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Model X IRS 100% Deduction “Hummer Loophole” - 2018 Edition
- Thread starter MelaniainLA
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- Model X section 179 tax break
The vehicle needs to have a GVWR over 6,000 LB. For Tesla, that means only the Model X qualifies.
cpa
Active Member
Only vehicles with a GVW >6,000 pounds receive the 100% business depreciation deduction write-off in the year of purchase. Vehicles that weigh less can receive a reduced depreciation deduction after the maximum Section 179 deduction is taken for "listed" property.
I do not know the actual amounts for 2018. The amounts change frequently from year-to-year, so I just let the software perform the calculations, and then discuss with my clients what they wish to do.
In the spirit of full disclosure, I generally recommend against using actual expenses (depreciation/lease payments, interest, operating expenses, etc.) for income tax deductions and suggest using the standard mileage rate. Recordkeeping is much less; just a contemporaneous log (like using MileIQ) is necessary. Better than half my individuals maintain rather poor records. Actual expenses must be recorded--honestly, how many of you will be parsing your electricity usage and variable electricity costs each day to charge your business vehicle every night that it is plugged in at home or at a public charging station? Unless the car is garaged at the place of business and only used for business, personal use creeps into play. My general experience reveals that personal usage increases year-over-year. Then there is recapture upon disposal.
I agree that being able to write off the business portion (net of rebates/credit) for a Model X is attractive for the year of purchase. Taxpayers potentially could save tens of thousands of dollars in federal tax. No argument. But I would suggest planning out your automobile business expenses and tax savings thereon over your estimated time of ownership. I would also estimate the selling price of the vehicle when sold and figure out how much tax will be owed on the depreciation recapture. Then compare the two totals. The income tax savings (other than time value of money) might not be as large as you would think. And then ask yourself how much additional time do I need to spend each year in tracking all my actual expenses, and how much extra fees I will pay to have my taxes prepared by a professional if you do not prepare them yourself.
I do not know the actual amounts for 2018. The amounts change frequently from year-to-year, so I just let the software perform the calculations, and then discuss with my clients what they wish to do.
In the spirit of full disclosure, I generally recommend against using actual expenses (depreciation/lease payments, interest, operating expenses, etc.) for income tax deductions and suggest using the standard mileage rate. Recordkeeping is much less; just a contemporaneous log (like using MileIQ) is necessary. Better than half my individuals maintain rather poor records. Actual expenses must be recorded--honestly, how many of you will be parsing your electricity usage and variable electricity costs each day to charge your business vehicle every night that it is plugged in at home or at a public charging station? Unless the car is garaged at the place of business and only used for business, personal use creeps into play. My general experience reveals that personal usage increases year-over-year. Then there is recapture upon disposal.
I agree that being able to write off the business portion (net of rebates/credit) for a Model X is attractive for the year of purchase. Taxpayers potentially could save tens of thousands of dollars in federal tax. No argument. But I would suggest planning out your automobile business expenses and tax savings thereon over your estimated time of ownership. I would also estimate the selling price of the vehicle when sold and figure out how much tax will be owed on the depreciation recapture. Then compare the two totals. The income tax savings (other than time value of money) might not be as large as you would think. And then ask yourself how much additional time do I need to spend each year in tracking all my actual expenses, and how much extra fees I will pay to have my taxes prepared by a professional if you do not prepare them yourself.
@cpa, what did u mean by this
"But I would suggest planning out your automobile business expenses and tax savings thereon over your estimated time of ownership. I would also estimate the selling price of the vehicle when sold and figure out how much tax will be owed on the depreciation recapture. Then compare the two totals"
i plan to take probably 80-90% depreciation in the first year (factoring in some minor personal use) and then keep the car for at least 5 yrs to avoid recapture. then sell it hopefully for $50k-$60k after yr 5. what do u think about my plan?
