Tax Tips

Knowing your luxury auto limits

Looking to purchase a new business vehicle? Choose carefully. The limit on the amount that can be deducted for depreciation varies by type of vehicle. Under §280F, passenger automobiles, trucks and vans are subject to special annual depreciation limits, known as luxury auto limits. These limits begin to apply for cars costing at least $19,000.

keyIf a vehicle is four-wheeled, used mostly on public roads and has an unloaded gross vehicle weight of no more than 6,000 pounds, the car is considered a passenger automobile. Similar characteristics apply to vehicles that are considered light trucks and vans. However, for a vehicle to be considered a light truck or van, it must have been built on a truck chassis and have a loaded gross vehicle weight of no more than 6,000 pounds. The limits will vary, depending on whether the vehicle purchased is technically a passenger car, light truck or van or over the 6,000-pound threshold. Generally speaking, due to the luxury auto depreciation limits that apply only to passenger vehicles, larger vehicles, such as light trucks and vans, will provide greater tax savings.

Generally, vehicles rated under 6,000 pounds will also qualify for a 50% bonus depreciation and an additional §179 deduction. The special 50% bonus depreciation applies to all new passenger cars that are used over 50% for business use. This bonus depreciation limit increases the regular depreciation limit by $8,000. The §179 deduction applies to all passenger auto­mobiles as well, but §280F limits will apply to this type of deduction.

Any vehicle that is rated over 6,000 pounds is not subject to the regular or bonus depreciation limits. In addition, for any vehicle over the 6,000-pound rating, the §179 expense deduction is $25,000. There are certain restrictions that may apply, however. Be sure to consult me about the make and model of your vehicle to accurately determine your depreciation limit.

Please note: If the vehicle is not used 100% for business, the depreciation limit will be reduced by multiplying the luxury auto limit by the percent of business use. The depreciation limit does not apply to any vehicle costing less than $19,000.

2016 Depreciation Limits:

What can you deduct under §179?

Purchasing equipment is simply part of running a business. Electing to immediately deduct the entire business purchase instead of capitalizing it and depreciating the asset over its useful life, which is usually several years, could provide substantial tax relief for business owners, especially those who are purchasing start-up equipment.

To qualify for the deduction, property must have been acquired for business use and by purchase. Tangible property that qualifies for the deduction includes:

  • business-equipmentMachinery and equipment.
  • Property contained in or attached to a building (other than structural components), such as refrigerators, gro­cery store counters, office equipment, printing presses, testing equipment and signs.
  • Gasoline storage tanks and pumps at retail service stations.
  • Livestock, including horses, cattle, hogs, sheep, goats and mink.

Generally, off-the-shelf computer software also qualifies for this deduction, as does qualified real property, including leasehold improvement property, restaurant property or retail improvement property.

Generally, you cannot claim this type of deduction if the expense is being used for:

  • Land and improvements.
  • Leased property.
  • Property used for lodging.
  • Energy property.

The total amount you can deduct under §179 for most property placed in service in tax years beginning in 2016 generally cannot be more than $500,000.

If you’d like to deduct a business equipment purchase but aren’t sure whether it qualifies for the deduction, please feel free to consult me.

IRS Raises De Minimis Safe Harbor Threshold
Life just got easier for certain small business owners

The IRS simplified the paperwork and record-keeping requirements for small businesses by raising the safe harbor threshold for deducting certain capital items from $500 to $2,500. This change affects businesses that do not maintain an applicable financial statement (i.e., audited financial statement). It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item.

The new $2,500 threshold applies to any such item substantiated by an invoice. As a result, small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions. The new $2,500 threshold takes effect starting with tax year 2016. In addition, the IRS will provide audit protection to eligible businesses by not challenging use of the new $2,500 threshold in tax years prior to 2016.

If you have an applicable financial statement, the de minimis or small-dollar threshold remains $5,000.

What’s deductible?

Business start-up costs are deductible in the taxable year in which an active trade or business begins. Start-up expenses may include training wages, pre-opening utilities, rent, advertising, depreciation and any exploration costs. If you are starting a business, you’ll want to separate certain expenses to ensure they get the proper tax treatment. The two categories of start-up expenses are:

  • Expenses you incur in exploring and setting up the business. You may deduct up to $5,000 of start-up costs in the first year. The remaining expenditures are amortized over 180 months, beginning in the first year your business begins.
  • Expenses you incur from the time the business officially begins. These are currently deductible.

Before the IRS will allow you to claim a deduction, your business activity must actually commence. If a business has yet to engage in its core business activity, the IRS will likely disallow any start-up expense deductions.