As you know, last year Congress passed the Tax Cuts and Jobs Act (TCJA) at the end of 2017 which, for the most part, effects the business purchases made in 2018. One of the business modifications was the ability to write off (thru use of Bonus Depreciation) 100% of USED equipment and Vehicles (Heavy SUVs, Vans and Trucks) used for business beginning on purchases put into business use after 09/27/17 thru 12/31/2026. But how will this affect your tax in the long run? I mean, most of us don’t buy vehicles every other year so is taking advantage of this 100% write off actually good for you in tax planning? Short answer – NO, not unless the year of purchase is an anomaly and you had huge profits you were/are trying to mitigate. Note that this 100% write off does NOT apply to passenger vehicles which is not the purpose of this post. Couple rules you need to know to help you figure this out…
- In the year of purchase you get a choice – Actual Costs or Standard Mileage Rate. This can be good to be able to have the choice in a year where you ended up not driving as often and you had a year where you had maintenance on the vehicle (but I’ll get into more of this below) say things like tires, brakes, water pumps… Essentially in the year where Actual costs exceeded the Standard Mileage Rate.
- Standard Mileage can only be used IF you use standard mileage in the First Year the vehicle is placed into Use, if you opt for Actual Expenses (Gas, Depreciation, Repairs, Insurance) in the first year, you can never use mileage rate.
See the dilemma caused? If you take Mileage, you lose the 100% depreciation but if you take the Deprecation you lose the Mileage option later after the vehicle is fully depreciated. So, how do you determine which is better? Make yourself a schedule take into consideration the following things:
- Is the vehicle New or Used? Although the TCJA adds the ability to write off Used vehicles (so long as it’s new to you), a Used vehicle may not be under warranty and repairs to the vehicle may be more costly so plan for this in your analysis
- How many miles do you expect to drive EACH year. On the below example, the client I did this for drives, on average 30,000 miles/year
- Fuel Costs – Using the expected miles, determine the Fuel Cost per mile. If the vehicle gets 20miles to the gallon at a rate of $3/gallon – your annual fuel cost would be $4500 (30,000 divided by 20 Miles/gallon x $3.00/gal = $4,500
- Insurance Cost
- Annual Vehicle Registration Cost
- Depreciation itself – Vehicles are 5 year Assets and can be depreciated under MACRS and using the 200% Double Declining Balance Method.
Here’s another thing to consider (which I mentioned above I would get into), If the vehicle isn’t used 100% for business, you need to reduce the Actual Costs by the Mileage used for Personal use. So if the vehicle is only used 50% for business, then only 50% of the actual costs can be deducted for business purposes AND the other 50% COULD be a Taxable Benefit to the user if the vehicle is owned by the business. Don’t over look personal use. You are required to keep mileage logs on your vehicle.
If the vehicle is used/owned by the business, you should have a log in the vehicle when the vehicle is loaned to employees or used personally by the Owner of the business. At the end of the year then, these miles are required to be added back to the employee’s W2 as a taxable benefit to the employee. Your Business percentage is the determined by this annual log of personal use. Here’s the schedule I did for my client. As you can see… it works better for us to use Mileage even in the first year where he’s considering no mileage used at all. Year 2 then has higher actual miles, followed by Year 3-6 using Mileage. Even with this scenario and losing the first year Depreciation, this person gets a higher benefit by opting out of the bonus depreciation and electing to use mileage in year 1, followed by Actual in Yr 2, then Mileage again in years 3-6.
So the moral, don’t be drawn in by teaser write off’s – they may end up costing you more in the long run.
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
| Year1 | Year2 | Year3 | Year4 | Year5 | Year6 | |
| Deprec | 3,900 | 14,040 | 8,424 | 5,054 | 3,033 | 4,549 |
| Bonus Depr | 0 | 0 | 0 | 0 | 0 | 0 |
| Fuel | 0 | 4,500 | 4,500 | 4,500 | 4,500 | 4500 |
| Insurance (Est) | 750 | 750 | 750 | 750 | 750 | 750 |
| Repairs | 0 | 300 | 1,700 | 900 | 1,200 | 1700 |
| Plates | 175 | 175 | 175 | 175 | 175 | 175 |
| Actual Cost | 4,825 | 19,765 | 15,549 | 11,379 | 9,658 | 11,674 |
| Mileage / yr | 0 | 30,000 | 30,000 | 30,000 | 30,000 | 30,000 |
| Mileage Allow | 0 | 16,350 | 16,350 | 16,350 | 16,350 | 16,350 |
| Mileage Allow | 0 | 16,350 | 16,350 | 16,350 | 16,350 | 16,350 |
| Benefit Using Mileage In year 1 | $85,165 | |||||
| Benefit Using Depreciation in yr 1 | $72,850 | |||||
