GVWR - IRS Section 179
04-23-03, 07:20 AM
#18
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w4rjd,
That just won't cut it!
If that happens, I will lose a great deal of money and I will NEVER purchase another Lexus and I will inform everyone I know, including all my Business Associates, how Lexus screwed the customer.
Francisco Garcia
That just won't cut it!
If that happens, I will lose a great deal of money and I will NEVER purchase another Lexus and I will inform everyone I know, including all my Business Associates, how Lexus screwed the customer.
Francisco Garcia
04-23-03, 07:26 AM
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Thats right
No way $1000 of service credit solves this problem. I'm not going to get my blood pressure up until I hear from them what they are going to do (my hunch is they don't know yet - still trying to understand the scope of the issue). I'll give them a little time to see what they come up with. I still have faith they will do the right thing...
04-23-03, 11:28 AM
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Other questions
Lets not get ahead of ourselves...I still think they will come through. However I wonder: If they send me the difference between my amended return and my original (say $8000) is THAT payment then taxable? Is the payment of the luxury tax TAXABLE? I don't want a 1099 form at the end of the year reporting that income unless they "gross me up" to cover the taxes. Or can we get them to "reissue" the bill of sale reflecting an $8000 discount. Also the interest I will be paying to IRS until I file the amendment, and the cost of preparing the amendment.
Any CPAs out there who know?
Any CPAs out there who know?
04-23-03, 01:57 PM
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Gents
This might be of interest.
Please remember that how your vehicle is configured will alter the GVWR. ie...trailer hitch, third row seats etc.
Whatever, the 6000 lbs is the threshold.
Using the $25,000 Section 179 Expense Option for Trucks and SUVs
Small Business Taxes & ManagementTM--Copyright 2003, A/N Group, Inc.
We've had several questions concerning newspaper articles that seem to indicate taxpayers will soon be able to write off a $75,000 SUV (sport utility vehicle). This article will try to clear up the confusion.
Is it true? Yes, no, and maybe. As usual, while the truth is out there, it's a bit more complicated. In the mid-80's Congress was concerned that business owners were buying luxury cars costing $40,000 and depreciating them over 5 years. In an attempt to discourage the practice, Congress put a dollar limit on the depreciation you can take on an auto. The limit is different for each year and indexed for inflation. For 2002 (the 2003 amounts should be published shortly) the maximum depreciation you can take on an auto is:
First Year $3,060
Second Year 4,900
Third Year 2,950
Subsequent 1,775
Note. For autos acquired after September 10, 2001 and before September 11, 2004, the limit indicated above is increased by $4,600 for the first year only. Thus, for 2002, the first-year limit is $7,660 ($3,060 plus $4,600). Subsequent years are unchanged.
The Job Creation and Worker Assistance Act of 2002 provides for 30% extra depreciation in the first year qualifying property is placed in service. The property must be acquired after September 10, 2001 and before September 11, 2004 and placed in service before January 1, 2005. The special allowance only applies to new property which has a recovery period of 20 years or less, is computer software depreciable over three years, or is qualified leasehold improvement property. Property amortized under Sec. 197 does not qualify. A taxpayer may make an election for bonus depreciation not to apply to any class of property. If a Section 179 election is made, the bonus depreciation applies after reduction for the 179 allowance.
Example--Madison Inc. acquires an auto for $35,000 on June 5, 2002. Madison can deduct $7,660 for 2002, leaving an undepreciated basis of $27,340. The maximum depreciation deduction for 2003 is $4,900; for 2004 it's $2,950; and for 2005 and subsequent years until the auto is fully depreciated, it's $1,775.
Congress provided a loophole in the law. In order to allow farmers, contractors, etc. to avoid these luxury car limitations, they crafted the definition of auto such that certain trucks and vans don't fall under these rules. Thus, trucks and vans where the gross vehicle weight rating (GVWR) is more than 6,000 pounds don't have these restrictions. Gross vehicle weight is the weight of the vehicle including passengers and cargo. Most full-size pickups, large SUVs and vans are often above the 6,000 pound threshold. If that's the case, the limitation discussed above doesn't apply and you might be able to write off over $25,000 in the year the vehicle is placed in service. How much will depend on the cost of the vehicle. (In addition, other restrictions may apply, see below.) You can use the Section 179 expense election to write off the first $25,000. You can then take depreciation on the remainder.