"But I would suggest planning out your automobile business expenses and tax savings thereon over your estimated time of ownership. I would also estimate the selling price of the vehicle when sold and figure out how much tax will be owed on the depreciation recapture. Then compare the two totals"
i plan to take probably 80-90% depreciation in the first year (factoring in some minor personal use) and then keep the car for at least 5 yrs to avoid recapture. then sell it hopefully for $50k-$60k after yr 5. what do u think about my plan?
cpa
Active Member
What I mean would be to schedule out your business profit or loss over your estimated time of ownership. In year one you would show the giant depreciation deduction plus whatever operating expenses incurred (times business percentage.) In the following years, you would only be deducting operating expenses since the vehicle is fully depreciated. Then estimate your estimated income taxes for all those years, including SE tax (if any.) Don't forget the 20% deduction for pass-through entities that went into effect January 1, if you are eligible for this--another wild card that gets thrown into the mix. Operating expenses will be electricity, license/registration, insurance, and annual Tesla service.
When you sell the car, you will have to pay income taxes (Code section 1245--see form 4797) on the difference between the sales price and the tax basis (presumably zero.) There is no minimum or maximum holding period--no "five year rule."
Add up all the taxes paid over this period.
Then do the same exercise using just the standard mileage rate of (I believe for 2018) $0.545 per business mile. Do not depreciate the vehicle. When you sell, there will be no Section 1245 recapture. Compare the results.
Don't forget to factor in Uncle Jerry's taxes too. California does not have near the generous depreciation deductions that the feds have, but California does have its version of Section 1245 depreciation recapture. You might even wind up with a Section 1231 loss for California purposes if the sales price < the adjusted basis for California.
If you do sell the car after five-plus years for 50K, and we assume the business portion is 85%, then you will have $42,500 of 1245 recapture at whatever your marginal federal tax rate would be in the year of sale--easily 24-35% depending upon your income picture in the year of sale.
Moreover, I recall that you are an attorney at law. Your income may fluctuate--some years diamonds, some years dust (if you are like some of my lawyer clients.) You might be taking the large deduction in a low income year and then selling your car in a high income year. In this scenario, you lose out to the progressive tax brackets.
Ain't taxes fun?
When you sell the car, you will have to pay income taxes (Code section 1245--see form 4797) on the difference between the sales price and the tax basis (presumably zero.) There is no minimum or maximum holding period--no "five year rule."
Add up all the taxes paid over this period.
Then do the same exercise using just the standard mileage rate of (I believe for 2018) $0.545 per business mile. Do not depreciate the vehicle. When you sell, there will be no Section 1245 recapture. Compare the results.
Don't forget to factor in Uncle Jerry's taxes too. California does not have near the generous depreciation deductions that the feds have, but California does have its version of Section 1245 depreciation recapture. You might even wind up with a Section 1231 loss for California purposes if the sales price < the adjusted basis for California.
If you do sell the car after five-plus years for 50K, and we assume the business portion is 85%, then you will have $42,500 of 1245 recapture at whatever your marginal federal tax rate would be in the year of sale--easily 24-35% depending upon your income picture in the year of sale.
Moreover, I recall that you are an attorney at law. Your income may fluctuate--some years diamonds, some years dust (if you are like some of my lawyer clients.) You might be taking the large deduction in a low income year and then selling your car in a high income year. In this scenario, you lose out to the progressive tax brackets.
Ain't taxes fun?
Funny you should ask! I asked about this and one CPA told me that as long as that $ is immediately used to purchase a similar vehicle, that won’t happen. A friend had his original 2016 Model x lemoned and that was recaptured because he used the $ to buy a house
@cpa your thoughts?
BTW guys, there's a great article from a tax law firm about this as well. Feel free to email or message me here with questions:
https://markjkohler.com/the-suv-and-truck-deduction-in-2018-an-unexpected-loophole/
https://markjkohler.com/the-suv-and-truck-deduction-in-2018-an-unexpected-loophole/
cpa
Active Member
Now you get into the business casualty loss/gain rules. Those are outside the depreciation recapture rules. I haven't had to go through one of those exercises since Hector was a pup, so I am recalling from memory. I could easily be all wrong or partly wrong or all correct.
