You might be surprised to learn that the new tax law actually rewards business owners for purchasing large, gas-guzzling vehicles for business use. Surprised? Me, too. I just purchased a Mini Cooper for my business because it gets almost 40 miles to a gallon of gas. However, according to a recent article in the Wall Street Journal, when it comes to paying taxes, my thrifty, "green" conscience may go unrewarded. In fact, if you are a small business owner who uses a vehicle in your business – especially a large one – you should take note of this new tax break. The new rules apply to vehicles purchased after Sept. 8, 2010 and before January 1, 2012. So, if you’re in the market to purchase a vehicle for your business, you’ll want to crunch some tax numbers first.
Here are some tips to consider:
- Business Use. Remember, unless the vehicle is used 100% for business, expenses are not fully deductible. The IRS is quick to question claims of 100% business use of a car.
- Depreciation deductions.This year Congress is running a large “bonus depreciation” on cars weighing more than 6,000 pounds, such as the Cadillac Escalade and Nissan Armada. Taxpayers may deduct 100% of the car’s cost in the first year – subject to the personal use disallowance, of course. Additionally, if this deduction creates a loss, the loss may be carried back to generate a refund. The new law also gives greater depreciation deductions in years two through six for cars costing more than $30,625.
- Tax Breaks for Fuel-Efficient Cars. There are still substantial tax breaks for purchasing a fuel-efficient car. Let’s not forget that all taxpayers (not just business owners) are eligible for a dollar-for-dollar tax credit up to $7,500 for “plug-in electric motor vehicles” like the Chevy Volt. If you are a business owner planning to purchase one of these vehicles, experts say you should take this credit first, and then figure depreciation based on the remaining purchase price.
As always, don’t let the “tax tail wag the dog,” when it comes to purchasing a car for your business. Consider, as I did, not just your business needs but feed your need to be environmentally friendly. Living as I do within sight of two rivers that feed the Chesapeake Bay, I feel a responsibility to be be a conscientious consumer although my slow adjustment to this way of thinking has not been without pain, especially knowing that luxury cars are built to impress. When purchasing a car for your business, consult with qualified counsel to help you crunch the tax numbers. If a small, inexpensive, fuel-efficient car is what you really want, then purchasing something larger and more expensive just for the tax advantage or in order to keep up with the Jones, probably will not make sense. However, if you need a heavier, more expensive vehicle to accomplish your business goals, then you won’t want to miss out on the tax breaks.
Reference: The Wall Street Journal Online (May 14, 2011) “The New Tax Breaks for Business Autos”