Q. We were at dinner with some friends who are self-employed, as are we. They just bought a new SUV and said we should consider doing so before year end since we were considering replacing our truck with an SUV in the next couple of years anyway. They tried to explain the benefits, but they rely on a CPA to make sure they do everything correctly, while we do our own taxes.
Should we jump on this and make a major purchase, and if so, could you explain why?
I wouldn’t spend money just to save taxes, but if you are planning to buy a new vehicle for your business, it may make sense to do so before year end. I’ll provide a simplified explanation, but it may also make sense for you to hire a tax professional on this and other issues that apply to the self-employed and to small-business owners.
This is the last year for what was once called the “Hummer tax loophole.” Section 179 of the U.S. Internal Revenue Code is the tax code allowing for the deduction of the cost of certain types of property as an expense, rather than requiring the cost to be capitalized and depreciated. The property is limited to that which is acquired by purchase for use in a trade or business. The Section 179 election is not mandatory, but it’s usually more advantageous than depreciating property over a number of years using the modified asset cost recovery system.
To take the Section 179 election, the property must be purchased and placed in service before midnight Dec. 31.
There are dollar limits:
• The maximum deduction a taxpayer may elect for 2012 is $139,000 on qualified new and used equipment as well as off-the-shelf software. This limit is reduced to $25,000 for years beginning after 2012.
• There is a limit also on how much can be spent in a single taxable year before the allowed 179 deduction is reduced. This dollar amount is $560,000 for 2012 and $200,000 thereafter. In 2012, there is also a 50 percent bonus depreciation that can be taken for new equipment purchases.
If you want to buy an SUV, to get the largest deduction you need to purchase a large vehicle, and it must be new, not just new to you. The gross vehicle weight must exceed 6,000 pounds and not be more than 14,000 pounds. If the salesperson doesn’t know the gross vehicle weight, the poundage can be found on the specifications plate inside the driver’s side front door.
You must purchase and place the SUV in service (drive at least one business mile) before midnight Dec. 31. You can expense up to $25,000 under Section 179, plus a 50 percent bonus depreciation and MACRS depreciation.
Example: You buy and place in service a new $45,000 qualifying SUV for which you can claim 100 percent business use. You can expense $25,000 plus the 50 percent bonus $10,000 plus the MACRS depreciation.
A qualifying used SUV does not qualify for the 50 percent bonus depreciation, but it still qualifies for the Section 179 expensing of up to $25,000.
Meet with a tax professional to see whether a purchase makes sense in your situation.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 99466, Raleigh, NC 27624