Insurance proceeds minus adjusted basis = casualty gain, or casualty loss if the proceeds < basis. If the proceeds are used to purchase similar replacement property, then the basis of the new property is reduced by the amount of any casualty gain. So, assuming a tax basis of zero, and an insurance check of $60,000 . . . . .
(1) Insurance proceeds are used for a home remodel. The full $60,000 is taxable income.
(2) Insurance proceeds are used to buy a $75,000 replacement vehicle. The adjusted tax basis for the new vehicle would be $75K-$60K, or $15,000. That would be the amount to figure any depreciation deduction.
(3) Insurance proceeds are used to buy a $55,000 replacement vehicle. The adjusted tax basis for the new vehicle would be zero, and the taxpayer would report a $5,000 casualty gain on his tax return.
As usual, these calculations require several forms. Form 4684 is the casualty and theft form. Page two (Part B) is for business or investment property. The results from the form 4684 business or investment property then get dumped onto form 4797 to be combined with any other business gains or losses from sales or disposals of property before being transferred either to Schedule D or page one of your 1040.
The new tax law eliminated personal casualty losses. I am almost 100% certain that the business/investment casualty loss rules are intact.
Pro tip: For those souls who have been or will be suckered into losing money through a Ponzi or similar fleecing, for the purposes of the Internal Revenue Code, these are considered theft losses, and can be deducted in full in the year that the scheme collapses and certain other criminal proceedings/convictions/pleadings are realized. This deduction is taken on page one of your 1040 (it is not an itemized deduction.) Furthermore, if the loss in the year deducted is greater than your other sources of income, it can give rise to a net operating loss to be carried forward to offset future years' income. See Rev. Proc 2009-20 for more info.
@cpa , it seems from this article, sec 179 is still important for the X and used with the new bonus depreciation rules
So if I make 100k and pay 30k in taxes throughout the year from my check then do my taxes and get a 1k refund after deductions. Then enter the model x deduction would that mean I would get the remaining 29k in taxes back making it where I don't pay anything for the year? I have a LLC for rental property and do my taxes as pass through taxes. Thanks
Presumably, yes. That assumes your business use is 100% on a $100,000 car -- you'd negate the full $100,000 from federal taxes in the year in which it's purchased, or less by a percentage of personal use of vehicle for JUST the remainder of this calendar year. I did it, and worked.
Happy to walk you through any aspects of this or just be your personal sounding board for questions on any aspects of ordering. Send me a private message on here. Good luck!
carbonx
Member
So what exactly would qualify as business use if you're not running a business that requires deliveries? Would it be a good idea to take delivery at the end of the year - rent the car out on Turo and list car rentals as one of our business income lines?
Uncle Paul
Well-Known Member
Your Turo rental business would have to be profitable enough to take advantage of the tax credits and deductions. IRS takes a pretty dim view of companies designed to loose money for tax purposes.
It could be ANY business for which you can legitimately justify (must pass the laugh test) need for a business vehicle. For example, if you're a consultant and go to different clients, it's your business vehicle for those trips. If you rent on Turo and it's not just occasional but rather a substantial portion of the car's use, it's business. Keep in mind that if you do the Turo business, you must continue it (at least 50% use each year) as a Turo car for 5 years, otherwise you have to pay BACK the $$ depreciated to the IRS. If you sell within 5 years, you also have to pay it back -- it's called Depreciation Recapture. PM me if you'd like to talk...
By the way, my accountant said recapture does not expire after 5 years. It happens whenever you sell the car, and you have to pay taxes on whatever you get from trade-in/sale.
cpa
Active Member
cpa
Active Member
If your full-time employment is managing your scores of rental properties through your LLC, there is a strong likelihood that your business mileage will greater than 50%. Any deduction related to your rental properties would be taken on the 8825 form that is attached to your partnership return. (Or on your Schedule E if you are a disregarded entity.)
On the other hand, if you have full-time employment elsewhere, and own a couple of rental homes, a duplex, or a small commercial property, I find it hard to believe that you would utilize your personal vehicle more than 10% for your rental duties. It is worse if you have a property manager. So, you will lose out on all the bonus depreciation benefits. Take the standard mileage rate. And then you get into all the 469 rules too, which are beyond the scope of this response.