For example, you purchase a truck for $35,000. You can use the expense election of $25,000 to reduce the adjusted basis to $10,000, then take the 30% bonus depreciation of $3,000 (30% of $10,000), leaving an adjusted basis of $7,000. The normal depreciation percentage on light trucks would be 20% for the first year, allowing you to take another $1,400 in depreciation.
If the proposed legislation passes and there are no restrictions on vehicles, you could use the proposed $75,000 expense option to write off the entire cost of the vehicle, assuming its cost is no more than $75,000.
Before running down to your dealer, here are some points to consider.
Qualifying vehicles. Unfortunately, there's no official list of vehicles that qualify. A truck, van, sport utility vehicle, and minivan will qualify if it has a GVWR of more than 6,000 pounds. A full-sized pickup should generally qualify. The GVWR on most we checked was greater than 6,000 pounds. On other vehicles you'll have to get the GVWR on the vehicle.
Business use. If the use of the vehicle isn't 100% business, only the portion used for business qualifies. For example, if you use the vehicle 80% for business and 20% for personal purposes, only 80% of the vehicle will qualify for the depreciation and expense option discussed above. In addition, your other expenses (insurance, fuel, etc.) will be limited to the same percentage.
Business use greater than 50%. In order to claim any Section 179 expense option or accelerated depreciation, the business use of the vehicle has to be greater than 50%. If an employee uses it for personal purposes but you include the value of the use on his or her W-2, that use can qualify as business. (If you're the employee and a shareholder in an S or C corporation, etc. putting the income on your W-2 won't qualify the use as business.) If the business use starts out at greater than 50% but drops below that amount in a subsequent year, you may have to recapture (take into income) some of the tax benefits received. (See below for an example of recapture.)
Income and asset limitations. You can only use the Section 179 expense election to offset income from the active conduct of a trade or business (that includes salaries and wages). It can't create a loss. For example, your only source of income for 2003 is $15,000 of earnings from a sole proprietorship (before taking the Section 179 expense) and $25,000 of interest and dividends. The amount of Section 179 expense you can use in 2003 is $15,000. (Since the 179 expense interacts with depreciation, the computations can get complicated.) You can elect a larger 179 deduction (say $21,000). In that case you can deduct $15,000 in 2003 and carry the remaining $6,000 forward to use in a later year. There's a second limitation if you place more than $200,000 of qualified property in service in any one year.
Leasing. In order to get these benefits you must own the vehicle. Under most vehicle leases you don't own the vehicle (there are exceptions; talk to your tax advisor). Instead of taking depreciation, interest, etc. you'll deduct the lease payments (special rules also apply here to limit the deduction for luxury autos). Some leases are structured as lease-purchase deals. Generally, they can be identified by the fact that at the end of the lease you pay a nominal amount (often just $1). (There are other factors that can determine the nature of the transaction.) Those transactions should be accounted for as purchases and you should take depreciation on the "purchase price" of the equipment.
Recapture. We mentioned that if the vehicle (or any business asset for that matter) is converted to personal use or sold, you may have to recapture a portion of the Section 179 expense election and depreciation. Here's a quick example that will show the tax impact. In 2003 you purchase a truck for $30,000 and elect to write off $20,000 as a Section 179 expense. You also take the 30% bonus depreciation and regular depreciation of $1,400. Your total deduction for the year is $24,400 ($20,000 plus $3,000 in bonus depreciation and $1,400 in regular depreciation. In September 2004 you sell the truck for $21,000. The rules require you to take a half-year's depreciation in the year of sale; that's another $2,240. Thus, your adjusted basis in the truck at the time of sale is $3,360. The difference between the selling price of $21,000 and your adjusted basis of $3,360 is $17,640. That's all recapture income that has to be reported on your 2004 tax return. (One way to avoid the income is to trade in the vehicle.)
Recordkeeping. If you're deducting auto expenses, you've got to keep good records of the expenses and a log detailing your business usage. If audited, the IRS will almost surely ask for your car log. If you don't have a good log and records your deductions can be disallowed and you could be subject to penalties.
