2020 Year-End Tax Reduction Strategies
No. 1 Purchasing a Vehicle or Big Equipment
“Can I buy a new car and write it ALL off this year?”
This is, by far, the most frequently asked question every year when business owners start getting worried about their tax bill.
I wouldn’t need to write a post about it if it was an easy ‘Yes’ or ‘No’ answer.
But I’ll do my best to make it simple.
First, some boring stuff you may not want to hear:
- You need to understand a rule that applies to any vehicle purchase, whether it’s all written off this year or not. You can only get a deduction equal to the business use % of the vehicle. For many people that is not, legitimately, 100%. Unless the vehicle is used in a business with a fleet, or some other obvious application that is business only use, you probably use it for some personal mileage.
- The vehicle can be purchased by the business, or by the owner-employee. If purchased by the owner-employee, there is a little more accounting paperwork to be done.
- If you choose to get the big first-year write off, you are choosing to deduct ‘actual costs’ rather than the mileage deduction. This means you will need to track actual fuel, repairs, insurance, and other expenses associated with operating the vehicle.
- The deductions mentioned below are available even if you purchase a USED vehicle, as long as it’s not purchased from related party.
- Even if you buy it on December 31, and put zero down, you still get the deduction on this year’s tax return. Although, you must ‘place it in service in 2020’, which means you do need to drive it at least 1 mile for business purposes in 2020.
Now, to the Answers:
You can write off 100% of the cost this year If your vehicle is used 100% for business purposes, and is either of the following:
- SUV with a GVWR of > 6,000 lbs
- Truck with a GVWR of > 6,000 lbs, and a bed of at least 6ft in length
- Van with a GVWR of > 6,000 lbs, and can seat more than nine passengers (excluding the front row), or is a Cargo Van with no seats in the back
If you cannot claim that it’s used 100% for business, that’s ok, but you will only get a deduction for the % of business use. But if your business use is 50% or less, you cannot take advantage of the first year write off at all.
- Example 1: You purchase a Suburban for $65,000 which is used 80% for business. You will get a deduction of $52,000 ($65,000 x 80%) on this year’s tax return.
- Example 2: You purchase a Suburban for $65,000 which is used 40% for business. You do not qualify for the first-year special deduction. You have to take the normal depreciation over the next 5 years. Simplified, to a deduction of $5,200 per year ($65,000 x 40% = $26,000 / 5 years)
You cannot write it ALL off if your situation is anything but above. However, you can still likely write off a big portion of the total cost this year.
- Up to a $30,900 deduction this year if you purchase a Truck or Van that is > 6,000 lbs but fails the bed length, or passenger test.
- Up to a $18,100 deduction this year if you purchase any other vehicle that has a GVWR of less than 6,000 lbs.
If you purchase business equipment such as a bulldozer, computer server, etc. you can write off ALL of it this year.
…if you are still reading, you deserve to know some important technicalities.
- You will likely have to report some portion of the deduction you are taking now, as INCOME, when you sell or trade-in the vehicle. This is known as depreciation ‘recapture’.
- If business use goes below 50% in a future year, you will have to recapture much of the deduction that year.
- As with just about any tax matter, we recommend you talk with an experienced tax professional about your specific situation rather than relying on general advice.