I am readding NOLO's article referenced at the end about how new Tax Law changes 179 expensing.
Do I read it correctly that I can write off a car cost (new or used) 100% using 179 expensing?
- Me and my wife run our rentals ourselves, so it's a business, not investment.
- I buy a car this year that's used at least 50% for business purposes - rentals, showing as my wife is RE broker.
The biggest issue is the car can't be business and personal use as described. The vehicle would need to be financed and owned by the corporation- not your personal names.
There are other limitations related to 179 and vehicles as well, and it's also considered to look at long term as you can choose to do either mileage expense, or actual, but not both. For many mileage makes more sense.
You can always switch from mileage to actual, but not vice versa.
Aprpecaite prompt response.
We actually run our business as layered LLC structure. Holding LLC is a regular income business providing management services to children LLCs that actually hold rental properties and are passive income.
We would purchase the car from holding LLC funds, would that make a difference?
So far we were reporting milage on holding LLCs, but with the new tax law looks like there is an opportunity to write it all off. Have you looked at the NOLO article?
You can actually take section 179 deduction on the car that will be personally used. It does not have to be under a corporation. When your car is used for both business and nonbusiness purposes, the Section 179 deduction can be elected only if the property is used more than 50% for business in the year it is placed in service. Even then, only the business-use portion of the car qualifies for the Section 179 election.
There are limits on the total depreciation deduction/section 179 deduction you can take on vehicles based on type and weight as well ( max 18k in 2018). There is also income limit. You cant take section 179 if you have a loss from rentals. If your business use falls below 50%, you have to recapture the deduction.
It's better to use the bonus depreciation for the auto that has both personal vs business use. There is no recapture.
Bonus depreciation does not have income limitation but is subject to the overall depreciation limit of autos. ( Max 18k)
Thank you for the clarifications.
Can you direct me how I can learn more about claiming bonus depreciation for the auto that has both personal and business use?
No, you're not really reading the article correctly, especially since it does not address business vehicles at all.
1. The fact that you run your rentals yourself does not necessarily qualify this as a business. There is more to it, mostly the size of your portfolio and the amount of work it requires.
2. Your wife's brokerage business is far easier to attach your vehicle to than your rentals, even if they do qualify as a business.
3. You can only deduct the business portion of the car. If your Volga ;) costs $40k and is used 60% for business, you can never deduct more than $24k, which is 60% of its cost.
4. There are two ways to deduct it: Section 179 or 100% bonus. The bonus is usually better.
5. In its first year, you're still limited to $18k, no matter which method you use. Just a quirk of the law for regular automobiles.
6. Consider buying a heavy (>6,000 lbs) SUV instead. You will be able to apply 100% bonus depreciation to its entire business portion, no matter how high it is.
7. Warning A: after taking this huge deduction the first year, you will only have a very small deduction from Year 2 forward. 60% of actual costs, like gas, insurance and maintenance. No more depreciation and no option to use mileage allowance.
8. Warning B: whenever you sell or trade-in this new car, you will have a taxable gain.
@Alik Levin I would strongly emphasize @Michael Plaks point 7 warning A. If you use bonus and deduct the full business use of the vehicle in Year 1 you will see a huge spike in taxable income in Year 2 since you've used up the depreciation tax shield in Year 1.
It could be a viable option to spread this deduction out over the vehicle's tax life of 5 years.
Michael, very resourceful and clear response with prescriptive guidance - much appreciated!
Josh, thanks for strssing key points and giving cons and pros and helping to make a call.
@Account Closed so you have the option to either spread the costs of the vehicle over 5 years or take it all in the first year? Also, do you have to have an llc or s corp set up? I reached out to my cpa but he didn't seem up to date on the new rules.
The rules did not change too much, actually.
You still have a choice between deducting mileage allowance (which covers everything) and deducting actual expenses. The actual expense method includes depreciation.
Depreciation can be spread over 5 years (often ends up being more than 5, long story) but you can deduct a huge portion of it in the first year. For regular cars, you cannot deduct the whole thing in the first year. For heavy trucks, you may be able to.
What changed is that depreciation rules became more generous across the board. I'd still caution against trying to figure it all out on your own. It's complicated. Trust your software or, better yet, a tax pro.