Tax bracket analysis. While taking the maximum Section 179 expense for a year can improve cash flow (because of the lower taxes), doing so may not result in the lowest overall tax bill. You've got to analyze your tax situation carefully. You don't want to take a $25,000 deduction in 2003 if your tax rate will be 15% only to pay taxes in 2004 at 27% (or more). The analysis is even more important if the Section 179 expense option is raised to $75,000 and you can take the maximum. You should also be aware that $100,000 of AGI for married individuals filing jointly is a threshold that affects the availability of several credits and special items. You may want to structure your transactions to avoid breaking that threshold.
This might be of interest.
Please remember that how your vehicle is configured will alter the GVWR. ie...trailer hitch, third row seats etc.
Whatever, the 6000 lbs is the threshold.
Using the $25,000 Section 179 Expense Option for Trucks and SUVs
Small Business Taxes & ManagementTM--Copyright 2003, A/N Group, Inc.
We've had several questions concerning newspaper articles that seem to indicate taxpayers will soon be able to write off a $75,000 SUV (sport utility vehicle). This article will try to clear up the confusion.
Is it true? Yes, no, and maybe. As usual, while the truth is out there, it's a bit more complicated. In the mid-80's Congress was concerned that business owners were buying luxury cars costing $40,000 and depreciating them over 5 years. In an attempt to discourage the practice, Congress put a dollar limit on the depreciation you can take on an auto. The limit is different for each year and indexed for inflation. For 2002 (the 2003 amounts should be published shortly) the maximum depreciation you can take on an auto is:
First Year $3,060
Second Year 4,900
Third Year 2,950
Subsequent 1,775
Note. For autos acquired after September 10, 2001 and before September 11, 2004, the limit indicated above is increased by $4,600 for the first year only. Thus, for 2002, the first-year limit is $7,660 ($3,060 plus $4,600). Subsequent years are unchanged.
The Job Creation and Worker Assistance Act of 2002 provides for 30% extra depreciation in the first year qualifying property is placed in service. The property must be acquired after September 10, 2001 and before September 11, 2004 and placed in service before January 1, 2005. The special allowance only applies to new property which has a recovery period of 20 years or less, is computer software depreciable over three years, or is qualified leasehold improvement property. Property amortized under Sec. 197 does not qualify. A taxpayer may make an election for bonus depreciation not to apply to any class of property. If a Section 179 election is made, the bonus depreciation applies after reduction for the 179 allowance.
Example--Madison Inc. acquires an auto for $35,000 on June 5, 2002. Madison can deduct $7,660 for 2002, leaving an undepreciated basis of $27,340. The maximum depreciation deduction for 2003 is $4,900; for 2004 it's $2,950; and for 2005 and subsequent years until the auto is fully depreciated, it's $1,775.
Congress provided a loophole in the law. In order to allow farmers, contractors, etc. to avoid these luxury car limitations, they crafted the definition of auto such that certain trucks and vans don't fall under these rules. Thus, trucks and vans where the gross vehicle weight rating (GVWR) is more than 6,000 pounds don't have these restrictions. Gross vehicle weight is the weight of the vehicle including passengers and cargo. Most full-size pickups, large SUVs and vans are often above the 6,000 pound threshold. If that's the case, the limitation discussed above doesn't apply and you might be able to write off over $25,000 in the year the vehicle is placed in service. How much will depend on the cost of the vehicle. (In addition, other restrictions may apply, see below.) You can use the Section 179 expense election to write off the first $25,000. You can then take depreciation on the remainder.
For example, you purchase a truck for $35,000. You can use the expense election of $25,000 to reduce the adjusted basis to $10,000, then take the 30% bonus depreciation of $3,000 (30% of $10,000), leaving an adjusted basis of $7,000. The normal depreciation percentage on light trucks would be 20% for the first year, allowing you to take another $1,400 in depreciation.
If the proposed legislation passes and there are no restrictions on vehicles, you could use the proposed $75,000 expense option to write off the entire cost of the vehicle, assuming its cost is no more than $75,000.
Before running down to your dealer, here are some points to consider.
