View Full Version : Question about tax savings from business deductions...(Green in Idaho: help please)
08-15-2003, 01:27 AM
As I have posted on another thread, I am in the market for a truck, and am still contemplating on purchasing new vs. used. Will be going with a 3/4 ton. If I get a new Chevy/GMC, I have relatives that work for them and I can get a great deal on a new one. Figured that I could get a new 2500 HD for around $350/month if I don't make a down payment (less if I do). I will have to finance whatever I get, so the monthly payment would probably not be that much higher than if I bought a decent used truck, I would just be paying for the new one longer.
Anyway, my question involves tax savings. Here is the way I am trying to figure out exactly what it will cost per year for new vs. used. A truck is to be depreciated over a 5-yr period. I am not quite sure exactly how to use the MACRS depreciation (haven't learned that yet), only straight-line, but I am assuming that roughly the depreciation for each year will be 1/5th of the cost for either method. If this were the case, and the truck cost $22,000, then I would have a depreciation deduction of around $4400/year.
Am I correct in assuming that I will actually be saving 30% of that $4400 in taxes (because of deduction), or $1320/year, that I would otherwise probably be paying? Maybe this is just some crazy idea that I had, but it makes sense to me. Will be glad when I get my accounting degree in a few years....will make things a whole lot simpler.
I took the mileage on my taxes it came out to be 9,490.00 of the 2002 year deduction.
Green in Idaho
08-15-2003, 11:07 AM
I am on my way out the door to Yellowstone after I drop off a few tax returns in the mail box. :)
I'll have to get back to you after the weekend. I am sure in the meantime you'll get some info. See www.irs.gov
Also your expected mileage/yr is important to make a complete decision.
Chat to ya later.
Green in Idaho
08-19-2003, 04:16 AM
I'm surprised to see only one other post on this....I'm also a little bummed I don't see, "read the IRS site and learned it all over the weekend".l:confused:
Dave there is not much difference between depreciating new and used vehicles. If you bought a used truck for $25,000 and a new truck for $25,000 the tax consequences are the same.
However, there is a HUGE difference between buying and leasing.
Basic depreciation works with a vehicle on MACRS for 5 years as:
Year 1 - 20%
Year 2- 32%
Year 3- 19.2%
Year 4- 11.52%
Year 5- 11.52
Year 6- 5.76%
Yes it would be 1/5 (20%) but not because it is one of the five years. If you are interested --- it is becauce MACRS allows twice the straight line deprection, but only one-half of it for the first year, hence 20%. And you see year 2 is more than 20%.... Just the way it is designed.
Additionally if you buy more than 40% of your assets for the year in the last quarter you you have different percentages- 5% for the first year.
As far as the actual tax savings it may be more complicated than a simple 30%.
You will most likely save at least 15% by cutting your self-employment tax. The other 15% depends on your taxable income and your effective tax rate due to other items such as AGI issues, EIC, afffected credits, etc.
Net income- exemptions-standard deductions = taxable income.
In YOUR case it will depend on the net income, and whether you claim your girlfriend and the baby as your dependents. If you do and if you income is relatively low (due to school and start-up) then the 15% may not come into play, in other words you would have a zero taxable income- possible.
Further if your income is relatively low and those two live WITH you as dependents you may have Earned Income Credit Issues. By reducing your taxable income with the truck deduction you may either increase or DECREASE the EIC. So it is difficult to say exactly how much the effective tax savings will be without doing forecasts. And it also matters whether you buy it before end of year or in the spring.
Since I've had a few cold ones I'll elaborate with an example:
Let's say Buck expects to gross $30,000 this year with $12,000 in expenses. As is, his net income is $22,000.
SE tax is $3,108.
If his is single and takes standard deduction for 2003 his taxable income is $14,200 (22,000-3,050 exp-4,750 std).
Federal income tax on that is $1,780.
So combined, the federal tax bite is $4,888.
But if Buck bought a $22,000 truck and 80% (17,600) of it was for business use and he bought it in Sept and takes 20% for a deduction for $3,520 (17600 x .2) then the net income is $18,480,
The SE is 2,611
Taxable is $10,680
Fed is $1,252
For a total tax of $3,863.
The difference is 1,025, so THAT is your 30% effective tax savings.
However! Let's consider if Buck was MARRRIED WITH one CHILD, and qualified for EIC.
With no truck.
Same SE tax- $3,108.
Taxable income would be 3,350 for $335 of federal income tax
Total of $3,443 (3,108 +335).
But the family would qualify for EIC of $1,402 (estimated with 2002 rates).
So net result would be 2,041 (+ child tax credit too).
With the truck deduction of 3,520.
SE is 2,611
Taxable income drops to 0 &
$0 for income tax;
Total of 2,611.
The EIC changes to 1,922 (est).
That net result is 689 vs. 2,041 above for a difference of 1,352 for an effective rate of 38% (1352/3520).
That example went a LONG way just show there are other factors to consider. In this case it showed a bigger impact in other situations it could be less of an impact. I just pulled numbers off the wall....
IF you put YOUR actual numbers to paper you will see the TRUE result.
You also need to compare lease vs buy.
You also need to consider you can deduct more than the basic MACRS deduction (above) due to the Section 179 election.
You also need to consider instead of deducting depreciation, fuel, maintenance, tires, etc. you can go with the mileage Method and take a deduction based on mileage.
So for the same vehicle of a dep at 3,520 and fuel & other costs of 3680 for total of 7,200. If you drive more than 20,000 miles it would be better to go standard mileage deduction.
Disclaimer: Estimates above.
Good luck with it. And always put it to pencil and paper with YOUR numbers. :cool:
08-20-2003, 10:21 PM
Thanks for the informative post. I did look at the site and try to read it a few times, but didn't really understand it all that well. I guess there really are quite a few factors to take into consideration that I never thought about before. This is why I know that when I get my degree I am going to be steps ahead of others in my position, because I will really learn to think like a businessman then. To anyone else, it also should show why you really do need to have a good accountant.
Green in Idaho
08-21-2003, 12:13 AM
Dave, also notice there that if you are going to buy this year and if it is your only major purchase, whether you buy in Sept or October makes a difference of 15% of the regular deduction.
That is an example of good accountants are more useful when people use them more than just for April 15.
Also r. there are tax accountants, cost accountants, audit accountants, financial accountants. It is impossible to be good at all of those areas, so decide which one you want to focus on and max it out. for others keep in mind what your needs are and match the speciality...
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