[Business Tax Tips] Claim Immediate Tax Deductions for Qualified Assets Including SUVs Over 6,000 lbs
With 2020 coming to an end, now is a great time to make some easy and smart tax moves to help lower your tax bill and increase your tax refund when you file. We spoke to Betty Kim at Encore Partners, one of our favorite CPAs, about some of the best business tax strategies you can take advantage of before the year-end. She told us that before Dec. 31, your business can act quickly and purchase any needed business equipment and other depreciable property. That way, you can take advantage of the Section 179 deduction and bonus depreciation.
The election provides a tax windfall to businesses, enabling them to claim immediate deductions for qualified assets, instead of taking depreciation deductions over time.
Even better, the Sec. 179 deduction isn’t the only avenue for immediate tax write-offs for qualified assets. Under the 100% bonus depreciation tax break, the entire cost of eligible assets placed in service in 2020 can be written off this year.
You may finance to purchase business properties, so no cash or little is spent, but the entire purchase price is either deducted 100% or depreciated in 2020. Unbeatable tax strategy you should consider to your taxable income.
But to benefit for this tax year, you need to buy and place qualifying assets in service by December 31.
Say you are considering replacing the car that you are using for your business – for tax savings purposes, you may be better off if you replace your business car with a heavy sport utility vehicle (SUV). That’s because the caps on annual depreciation and expensing deductions for passenger automobiles don’t apply to trucks or vans (and that includes SUVs) that are rated at more than 6,000 pounds gross (loaded) vehicle weight. This means that in most cases you will be able to write-off the entire cost of a new heavy SUV used entirely for business purposes as 100% bonus depreciation in the year you place it into service.
Please note that the tax benefits described above are all subject to adjustment for non-business use. Also, if business use of an SUV doesn’t exceed 50% of total use, the SUV won’t be eligible for the expensing election, and would have to be depreciated on a straight-line method over a six-tax-year period.
The Sec. 179 deduction applies to tangible personal property such as machinery and equipment purchased for use in a trade or business, and, if the taxpayer elects, qualified real property. It’s generally available on a tax year basis and is subject to a dollar limit.
The annual deduction limit is $1.04 million for tax years beginning in 2020, subject to a phaseout rule. Under the rule, the deduction is phased out (reduced) if more than a specified amount of qualifying property is placed in service during the tax year. The amount is $2.59 million for tax years beginning in 2020. (Note: Different rules apply to heavy SUVs.)
There’s also a taxable income limit. If your taxable business income is less than the dollar limit for that year, the amount for which you can make the election is limited to that taxable income. However, any amount you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable dollar limit, the phaseout rule, and the taxable income limit).
In addition to significantly increasing the Sec. 179 deduction, the TCJA also expanded the definition of qualifying assets to include depreciable tangible personal property used mainly in the furnishing of lodging, such as furniture and appliances.
The TCJA also expanded the definition of qualified real property to include qualified improvement property and some improvements to nonresidential real property, such as roofs; heating, ventilation and air-conditioning equipment; fire protection and alarm systems; and security systems.
What about bonus depreciation?
With bonus depreciation, businesses are allowed to deduct 100% of the cost of certain assets in the first year, rather than capitalize them on their balance sheets and gradually depreciate them. (Before the Tax Cuts and Jobs Act, you could deduct only 50% of the cost of qualified new property.)
This tax break applies to qualifying assets placed in service between September 28, 2017, and December 31, 2022 (by December 31, 2023, for certain assets with longer production periods and for aircraft). After that, the bonus depreciation percentage is reduced by 20% per year, until it’s fully phased out after 2026 (or after 2027 for certain assets described above).
Bonus depreciation is allowed for both new and used qualifying assets, which include most categories of tangible depreciable assets other than real estate.
Contact Encore Partners LLP if you have questions, or you want more information about how your business can maximize the deductions.
Betty Kim, CPA
Encore Partners LLP
Tel. (858) 549-7100