• Do you need a replacement business car, SUV, van, or pickup truck?
• Do you need tax deductions this year?

If you answered yes to both questions, you need to examine this article and get ready to smile.

Thanks to the Tax Cuts and Jobs Act (TCJA) tax reform, you can write off the cost of a vehicle purchase faster than ever before—including, in many cases, up to 100 percent of the cost in 2021.

Get the Timing Right

Don’t procrastinate. If you want the vehicle deduction, you need to:

1. Own the vehicle, and
2. Place it in business service on or before December 31, 2021.

To ensure compliance with the “placed in service” rule, drive the vehicle at least one business mile on or before December 31, 2021. In other words, you want to both own and drive the vehicle to ensure that it qualifies for the big deductions.

Now that you have the basics, let’s get to the tax deductions.

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

Let’s say that on or before December 31, 2021, you or your S 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 TCJA)
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

Yes, you read that correctly: Bonus depreciation applies to both new and used property, thanks to the TCJA tax reform.

Example: On or before December 31, 2021, you buy and place in service a used $50,000 qualifying 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.

If you don’t want 100 percent bonus depreciation in 2021, you can take three steps:

1. Elect out of bonus depreciation for that property class.
2. Expense any portion of the business cost of up to $26,200 using Section 179.
3. Take the remaining cost using MACRS depreciation over five years.

From what we’ve seen, almost all SUVs, crossover vehicles, and vans with a GVWR of 6,001 pounds or more qualify as trucks for purposes of both 100 percent bonus depreciation and the up-to-$26,200 Section 179 expensing election.

Example: On or before December 31, 2021, you buy and place in service a $51,200 qualifying SUV for which you can claim 100 percent business use. If you elect out of bonus depreciation and elect $26,200 in Section 179 expensing instead, your maximum 2021 write-off for the cost of the SUV is either $31,200 or $27,450, computed as follows:

• $26,200 in Section 179 expensing, plus
• $5,000 in MACRS depreciation (20 percent x $25,000)—or $1,250 in MACRS depreciation if the mid- quarter convention applies because you placed more than 40 percent of your MACRS assets in service in the final quarter of the year.

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:

1. A GVWR (Gross Vehicle Weight Rating) of more than 6,000 pounds, and
2. 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, the tax code 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. See solution number 1 above for how the 100 percent bonus depreciation works.

3. Buy a New or Used Qualifying Cargo or Passenger Van

A new or used cargo or passenger van with a GVWR of more than 6,000 pounds that is bought and placed in service on or before December 31, 2021, can qualify for four big tax benefits:

1. Bonus depreciation of 100 percent
2. Section 179 expensing of up to $1,050,000
3. MACRS Depreciation (MACRS, Modified Accelerated Cost Recovery System) using the five-year table
4. No luxury limits on vehicle depreciation deductions

Cargo Van: To qualify for either 100 percent bonus depreciation or up to $1,050,000 in full Section 179 expensing, the cargo van must:

1. Have a GVWR of more than 6,000 pounds;
2. Fully enclose the driver compartment and load-carrying area;
3. Have no seating behind the driver’s seat; and
4. Have no body section that protrudes more than 30 inches ahead of the leading edge of the windshield.

If the van passes the GVWR test but fails one of the other qualifying tests listed above, the law deems it an SUV.

Minivans: Many of the vans that you used to think of as minivans now have GVWRs greater than 6,000 pounds and thus qualify as SUVs for the Section 179 deduction and 100 percent bonus depreciation as explained in solution number 1 above.

Passenger Van: If the van has a GVWR of greater than 6,000 pounds and seats more than nine people behind the driver’s seat, tax law defines it as a passenger van, not an SUV, and it qualifies for full Section 179 expensing of up to $1,050,000 and 100 percent bonus depreciation.

4. Buy a Depreciation-Limited New or Used Car

$10,200 for the first taxable year;

$16,400 for the second taxable year;

$9,800 for the third taxable year; and

$5,860 for each succeeding year.

Key Point: The limit does not come into play if you spend less than $51,000 for your depreciation-limited vehicle. Actually, you can spend $59,000 and not worry about the limits if you are claiming bonus depreciation. But keep in mind that the limits are annual and that your maximum first-year deduction is $18,200 on a depreciation-limited vehicle.

Mid-Quarter Trouble: And then there’s the possibility that you face the mid-quarter convention, which would grant you only a 5 percent MACRS depreciation on the vehicle if you placed it in service during the final quarter of the year. You trigger the mid-quarter convention when you place more than 40 percent of your MACRS assets (other than real property) in service during the final three months of the year.

Section 179 Trouble: Section 179 expensing on a so-called luxury vehicle is not permitted to exceed the depreciation limit. So in effect, Section 179 deductions are useless on vehicles in the luxury depreciation-limited category.

Planning Point: If you want the big deductions, forget the depreciation-limited vehicles.

Takeaways

The TCJA made it much easier to find big deductions on your new or used vehicle purchases:

• If your new or used vehicle has a GVWR greater than 6,000 pounds, then you can write off 100 percent of your business cost with bonus depreciation if you both buy it and place it in service on or before December 31, 2021.
• If your new or used vehicle has a GVWR of 6,000 pounds or less, then with a purchase price of $59,000 or more, you can write off up to $18,200 in 2021 if you buy it and place it in service on or before December 31, 2021 (assuming the mid-quarter convention does not apply).

Example: You buy and place in service a business SUV with a GVWR of 6,500 pounds and with a business cost of $100,000. You can immediately write off $100,000 using bonus depreciation.

If this vehicle were depreciation limited because it failed the weight test, your maximum first-year write-off would be $18,100 (again, assuming the mid-quarter convention does not apply).

Don’t forget to follow our recommendation and drive your new vehicle for at least one business mile on or before December 31, 2021, to ensure it meets the “placed in service” requirement.

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We at Morris + D’Angelo believe that Tax Optimization is one of the most empowering and responsible things you can do to protect your growing financial assets. Tax optimization looks at a multi-year approach to minimizing tax costs. Tax avoidance is integral to tax optimization.

In this article, I shared with you four (4) powerful business tax depreciation strategies that you can easily understand and implement before the end of 2021. If you need guidance regarding these tax-saving strategies, please contact us at Morris + D’Angelo. This is our Expertise!

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Parts of this article are published with permission from Bradford Tax Institute, © 2021 Daniel Morris, Morris + D’Angelo

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Daniel Morris
Daniel frequently provides Media Content via Workshops, Podcasts, and Printed Articles on topics like Bitcoin and Cryptocurrency, Wealth Preservation and Planning, Global Banking, and many other high-level financial topics that serve and demonstrate the Value of our Global Network that should be of interest to those who need Private High-Wealth Services.

If you would like Daniel to speak to you or your Professional Group and bring clarity about the new frontier of the new business tax law changes. Please contact us.

Morris+D’Angelo is the industry leader for many High-Wealth Customers and Organizations.

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