Small business owners are often looking for additional ways to lower their taxes. One simple and effective tax planning technique that is available thanks to the Tax Cuts and Jobs Act (TCJA) is to purchase a “heavy” vehicle, work from a qualifying home office, and keep detailed business expense records. This opportunity will be available from 2018 through 2022.
New and pre-owned heavy SUVs, pickups, and vans acquired and put to business use in 2018 are eligible for 100% first-year bonus depreciation under the TCJA. The key is that you must use the vehicle more than 50% for business. As long as your business usage is between 51% and 99%, you can deduct that percentage of the cost in the first year the vehicle is placed in service. Qualifying vehicles need to be acquired and placed in service between September 28, 2017, and December 31, 2022.
Your federal income tax bill and self-employment tax bill, if applicable, will be reduced thanks to the 100% first-year bonus depreciation write-off. There may also be a state tax income deduction as well.
To collect additional tax savings, set up a business office in your home. In order to combine the benefits of these two tax breaks, there are three steps required:
1. Pick Out a Suitably Heavy Vehicle
The 100% first-year bonus depreciation deal is only available for an SUV, pickup or van with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. You must purchase the vehicle, not lease it. If the vehicle is lighter, first-year depreciation deductions are subject to a maximum limit of only $18,000 for 2018.
There are many vehicles above the 6,000-pound threshold including:
· Audi Q7,
· BMW X5,
· Buick Enclave,
· Cadillac Escalade,
· Chevy Tahoe,
· Ford Explorer,
· Jeep Grand Cherokee, and
· Lincoln Navigator.
Many full-size pickups also qualify. The GVWR can usually be found on a label on the inside edge of the driver’s side door.
Remember, the 100% first-year bonus depreciation deal is allowed only if you use your heavy SUV, pickup or van over 50% for business. The percentage will be calculated by dividing the business mileage by total mileage for the year (see Step 3 for details).
2. Set Up a Home Office
If you have an office in your home that qualifies as a principal place of business, it’s easier to pass the over-50%-business-use hurdle for your new heavy vehicle. All mileage accrued commuting from your home office to temporary work locations—whether customer offices or job sites—is considered business mileage. Commuting mileage between your home office and other regular places of business (perhaps another office you keep) also counts as business use.
And yes, according to the IRS, the miles you drive from other regular places of business to temporary work locations count as business mileage too.
You can see how easy it is to accumulate business miles once your home office qualifies as a principal place of business, making it easier to pass the over-50%-business-use test for your heavy vehicle.
There are two different way to qualify a home office as a principal place of business for self-employed individuals (sole proprietors, partners, and limited liability company members):
· Conduct most of your income-earning activities in the home office.
· Conduct your administrative and management chores in the home office. To take advantage of this qualification rule, however, you can’t make substantial use of any other fixed location (like another office downtown) for administrative and management functions.
The home office space must be used “regularly and exclusively” for business purposes during the whole year under either option. You might need to wait until next year to set up your deductible home office and buy your heavy vehicle because exclusively means no personal use at any time during the year.
Important reminder: You can’t write off home office expenses under the current rules If you’re an employee of your own corporation. The TCJA eliminated unreimbursed employee business expense deductions for 2018 through 2025.
3. Keep Detailed Business Expense Records
You must have detailed, contemporaneous expense records for this small business tax planning strategy in case the IRS questions your heavy vehicle’s claimed business-use percentage or your home office deductions.
You’ll need to keep track of the miles you’re driving for business purposes, compared to the vehicle’s total mileage for the year. Now that there are apps and mobile technology, recordkeeping is much easier, although you can simply keep a small calendar or mileage log in your car and record details as business trips occur.
Your vehicle records should include the trip mileage, destination, purpose, and date of the business trip and (if applicable) who you were meeting. And of course, hold onto your sales invoice when you purchase a heavy vehicle.
As addressed above, home offices must pass the 1) regular-and-exclusive-use test and the 2) principal-place-of-business test. Your allowable business mileage could be significantly reduced If your home office fails either test.
You’ll need to keep records to support the amount of your home office deduction. Taxpayers can deduct actual expenses when they claim a home office deduction, including:
· Direct expenses, like the cost of painting and carpeting a room used exclusively for business,
· A proportionate share of indirect expenses, including mortgage interest, property taxes, utilities, repairs and insurance, and
· A depreciation allowance for the office portion of your home.
This can be very time-consuming. Luckily, there’s an easier method that’s allowed under a tax law change that went into effect in 2013: You can simply deduct $5 for each square foot of home office space, up to a maximum total of $1,500.
Tax-Saving Double Play
You can potentially reap major tax savings by combining the 100% first-year bonus depreciation break for heavy business vehicles with the home office deduction privilege. If you have questions or need more information about this strategy, contact your tax advisor.