AUTOMOTIVE

This section is provided to assist clients in making informed financial decisions when buying, selling or leasing vehicles. Being knowledgeable before shopping can help save those hard-earned dollars.

Buying, Selling or Leasing a Car

This is provided to assist clients in making informed financial decisions when buying, selling or leasing vehicles. Being knowledgeable before shopping can help save those hard-earned dollars. This page is organized in logical steps to help you prepare yourself.

(STEP #1) Determine Trade-in Values - Use this link to determine the trade-in value of your vehicle. The valuation will take into consideration the make, model, year, mileage, condition and vehicle amenities.

(STEP #2) Determine Affordability - Based on your down payment (if any), trade-in (if any), current interest rates, and the amount you can afford monthly, this loan payment calculator will determine what purchase price you can afford. With this information, proceed to the new or used car values to select a vehicle within your price range.

(STEP #3a) New Car Values - Use this link to determine the suggested resale price of a planned new car purchase.

(STEP #3b) Used Car Values - If you plan on purchasing a used vehicle, use this link to determine the estimated used car retail value. Caution: Used car values can vary significantly, based on the condition of the vehicle.

(STEP #4) See if any of the special considerations below apply to you.

Considering a Lease? If you are considering a lease rather than purchasing a vehicle, our calculator can assist you in evaluating whether it is better to lease or buy.




Special Rules for Car Donations

Congress has imposed tough rules that substantially limit the deduction for this charitable donation.

It is common practice for charities to immediately resell the donated vehicles to a wholesaler at substantially reduced prices, generally far less than the Fair Market Value (FMV) one might consider as the listed bluebook FMV of the vehicle.  As a result and to keep taxpayers from deducting more than the charity benefited from the donation, if the deduction exceeds $500, the deduction will be limited to the gross proceeds from the charity’s sale of the vehicle.

Example: A taxpayer donates a car with a FMV of $2,000 to a charity. The charity immediately sells the car to a wholesaler for $900. The taxpayer would only be able to deduct the gross proceeds from the charity’s sale. This limits the taxpayer’s charitable contribution deduction to $900.

In addition, a written acknowledgement from the charity is required and must contain the name of the donor, donor’s tax ID number and the vehicle identification number (or similar number) of the vehicle. The IRS  Form 1098-C incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. This form must be obtained within 30 days of the sale of the donated vehicle. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat or airplane.

There is an exception to these rules for donated vehicles which the charity retains for their own use “to substantially further the organization's regularly conducted activities” or sells it at a price significantly below FMV (or gives it away) to a needy individual in direct furtherance of the charitable purpose of a donee of relieving the poor and distressed or the underprivileged who are in need of a means of transportation. Please call this office for more information.

Deducting Auto Expenses & Luxury Auto Limits

When you use a vehicle for business purposes, you can deduct the business portion of the operating expenses as a business expense. If you use the car for both business and personal purposes, you may deduct only the cost of its business use. You can generally determine the expense for the business use of your car in one of two ways, the standard mileage rate method or the actual expense method.

Standard Mileage Rate Method: The standard mileage rate takes the place of fuel, oil, insurance, repair, maintenance and depreciation (or lease) expenses. The rate varies from year to year and for 2017, the standard mileage rate is 53.4 cents per mile (down from 54.0 in 2016). In addition, the cost of business-related parking and tolls is deductible. 

Caution: If you don’t use the standard mileage rate in the first year the vehicle is placed in service, you cannot use it in future years for that vehicle. If, in a subsequent year, you switch to the actual method, you must use the straight-line method for depreciation. If the car is leased, you must continue to use the standard mileage rate in future years.

Actual Expenses Method: To use the actual expense method, determine the entire actual cost of operating the car for the year and then determine the business portion attributable to the business miles driven. Parking fees and tolls attributable to business use are also deductible. Both methods can include interest paid on the car loan when deducted on business returns. However, the interest deduction is not allowed for employees deducting job connected car expenses as part of their itemized deductions.  Unfortunately, if you deduct actual expenses for the business use of your car, you will probably find your write-offs for depreciation restricted due to so-called luxury car limitations. And most all cars (including trucks or vans) fit the IRS definition of a “luxury vehicle,” regardless of their cost. If a vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, the car is considered a “luxury vehicle.”

The depreciation deduction for luxury vehicles has an annual limit, which is $3,160 for 2016 and if bonus depreciation is elected, the first year luxury vehicle limit will be $11,160. The first-year limit is $400 more for vans and trucks purchased in 2016. At the time this article was updated (1/17) the IRS had not yet released the 2017 rate.  

In an effort to rein in the practice of purchasing SUVs as a tax shelter, Congress has placed a limit of $25,000 on the §179 deduction for certain vehicles. The limit applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less. Excluded from this limitation is any vehicle that: is designed for more than nine individuals in seating rearward of the driver’s seat; is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

The following is a representative example of a heavy SUV write-off (assuming 100% business use) using the maximum Sec 179 exclusion.

Heavy SUV Total Cost                                   $50,000
Sec 179 Deduction                             
Balance                                                        $25,000
Regular 1st Year Depreciation (20%)          $5,000
Total First Year Write-Off                                                                        $30,000

If you are planning to buy an SUV based on this big write-off, be sure to call first to find out the status of any current legislation on this issue and how the tax benefits apply to your particular situation.

Will the Interest on Your Vehicle Loan be Deductible?

The answer to that question depends upon whether or not the vehicle is being used for business purposes, where the expenses are being deducted, and the type of loan. If the loan is a consumer loan secured by the vehicle, then the following rules would apply:
  • If the vehicle is being used partially for business and the expenses are being deducted on your self-employed business schedule, then the business portion of the interest will be deductible as business interest, but the personal portion will not.

