2018 Luxury Auto Depreciation Limits Increasing

Finally, lawmakers did the right thing by increasing the luxury auto depreciation limits on business cars.

The old luxury limits were unrealistic, punitive, unfair, and discriminatory against any car that cost more than $15,800. The new limits don’t create parity in all respects, but they are a big improvement.

If you bought a car in 2017 and paid more than $15,800, you were driving a luxury car that lawmakers punished you for by putting a lid on your depreciation.

For example, say in 2017 you bought a $40,000 car and drove it 100 percent for business. Your maximum depreciation deductions for the first five years would total only $15,060. To fully depreciate this car under the old rules would have taken 19 years.

It was ridiculous to take 19 years to depreciate that $40,000 car. And now, finally, lawmakers have fixed a big part of what the tax code calls luxury automobile limits.

Under the new law, this $40,000 vehicle is fully depreciated in six years. Think about that. Old law: 19 years. New law: six years.

Essentially, the new law sets the so-called luxury automobile limit at $50,000. This means that any vehicle costing $50,000 or less is not penalized by the luxury vehicle limits when using MACRS depreciation.

Under the new law, the annual limits are:

  • Year 1, $10,000
  • Year 2, $16,000
  • Year 3, $9,600
  • Year 4 and each succeeding year, $5,760

What do the new limits mean? Before 2018, many business taxpayers were buying vehicles with gross vehicle weight ratings (GVWRs) greater than 6,000 pounds to escape the draconian roughly $15,000 luxury limits.

Even today, SUVs, crossover vehicles, and pickup trucks can avoid the automobile luxury limits and even qualify for immediate write-offs of the full business cost using bonus depreciation or Section 179 expensing. Cars don’t qualify for unlimited bonus depreciation or any added benefits from Section 179 expensing.

But the big deal in the new realistic luxury auto limits is that there’s far less need to buy the bigger, heavier SUV or crossover vehicle, because of the new higher luxury limits. With a car costing $50,000 or less, you realize 71.2 percent of your total vehicle deductions in the first three years.

If you are thinking of a new or replacement business vehicle and would like to discuss the new rules, contact me at: info@iwealthstrategies.com

Recent Tax Reform kills the Section 1031 exchange on personal property

Beginning January 1, 2018, tax reform no longer allows Section 1031 exchanges on personal property such as your business vehicle.

The trade-in was the most common 1031 exchange of a business vehicle. Now, because of tax reform, the vehicle trade-in is simply the sale of the old vehicle to the dealer and the purchase of a new vehicle. The sale to the dealer creates gain or loss on the sale just as it would on an outright sale.

But having a taxable event does not necessarily mean that you are going to pay more taxes. There’s more than one nifty silver lining for many business taxpayers in this lost ability.

For example, if you pay self-employment taxes, you usually come out ahead if you use the “sell and buy” strategy rather than the trade-in strategy (Section 1031 exchange).

With the sell-and-buy strategy, you save self-employment taxes because

  • you don’t pay self-employment taxes on the sale of your existing business vehicle, and
  • you deduct depreciation and Section 179 expensing on your new vehicle (even when you use IRS mileage rates, you benefit).

Owners of S and C corporations don’t generate any self-employment tax savings on the sales and purchases of new vehicles. They just have gains and losses.

If you operate as a corporation and the sale or trade-in of your existing vehicle is going to produce a big taxable gain, why do it? Before tax reform, when you could avoid taxes with the trade-in, you could easily justify the newer vehicle. Not so after tax reform.

Perhaps now, more than ever, you should have me calculate your tax result before you sell or trade in a vehicle or other personal property. Contact me to set up a time to talk.

The "S" Corporation and the new Section 199A tax deduction

Tax reform created a new 20 percent tax deduction for select pass-through entities. Will your business operation create the 20 percent tax deduction for you?

If not, and if that is due to too much income and a lack of (a) wages and/or (b) depreciable property, a switch to the S corporation as your choice of business entity may produce the tax savings you are looking for.

To qualify for the full 20 percent deduction on your qualified business income under new tax code Section 199A, you need defined taxable income of less than $157,500 (single) or $315,000 (married).

If your taxable income is greater than $207,500 (single) or $415,000 (married), you don’t qualify for the Section 199A deduction unless you have wages or property.

Example. Sam is single, not in the out-of-favor specified service trade or business group (doctors, lawyers, consultants, etc.), operates a sole proprietorship that generates $400,000 of proprietorship net income, and has taxable income of $370,000. In this condition, Sam’s 20 percent Section 199A tax deduction is zero.

Here’s how the S corporation helps Sam. The S corporation pays Sam a reasonable salary, let’s say that’s $100,000. With this salary, Sam pockets

  1. $10,871 on his self-employment taxes, and
  2. $17,500 on his new-found 20 percent deduction under new tax code Section 199A.

Is this something you and I should talk about? If so, please contact me to set up a time to talk.

The new Section 199A Phaseouts - what it may mean to your small business

If your pass-through business is an in-favor business and it qualifies for tax reform’s new 20 percent tax deduction on qualified business income, you benefit at all times, including being above, below, or in the expanded wage and property phase-in range.

On the other hand, if your business is a specified service trade or business (doctors, lawyers, accountants, actors, athletes, traders, etc.), it is in the out-of-favor group and you benefit only when you are in or below the phaseout range.

New tax code Section 199A creates a totally uncomplicated 20 percent tax deduction for you on your qualified business income if you operate a proprietorship, partnership, or S corporation and you

  • are married and file a joint tax return with less than $315,000 in taxable income, or
  • are single and file your tax return with less than $157,500 of taxable income.

Example. You operate a proprietorship, file as a single taxpayer with $135,000 of taxable income, and have qualified business income of $120,000. Your new 20 percent tax deduction is $24,000 ($120,000 x 20 percent).

Once your taxable income exceeds the threshold amounts above, you arrive in one of the four possible categories below:

  1. Phase-in range for a non-specified service trade or business
  2. Phaseout range for a specified service trade or business
  3. Above the phase-in range for an in-favor non-specified service trade or business
  4. Above the phaseout range for an out-of-favor specified service trade or business

If your taxable income is going to be above the threshold amounts that trigger the phase-in or phaseout issues, you and I should spend some time on your tax planning. Please contact me to discuss.