If you buy a new or pre-owned “heavy” SUV, pickup, or van this year and put it to use in your business, you are potentially eligible for 100% first-year bonus depreciation. That means you can write off the entire business portion of the cost on this year’s tax return. The only requirement is that you must use the vehicle over 50% for business. If business usage is between 51% and 99%, you can deduct that percentage of the cost.
The write-off will reduce your federal income tax bill and self-employment tax bill, if applicable. You might get a state tax income deduction too. Nice! This almost-too-good-to-be-true break is thanks to the Tax Cuts and Jobs Act (TCJA).
More good news: Setting up a business office in your home can lead to additional tax savings.
Here’s the drill on the benefits of combining these two tax breaks under the new law.
Step 1: Buy a suitably heavy machine100% first-year bonus depreciation is available for qualifying vehicles that are acquired and placed in service between 9/28/17 and 12/31/22. But it’s only available for an SUV, pickup, or van with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds that is purchased (not leased). First-year depreciation deductions for lighter vehicles are subject to a much lower limit (maximum of $18,000 for 2018).
You can usually find the GVWR on a label on the inside edge of the driver’s side door.
Many attractive vehicles have GVWRs above the magic 6,000 pound threshold. Examples include the Chevy Tahoe, Dodge Grand Caravan, Ford Explorer, Jeep Grand Cherokee, Porsche Cayenne, Toyota 4Runner, and many full-size pickups. To see whether your SUV, pickup truck or van is heavy enough to qualify, check www.autobytel.com and www.motortrend.com.
Step 2: Play the home office cardAs I said earlier, the tax-saving 100% first-year bonus depreciation deal is only allowed if you use your heavy SUV, pickup, or van over 50% for business. Calculate your business-use percentage for the year by dividing business mileage by total mileage.
So far so good, but the over-50%-business-use test is sometimes difficult to pass for small business owners. Thankfully, you’re much more likely to pass if you have an office in your home that qualifies as a principal place of business. Then you can count all the commuting mileage from your home office to temporary work locations (such as client sites) as business mileage. Ditto for commuting mileage between your home office and any other regular place of business (such as another office you keep downtown). Finally, you can also treat all mileage between any other regular place of business (such that downtown office) and temporary work locations as business mileage. These trips can add up to a lot of business mileage! You can easily rack up enough business miles to pass the over-50%-business-use test just by running around in your heavy vehicle.
More business mileage also means a bigger first-year depreciation deduction. For example, if you buy a $60,000 heavy SUV in 2018 and use it 80% for business, that translates into a first-year bonus depreciation deduction of $48,000 (100% x 80% x $60,000). If your business usage is 60%, your first-year deduction drops to $36,000 (100% x 60% x $60,000). While that’s still pretty good, it’s not as good as a $48,000 write-off.
Finally, allowable home office expenses count as business deductions that will reduce your federal income tax bill and your self-employment and state income tax bills, if applicable.
How to make your home office principal place of businessSelf-employed folks (sole proprietors, partners, and LLC members) have two different ways to qualify a home office as a principal place of business.
First Way: Conduct most of your income-earning activities in the home office.
Second Way: Conduct your administrative and management tasks in the home office. However to take advantage of this qualification rule, you cannot make substantial use of any other fixed location (like another office downtown) for administrative and management chores.
Either way, you must use the home office space regularly and exclusively for business purposes during the whole year. Exclusively means no personal use at any time during the year, so you might have to wait until next year to set up your deductible home office and buy your heavy SUV, pickup, or van. No problem. That gives you more time to shop around for the right vehicle.
Warning: If you are an employee of your own corporation, you cannot write off home office expenses under the current rules. That is because the TCJA eliminated unreimbursed employee business expense deductions for 2018-2025.
The bottom lineYou can potentially mate the 100% first-year bonus depreciation break for heavy vehicles with the home office deduction privilege and reap major tax savings from the combination. It’s a tax-saving double play!
