicle's GVWR by checking the label on the
inside edge of the driver's door.
Then, Buy It (Don't Lease It)
Here's another very important point: Leasing a heavy SUV, pickup or van
will disqualify you from claiming the huge first-year Section 179
deduction. Instead, you'd only be able to deduct your lease payments as
you make them. For this reason, you should generally buy rather than
lease heavy SUVs, pickups and vans that will be used over 50% for
business. The fact that you may finance some or all of the vehicle's
purchase price won't affect your Section 179 deduction in the least.
Next, Play the Home-Office Angle
As mentioned above, the lucrative Section 179 write-off is available
only when you use your heavy SUV, pickup or van over 50% for business.
Your business-use percentage is based on your business and personal
mileage.
Unfortunately, this over-50% business-use test can be
difficult to pass. You're much more likely to clear the hurdle if you
can also claim a principal place of your business is an office located
in your home. Why? Because then all the commuting mileage from your home
office to various temporary work locations (client sites, etc.) will be
considered business mileage. Ditto for commuting mileage between your
home office and any other regular place of business — such as another
office you keep in the city. (Frustratingly, if you only have an
office outside your home, your drives between home and office won't
count as business mileage.) You can also treat all the mileage between
your other regular place of business (that office in the city) and your
various temporary work locations (client sites, etc.) as additional
business mileage. Source: IRS Revenue Ruling 99-7.
More business mileage also means a bigger first-year
Section 179 deduction. For example, a $60,000 heavy SUV used 100%
business means a $60,000 first-year write-off (100% x $60,000 =
$60,000). In contrast, 70% business use cuts your deduction down to
$42,000 (70% x $60,000 = $42,000).
Last but not least, your home-office deduction counts
as a business write-off as well. As such, it reduces your federal
income-tax and self-employment-tax bills. And as if that's not enough,
you'll probably also get a state-income-tax write-off.
All that — plus the option of showing up for work in
your pajamas. You just can't beat it.
Making Your Home Office a
Principal Place of Business
So how do you make your home office a principal place of business if you
haven't done so already? The tax law gives the self-employed types (sole
proprietor, partner or LLC member) two ways to qualify:
1st Way: You conduct most of your income-earning
activities in the home office.
2nd Way: You conduct your administrative and
management functions in the home office. However, to take advantage of
this taxpayer-friendly qualification rule, you can't make substantial
use of any other fixed location (like that other office downtown) for
your administrative and management chores.
For either qualification rule you must use
your home-office space regularly and exclusively for business
purposes during the year in question. Regularly means often and
continuously, as opposed to occasionally. Exclusively means no personal
use at any time during the year. (Granted, if you occasionally use the
TV in your home office to catch the scores of your favorite sports team,
the IRS is obviously never going to be the wiser — but you do need to
take these rules seriously.)
So if you don't already have a home office dedicated
to your small business, you'll have to wait until next year to set one
up and buy your heavy SUV, pickup or van. No problem. That gives you
plenty of time to shop around for just the right vehicle.
