UPDATE Heavy Vehicle Tax Write-off for 2019 Tax Returns

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Almost two years ago, in February 2018, I wrote a blog about heavy vehicles and the Trump Tax Plan. I still get a lot of questions about this strategy for buying business vehicles. Since it’s been awhile, it’s time for an update!

If you buy a heavy vehicle, defined as greater than 6,000 GVW, you get a big tax break! Here’s how to take advantage of the tax write-off.

First, determine how much business use you have. If you have 90% business use, then you will be able to take 90% of the available deduction. If you have 70% business use, you get 70% of the available deductions. But if you have 100%, then you get it all.

Remember that this applies to heavy vehicles (which have 6,000 or more GVW) and for just the business use percentage.

There are two types of deductions: Section 179 immediate expensing and bonus depreciation for these types of vehicles.  

The Section 179 deduction gives you a $25,000 maximum write-off. That, in and of itself, is a good deal, but the really good deal is the bonus depreciation. That’s now 100%.

By the way, you can also use the bonus depreciation on a luxury vehicle for a deduction of $16,000. But if you do take the bonus depreciation on a luxury vehicle (defined basically as any vehicle that’s not clearly a work truck or van or a heavy vehicle), you can’t take any other depreciation on that item for the next 5 years. It usually doesn’t work out to take the new 100% bonus depreciation. So be careful of doing that UNLESS you have a heavy vehicle.

The big break really is only with heavy vehicles. They now are eligible for the full 100% bonus depreciation. You can use it in conjunction with the Section 179 or just by itself.

You need to buy the vehicle to qualify. You can’t just lease it. It is possible to finance it with little or no down and still get the write-off. There can be a fine line between leasing and financing, so make sure you and your tax preparer know the rules.

As an example, let’s say you buy a vehicle for $50,000 that is used 100% for business and is a full sized 4×4. Chance are it’s a heavy vehicle. Some SUVs are as well, so check online or with the seller to find out if it qualifies.

You get a business write-off of $50,000. If you take a deduction as some Section 179 ($25,000) and some bonus depreciation (the remainder of $25,000), the amount you can take as a deduction may be limited since a Section 179 can’t push you into a loss or increase a loss. BUT bonus depreciation can. In the past, there was a problem if you bought a used vehicle or piece of equipment. That is no longer the case. Now, you can use the bonus depreciation deduction even if the equipment or vehicle is used. And the bonus depreciation can push you into a loss or increase a loss that would be carried forward.

Those are the basics of the rules. Now, let’s look at a real life example of a question I received. I slightly edited the question for this blog:

“I own 2018 Dodge Ram 2500 with a Cummings Diesel We wrote off $50,000 in 2018
I need to sell or trade my truck and buy a Ford f-450. When can I buy a new truck and get 100% write-off.”

The company owns the Cummings Diesel now. There are a couple of things you can do with it.

(1) You could trade it in and buy a Form F-450. There will likely be some additional cash due and that will be the write-off. So, for example, let’s say the 2018 Dodge is worth $30,000 and the new Ford is worth $65,000.

You’ll pay $35,000 and that will be 100% deductible. You wouldn’t get the full write-off of $65,000.

(2) You can take a distribution on the Dodge at fair market value. In some cases, this is the best. Although it won’t create a deduction for the company and would be considered income for you (based on that fair market value), then you’ve got a business deduction of 100% of the Ford F-450 pick-up.

If you do this, you’ll want the lowest possible fair market value. If you’ve used it for business, for example, it may have higher mileage and harder use. So, the condition may be “fair” or “poor”. In this case, that’s better, because the value would be less.

Probably the best strategy is to see what kind of trade-in value you’d get and whether it makes sense to take that with a lower business deduction or whether it makes more sense to take some of it as personal income.

One more strategy that isn’t use as often works if you plan to hang on to both vehicles. If that’s the case, keep them both in the company name. If you use them personally, there would be value to the amount you use it and that would be taxable and reported on your W-2 from the company. Usually, that value is a lot less, though, and can be a good tax move.

The challenge is that you can’t sell the vehicle and avoid tax. In this strategy, there is no tax, but you still own the truck. If you sell it, there is some tax.

In a follow up question, I was asked,

“Can I buy a new heavy duty truck that’s used for 100% business every year and write off 100%?”

The answer is “yes.” The problem, though, is that at some point, you’re going to own a whole lot of heavy duty trucks. When you sell them or distribute them, you have a tax issue.

Tax planning is best if you consider it all year long. It’s not too early to start planning for 2020. To find out more about a consultation with me, Contact Us.

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