New Tax Law For Vehicles Over 6000# GVWR

Discussion in 'Business Operations' started by Quality Lawn Care, Dec 7, 2003.

  1. Quality Lawn Care

    Quality Lawn Care LawnSite Member
    Messages: 45

    Recent changes in the tax laws enable taxpayers who use their vehicle in their business to deduct 100% of the cost of the vehicle, under certain circumstances. As a result, some people are advising providers to buy a new SUV for their business to take advantage of this tax law change. Is this a good idea? Probably not.

    Here's why.

    The new law allows providers who purchase a car, computer, furniture, appliances, or equipment to deduct up to $100,000 of the cost in the first year if the purchase meets the following conditions:

    The item must be purchased in 2003.
    The item must be used more than 50% of the time in the business.
    Claiming this expense cannot create a loss on your tax return.
    Here's an example: If a provider purchased a computer for $2,000 in 2003 and used it 80% in her business, she could claim a $1,600 deduction ($2,000 x 80%) on her tax return. To use this rule (called a Section 179 rule), providers must claim this deduction on Part I of Form 4562.

    This Section 179 rule also applies to vehicles. But to use this rule for vehicles, providers must meet an additional condition: the vehicle must weigh more than 6,000 pounds. Such vehicles include: Durango SUV, Ford Econoline Van E150, Ford Excursion or Expedition, GMC Safari AWD Passenger Van, and more. So if you bought one of these vehicles for $30,000 and used it 60% for your business, you could deduct $18,000 ($30,000 x 60%) on your tax return.

    This sounds like a great deal! So, what's the problem?

    First, if you use this Section 179 rule and use it 50% of the time or less in the five years following your purchase, you will have to pay income taxes on some of the deduction you claimed. To do this you must file another tax form (Form 4797) and pay back some of the tax benefit you claimed earlier. This would also be true if you went out of business or sold the vehicle within five years of buying it.

    But the bigger problem is this: It is not a good idea to buy something for a tax deduction because the tax deduction will never equal the cost to you of the vehicle. For example: Let's say you bought a $30,000 Durango SUV and used it 100% in your business. You can deduct the entire $30,000 as a business expense. But your taxes won't be reduced by $30,000. How much you save on your taxes will be based on the tax bracket your family is in. If you are married and your family's taxable income is between $56,800 and $114,650, you are in the 25% federal tax bracket and you will pay 25% in federal income taxes, plus about 15% in Social Security taxes, for a total of about a 40% tax rate. Therefore, your $30,000 vehicle purchase will save you about $12,000 in taxes ($30,000 x 40%). So, you spent $30,000 to save only $12,000 in taxes.

    If you need to buy a new vehicle for use in your business, then do so. But don't make a decision on what kind of vehicle to buy based on the tax consequences. In other words, if you can meet your needs by buying a cheaper business vehicle that weighs less than 6,000 pounds, buy the cheaper vehicle rather than shopping for something more expensive. Don't spend more money on a larger vehicle to get the extra tax deduction. When you spend more money than you have to, you still end up with less money in your pocket, even after taking tax deductions into consideration.

    Note: If you buy a heavier, more expensive vehicle your car insurance and gasoline expenses will always be higher than a cheaper, lighter vehicle.

    In conclusion, if you are in the market for a vehicle, make your decision based on what is the best vehicle that will meet your needs that's costs the least. Do not spend more money than you have to, and ignore the lure of a higher tax deduction. It doesn't pay.
  2. bayfish

    bayfish LawnSite Senior Member
    Messages: 641

    Good post!

    The IRS always has an angle to to either get you up front or in the back door. They know people try to blur the line between business use and personal use with the vehicles you mentioned. Harder for them not give you the deduction if you purchase a 1 ton flat bed or a dump truck though.
  3. MOlawnman

    MOlawnman LawnSite Member
    Messages: 161

    Two questions---
    1.) Did you type all that in????
    2.) Are you an accountant or a lawn care operator??
  4. MOlawnman

    MOlawnman LawnSite Member
    Messages: 161

    Didn't mean to sound like a smarta**, but this was orriginally posted in the commercial lawn care forum.

    It is good that people are made aware of the tax laws but a good accountant should inform any business person, whether it is the green industry or any other, what the current laws and benefits of those laws are.
  5. morturf

    morturf LawnSite Senior Member
    from midwest
    Messages: 476

    And Don't forget.......if you dispose of the asset before the set depreciation time runs out you will owe capital gains on the difference. There are also some rules about purchases made in the last 1/4 of the year that will weed out some more deductions. Just keepin us all informed, this place rocks!!
  6. TurfPro

    TurfPro LawnSite Member
    Messages: 232

    does this only apply to brand new vehicles purchased at dealers? or can a used vehicle that meets the weight and use criteria work?
  7. Quality Lawn Care

    Quality Lawn Care LawnSite Member
    Messages: 45

    I did not type any of this. It would have taken me forever. I was researching the law and did the old cut and paste thing. The law works on new or used vehicles. This is going to benefit me greatly because I bought 2 newer used trucks this year (2003).

    Have a great Day
  8. hoyboy

    hoyboy LawnSite Senior Member
    from Chicago
    Messages: 346

    The section 179 expense is good for new AND used equipment. However, there is a "bonus depreciation" after the section 179 expense is used up. The bonus depreciation is for 50% of NEW equipment only...there is a maximum bonus which I believe is $50,000 (don't quote me though). This bonus depreciation was enacted after the Sept. 11 attack. I believe it is only good through 2004 or 2005.

    Sorry I don't have the specifics as I started typing before I checked the exact info. but the NEW EQUIPMENT part is a google search on it...."bonus depreciation".

  9. rshofcols

    rshofcols LawnSite Member
    from ohio
    Messages: 86

    or what my tax accountant does is just take the usual standard deduction for vehicles either a full percentage for the use for one year or you can depreciate any business vehicle over three years ,same thing with the mowers.Did ya know you can also deduct the gas you put into your mowers ,thats 42 cents or more a gallon,the tax on gas is a road tax since ya dont mow concrete its a deduction
  10. BravesFan

    BravesFan LawnSite Member
    Messages: 233

    Hope people don't take the recommendation and go out blindly buying a SUV. Some SUV's(Ford Explorer for example) weigh less than 6000 pounds.


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