  • If the vehicle is being used partially for business as an employee and the expenses are being deducted as an itemized deduction, then neither the business portion nor the personal portion of the interest will be deductible.

  • If the vehicle is entirely for personal use, then none of the interest will be deductible, because the only interest that is deductible as an itemized deduction is home mortgage interest and investment interest. 

As an alternative to a nondeductible consumer loan, you might consider acquiring that vehicle with a home equity line of credit. Generally, current law allows individual taxpayers to borrow up to $100,000 of home equity and deduct the interest on that loan as home mortgage interest. This would also apply to the purchase of a vehicle or motor home. Using a home equity line will make the interest deductible.

Before borrowing against the home, you should consider the following:

  • Treat the home equity loan like a consumer loan and pay it off over the same period of time you would have had to pay the consumer loan. Otherwise, you may reach retirement age without having the home paid for.

  • When buying a car, you can sometimes get very favorable interest rates or a rebate.To determine which is best, compare the difference in total loan payments over the life of the loan to the rebate amount.

  • It is also good practice to make sure the benefit of making the interest deductible is greater by using the home equity line of credit than the benefit of the low interest consumer loan or the rebate.

  • If there is any chance of defaulting on the loan, the repercussions from defaulting on a home loan are far more serious than on consumer debt.

If you need assistance in deciding on a course of action, please call our office.

Looking for Business Tax Deductions? Look No Further Than Your Business Vehicle!

The options for deducting the business use of a vehicle are both numerous and generous. In fact, there are so many options that some can easily be overlooked. Note: When a vehicle is used both for personal and business use, the expenses must be prorated based on miles driven for each purpose.

Listed below are some of the current options:
  • Lease or Purchase – Your first option deals with the manner in which you acquire the vehicle. Whether you decide to lease the vehicle or purchase it, you may choose to deduct the business use of the vehicle using either the actual expense method or the standard cents-per-mile method. Note: If you choose the actual expense method the first year, then the standard cents-per-mile method cannot be used in any future year for that vehicle.

  • Trade-In or Sell Old Vehicle – If you are replacing an existing vehicle, you have the option either to trade in the old vehicle or to sell it. Without considering other economic factors, if the sale of the old vehicle would result in a gain, then you may wish to consider trading it in and avoid the need of reporting the gain and instead reduce the cost basis of the replacement vehicle. On the other hand, if the sale will result in a loss, then it would probably be better to sell the vehicle and take the loss on your return.

  • Cents-Per-Mile Method – This method requires the least amount of bookkeeping. You need only record the business miles and total miles driven on the vehicle each year, and the business deduction is the business miles multiplied by the rate for the year. Note: This method cannot be used to compute the deductible expenses of five or more autos owned or leased by a taxpayer and used simultaneously, such as in fleet operations.

  • Actual Expense Method – As the name implies, this method involves deducting the actual expenses of operating the vehicle. This requires keeping track of the operating costs, including fuel, oil, maintenance, repairs and insurance. In addition, either the annual lease expense or, depending on the class of vehicle, an allowance for wear and tear on the vehicle is added to the annual expenses. A record of the business and total miles must also be maintained to determine the business portion of the expenses.

  • Class of Vehicle – The class of vehicle affects the limitations that are applied to the allowances for wear and tear available for a particular vehicle.

    A. Vehicles With No Limitations: The following vehicles qualify for the Sec 179 deduction, regular depreciation and for years when permitted by law, first-year bonus depreciation. Depending on the methods selected, virtually any amount of the cost of this type of vehicle can be deducted in the year of purchase.

    - Heavy Vehicle – A vehicle exceeding 6,000 pounds gross unladen weight such as many of today’s sport-utility vehicles.

    - Qualifying Nonpersonal Use Vehicle
    – A vehicle that has been specially modified with the result that it is not likely to be used more than a de minimis amount for personal purposes.

    - Exempt Vehicles – A vehicle used directly in a taxpayer’s trade or business of transporting persons or property for compensation or hire, such as an ambulance, hearse, taxi, clean fuel vehicles, bus or commuter highway vehicles.

    B. Those With Limitations: The following vehicles are limited by the luxury auto rules:

    - Luxury Vehicle – Generally, a vehicle costing more than an annually inflation-adjusted threshold ($15,900 to $17,700 for 2016) and not falling into one of the other previous categories. This threshold and the annual limits are not determined until part way through the year.

    - Special Trucks & Vans – Defined as passenger autos that are built on a truck chassis, including minivans and sport-utility vehicles (SUVs). These vehicles are subject to the annual luxury vehicle limitations, but are allowed an additional amount (usually $200 or $300, depending on the year purchased) added on to those limitations.

    C. Vehicles with Other Limitations: In addition to those described above, there are certain other seldom encountered vehicles, such as electric vehicles and certified clean fuel vehicles, with other special allowances.

  • Interest and Taxes – In addition to the other deductions discussed above, the business portion of personal property taxes, license and interest on the debt to purchase the vehicle are also deductible when the vehicle expenses are being deducted on a business schedule.
NOTE: Limitation for Employees -  An employee who uses a personal vehicle for business and who qualifies to claim unreimbursed vehicle-related costs must include those expenses as part of the miscellaneous itemized deductions category on Schedule A, and that entire category of expenses is deductible only to the extent the total exceeds 2% of the taxpayer’s adjusted gross income. However, employees are allowed to claim all of the personal property tax portion of their vehicle registration fees as a Schedule A tax expense rather than as part of their employee business expenses.

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