tax write-offs

[rh71]

Not a finance person in the least... help me understand something... as an example...

Say the person is in the 25% tax bracket, with $100k annual income. Person buys a $60k vehicle and writes it off (section 179).

25% of $60k = $15k ... $100k taxable income minus $15k is now only a $85k taxable income.

So whatever amount was saved in that $15k of taxable income is the total they just saved in the price of the vehicle. Is this correct ?

 

[vi edit]

Tax bracket comes after deductions (effective rate).

If you make 100k, and you have 60k in deductions, you're income is now 40k. You pay taxes at whatever rate 40k is at.

 

[rh71]

$100k income = $25k taxes
$40k income = $10k taxes

^ wow so "business owners" are saving $15k on the cost of the "business vehicle" in that situation ?

 

[Slew Foot]

If you buy a 60K car, do you deduct the whole thing right away, or just the actual payments you make?

 

[Slew Foot]

Originally posted by: rh71
^ wow so "business owners" are saving $15k on the cost of the "business vehicle" in that situation ?

If I understand correctly probably more than that.
100K*30%= 30k In taxes
40K*25%= 10K in taxes for a 20K savings. Not sure about the exact tax rates though.

 

[vi edit]

Originally posted by: Slew Foot
If you buy a 60K car, do you deduct the whole thing right away, or just the actual payments you make?

***NOT A TAX ACCOUNTANT***

There was major loophole that existed that allowed vehicles with a gross weight over 6000 pounds (or thereabout) to have a one time lump write off. It was aimed at construction companies and farmers but every Realtor and small business owner in the world that wanted a Hummer or Suburban now had a free shot at it.

Normal vehicle purchases are depreciated over time (XX% of vehicle a year). Leases are usually a full write each month since all you are really paying on is depreciation anyway.

 

[smack Down]

Originally posted by: Slew Foot
If you buy a 60K car, do you deduct the whole thing right away, or just the actual payments you make?

You can only write off the deperation on the car.

 

[rh71]

However, when it comes to vehicles purchased utilizing the Section 179 break, legislators took back some of the benefit as it related to large sport utility vehicles. When the limit was originally increased, business owners were allowed to select for company use one of several light-truck models (which included many luxury SUVs) weighing more than 6,000 pounds fully loaded and write off most, if not all, of the costs on their tax returns. That changed on Oct. 22, 2004, when the American Jobs Creation Act became law; now only company vehicles weighing 14,000 or more are eligible for the larger deduction amount.

But it seems people are still doing it...

What the deduction does is lower your tax basis so that your corporate/income taxes are taxed at a lower tax basis. Where it does come in handy tho, is if you own a business and take out a loan for say 5 years. You will only pay your payments, but you can take the deduction in the year you place the vehicle in service (essentially creating 25000 cash flow for your company). Its not a loophole, but more about how business property can be "expensed" in the first year of ownership as opposed to 5 year depreciation. This is called the "section 179" deduction and must not exceed 108,000 for all equipment purchased for the business.

The old limit was the total of the expensing limit, 108000. The new limit is 25000. The vehicles must be over 6000gvwr (and used primarily for business) to apply for this expensing deduction under Section 179.

 

[hiromizu]

Like a computer write off, you cannot take a lump sum deduction but instead over a 5 year depreciation (guess). Also at 100K, your tax bracket is not 25%, it's 33%. It's 25% up to about $64K. Above that I believe it's 28% up to $96K and above that, 33%. Your income tax bracket however is calculated after business expense deductions are made. So if you've deducted $30K in business expenses, your tax bracket is actually $70K

 

[piasabird]

It probably depends on the Depreciation Formula also.

Only if a vehicle is used solely for business can it be totally deducted. Driving to and from work does not qualify for a deduction. You would have to have a business use for the vehicle like picking up clients, driving to appointments, sales trips, buying supplies. All of these things should require a trip log showing how many miles you traveled for the said work. For instance if your business was pizza and you delivered pizza with the vehicle, that would qualify a a business expense. Or if you drove to the Wholesaler to pick up goods to sale in your store, that would qualify for a deduction. Or if you deliver Newspapers, that would qualify for a deduction.


Accountants use various depreciation formulas. You could take the price of the vehicle and divide by the exected life of the vehicle in years and deduct a flat amount every year. Or you could realize that a big chunck of depriciation occurs that day you drive a vehicle off the lot and use a curve or some formula. If you try to sell a used computer you will realize the average life of a computer is 3-5 years and that in the first year it loses half its value or pretty close to it. However, some things like houses may actually increase in price.

Dont forget maintenance costs as well. You have to do a repair or pay for a license or pay taxes. Some of that may be deductable and some may not. State licenses or taxes may be deductable on a state form or may not.