New and pre-owned “heavy” SUVs, pickups and vans used over 50% of the time for business are eligible for the IRS’s Section 179 depreciation write-off in the year they are first put into business use. The Section 179 deduction will reduce your federal income tax bill and self-employment tax bill, if applicable. You might get a state income-tax deduction too. Setting up a business office in your home can help you collect additional tax savings. Here’s what you need to know about the benefits of combining these two tax breaks.
First, pick out a suitably heavy machine
The Section 179 deduction deal applies to a wide range of “business property.” But when it comes to vehicles, the really big deduction is only available for an SUV, pickup or van with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds that is purchased (not leased). First-year depreciation deductions for lighter vehicles are subject to skimpy limits of a little over $3,000—just a fraction of what a bigger vehicle can get.
It’s easy to find attractive vehicles with GVWRs above the magic 6,000 pound threshold. Examples include the Audi A7, BMW X5 and X6, Buick Enclave, Cadillac Escalade, Chevy Tahoe, Dodge Durango, Jeep Grand Cherokee, Nissan Titan, Toyota Tundra, Ram pickups, and most other full-size pickups. You can usually find the GVWR on a label on the inside edge of the driver’s side door.
Then play the home office angle
As I said earlier, the tax-saving Section 179 deduction is only allowed if you use your heavy SUV, pickup or van over 50% of the time for business. (The business-use percentage is calculated by dividing business use mileage by total mileage for the
More business mileage also means a bigger Section 179 deduction. For example, a $50,000 heavy SUV used 100% for business in 2014 generally means first-year depreciation deductions of at least $30,000 ($25,000 from the Section 179 deduction plus another $5,000 of “regular” depreciation). In contrast, 70% business use would generally cut your first-year deductions to only $21,000 (70% x $30,000).
Last but not least, allowable home office expenses count as business deductions that will reduce your federal income tax bill and your self-employment and state income tax bills, if applicable.
How to make your home office a principal place of business
Our beloved Internal Revenue Code gives self-employed individuals (sole proprietors, partners, and LLC members) two different ways to qualify a home office as a principal place of business.
First way: You conduct most of your income-earning activities in the home office.
Second way: You conduct your administrative and management functions in the home office. However, to take advantage of this qualification rule, you cannot make substantial use of any other fixed location (like another office downtown) for administrative and management chores.
If you are an employee of your own corporation, your home office write-offs are treated as miscellaneous itemized deductions that can only be written off to the extent they exceed 2% of your adjusted gross income.
In any case, you must use the home office space regularly and exclusively for business purposes during the whole year. Exclusively means no personal use at any time, so you might have to wait until next year to set up your deductible home office and buy your heavy SUV, pickup or van. No problem. That gives you more time to shop around for the right vehicle.
The bottom line
You can potentially mate the Section 179 first-year depreciation break for heavy business vehicles with the home office deduction privilege and reap major tax savings. If you feel guilty about buying a gas guzzler, console yourself by thinking about the taxes you saved.
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