New truck time: Expensing vs. depreciation

You need a practical vehicle to get you to all your consulting appointments. An SUV may be your best bet, and John McCormick explains why such a purchase is also a smart tax writeoff.

I'm the last person to encourage anyone to cheat on their taxes, but I've always believed that if God didn't want you to use tax loopholes, Congress wouldn't have made the tax code millions of pages long. Of course, the term “loophole” is a misnomer; Uncle Sam wants you to succeed in a small business so you can employ more people and grow the economy so more people can pay taxes.

Therefore, there are many ways you can save money in your business completely within the tax code by merely adjusting your tactics, but not your goals. One way to save money is to buy a new truck and write it off as a business expense.

Consider a sport utility vehicle
Every successful consultant would love to be driving a Porsche, Cadillac, or Lincoln, but the IRS says those are luxury vehicles. Not only will you have trouble deducting them, you can only depreciate them for a tiny percentage of their cost each year.

Why not join the swelling ranks of Sport Utility Vehicle owners? There's no loss of credibility in showing up at a client's in a shiny new Dodge Durango, a fancy luxury van, or even a sporty Lincoln Navigator.

A big SUV or van makes the perfect mobile office, and as a small business owner it makes perfect sense to keep your client base close to home so you can drive to them rather than spend half your life sitting in airports. (The major exception to this is the one client you sign up just because they are located in Las Vegas, New York City, or your favorite vacation spot.)

But for most client visits, you want to drive. Buy a truck and trick it out as nicely as you like, and you can easily justify it as a business vehicle on the grounds that it can get you to a client complete with all the tools and spare parts you might need, even in the nastiest weather. And the more time you spend on the road, the easier it is to justify owning a large, rugged vehicle.

But if you haven't been inside a leather-wrapped SUV or sat in the swivel captain's chair of a well-equipped, full-size van, then you may not realize it can be every bit as comfortable as most luxury cars.

Gross vehicle weight—why is it so important?
The bottom line here is something known as gross vehicle weight (GVW). It's not as glamorous as a 26-speaker Dolby stereo system and you won't find it advertised by car dealers the way they do dual air conditioning, but GVW is the very first thing a bottom-line business professional looks at when he or she begins to narrow down the vast field of possible new vehicles.

Once a truck passes a certain gross vehicle weight (the current limit is 6,000 pounds) and meets certain other restrictions you should discuss with your tax preparer, you get to deduct the entire purchase cost the first year, up to an ever-rising limit. For 1999, the one-year deduction limit was $19,000; that is, you could only deduct that amount the first year, but you can depreciate the rest. The limit for 2000 is a nice round $20,000.

All other things being equal, and if you qualify for a Section 179 expense, you could only deduct $3,060 the first year if you bought a Caddy in 1999.

If you bought a GMC Suburban or an all-wheel-drive Chevy Astro with air conditioning, two comfortable captain's chairs, and a GVW of 6,100 pounds, you could deduct $19,000 from your business's gross the first year.

You can even legitimately use the vehicle for personal use. Just keep track of the percentage you use it for business and reduce your expense basis by that amount.

This isn't something to just guess about. You need to get the advice of a good tax accountant or CPA who works with small businesses, but failing to take a possible Section 179 expense into account when looking at vehicles can be a costly mistake.
If you have a question or suggestion for John McCormick, e-mail him here.

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