Qualifying vehicles. Unfortunately, there's no official list of vehicles that qualify. A truck, van, sport utility vehicle, and minivan will qualify if it has a GVWR of more than 6,000 pounds. A full-sized pickup should generally qualify. The GVWR on most we checked was greater than 6,000 pounds. On other vehicles you'll have to get the GVWR on the vehicle.
Business use. If the use of the vehicle isn't 100% business, only the portion used for business qualifies. For example, if you use the vehicle 80% for business and 20% for personal purposes, only 80% of the vehicle will qualify for the depreciation and expense option discussed above. In addition, your other expenses (insurance, fuel, etc.) will be limited to the same percentage.
Business use greater than 50%. In order to claim any Section 179 expense option or accelerated depreciation, the business use of the vehicle has to be greater than 50%. If an employee uses it for personal purposes but you include the value of the use on his or her W-2, that use can qualify as business. (If you're the employee and a shareholder in an S or C corporation, etc. putting the income on your W-2 won't qualify the use as business.) If the business use starts out at greater than 50% but drops below that amount in a subsequent year, you may have to recapture (take into income) some of the tax benefits received. (See below for an example of recapture.)
Income and asset limitations. You can only use the Section 179 expense election to offset income from the active conduct of a trade or business (that includes salaries and wages). It can't create a loss. For example, your only source of income for 2003 is $15,000 of earnings from a sole proprietorship (before taking the Section 179 expense) and $25,000 of interest and dividends. The amount of Section 179 expense you can use in 2003 is $15,000. (Since the 179 expense interacts with depreciation, the computations can get complicated.) You can elect a larger 179 deduction (say $21,000). In that case you can deduct $15,000 in 2003 and carry the remaining $6,000 forward to use in a later year. There's a second limitation if you place more than $200,000 of qualified property in service in any one year.
Leasing. In order to get these benefits you must own the vehicle. Under most vehicle leases you don't own the vehicle (there are exceptions; talk to your tax advisor). Instead of taking depreciation, interest, etc. you'll deduct the lease payments (special rules also apply here to limit the deduction for luxury autos). Some leases are structured as lease-purchase deals. Generally, they can be identified by the fact that at the end of the lease you pay a nominal amount (often just $1). (There are other factors that can determine the nature of the transaction.) Those transactions should be accounted for as purchases and you should take depreciation on the "purchase price" of the equipment.
Recapture. We mentioned that if the vehicle (or any business asset for that matter) is converted to personal use or sold, you may have to recapture a portion of the Section 179 expense election and depreciation. Here's a quick example that will show the tax impact. In 2003 you purchase a truck for $30,000 and elect to write off $20,000 as a Section 179 expense. You also take the 30% bonus depreciation and regular depreciation of $1,400. Your total deduction for the year is $24,400 ($20,000 plus $3,000 in bonus depreciation and $1,400 in regular depreciation. In September 2004 you sell the truck for $21,000. The rules require you to take a half-year's depreciation in the year of sale; that's another $2,240. Thus, your adjusted basis in the truck at the time of sale is $3,360. The difference between the selling price of $21,000 and your adjusted basis of $3,360 is $17,640. That's all recapture income that has to be reported on your 2004 tax return. (One way to avoid the income is to trade in the vehicle.)
Recordkeeping. If you're deducting auto expenses, you've got to keep good records of the expenses and a log detailing your business usage. If audited, the IRS will almost surely ask for your car log. If you don't have a good log and records your deductions can be disallowed and you could be subject to penalties.
Tax bracket analysis. While taking the maximum Section 179 expense for a year can improve cash flow (because of the lower taxes), doing so may not result in the lowest overall tax bill. You've got to analyze your tax situation carefully. You don't want to take a $25,000 deduction in 2003 if your tax rate will be 15% only to pay taxes in 2004 at 27% (or more). The analysis is even more important if the Section 179 expense option is raised to $75,000 and you can take the maximum. You should also be aware that $100,000 of AGI for married individuals filing jointly is a threshold that affects the availability of several credits and special items. You may want to structure your transactions to avoid breaking that threshold.
04-23-03, 03:40 PM
#25
It'sunderstanding that the $1,000 Visa debit card will be for the luxury tax issue. The business deduction under Section 179 is a separate problem.
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