MelaniainLA mentioned something about the "laugh" test. More accurately, it is really the smell test. Look at something from an uninterested third party. I mean no disrespect. But I would not sign a return for a client who insisted upon claiming the 100% depreciation deduction on their Model X if their rental activities were a handful of properties with gross rents for the year in the five-figure range and a small gain or loss. Matters get worse if they have six-figure wages or other forms of income.
Speak to a professional and lay all your cards on the table. Better to pay a couple of hundred bucks up front to have a clear and unambiguous understanding of the rules today than to panic come next April.
I have not seen any discussion about how the new 2018 20% pass-through deduction affects the 179 and 168K analysis? I just ordered a model X and had a long discussion with my accountant about whether my S corp should purchase the vehicle. Bottom line in our case was that he totally convinced me the S Corp should NOT purchase the vehicle and if anything, we should consider the 179 and 168K for our sole proprietorship business (I have an S Corp business and my wife and I also run a second sole proprietor business). It seems to me that the new 20% pass-through deduction makes the 179/168K not as advantageous, especially when you start considering the all the hassle of logging every business mile, and the recapture that has to occur whenever you sell (at any time, not just 5 years). Basically, my accountant was strongly encouraging me to just take the standard cents-per-mile deduction. Disclaimer: taxes make my head swim. That's why I rely on my accountant
cpa
Active Member
I have not seen any discussion about how the new 2018 20% pass-through deduction affects the 179 and 168K analysis? I just ordered a model X and had a long discussion with my accountant about whether my S corp should purchase the vehicle. Bottom line in our case was that he totally convinced me the S Corp should NOT purchase the vehicle and if anything, we should consider the 179 and 168K for our sole proprietorship business (I have an S Corp business and my wife and I also run a second sole proprietor business). It seems to me that the new 20% pass-through deduction makes the 179/168K not as advantageous, especially when you start considering the all the hassle of logging every business mile, and the recapture that has to occur whenever you sell (at any time, not just 5 years). Basically, my accountant was strongly encouraging me to just take the standard cents-per-mile deduction. Disclaimer: taxes make my head swim. That's why I rely on my accountant
Your accountant and I think alike. The standard mileage rate is very generous, and all you need to do is keep a reasonably accurate contemporaneous log of your business miles. You will still get the $7,500 federal income tax credit in full (as long as your income tax liability is >$7,500) as a personal, not business tax credit. You don't have to worry about depreciation recapture when you sell or trade the car in down the road. All in all, it makes life easier for the taxpayer over the long haul. Admittedly, it makes for dandy bar conversations when a person can brag about paying zero income taxes because he purchased a Model X for his business, but I digress.
The twenty percent small business deduction for pass-through entities is a complex, tricky area. It depends on a number of factors: Taxable income before the deduction; wages paid through the various businesses; cost basis of depreciable assets; the industry the business is in. For example, all service businesses, actors, athletes, and others whose personal skills are the primary factor are specifically excluded from obtaining this deduction unless their taxable income is beneath a cutoff amount--I believe 315K for MFJ, phasing out at 415K. (In other words, a lawyer with $125,000 of taxable income will be able to utilize the 20% deduction from his law practice, but a lawyer with $750K of income will not be able to.) Businesses in other industries have limitations tied to wages paid and/or the unadjusted basis of assets that are used in the business. For example, an owner of a small company with zero employees will be able to take the full 20% deduction on his profit if his taxable income is <315K. If his taxable income is >415K, then the deduction is limited to 50% of wages paid (I recall) or 5% of the unadjusted basis in his equipment. So, if this owner has zero employees, and has only 250K invested in equipment, then his deduction will be limited to $250,000(.05) or $12,500.
I seem to recall that there are further adjustments for qualified dividends and long term capital gains in making the calculation, but do not remember exactly how those adjustments dovetail into the final deduction amount.
This is all off the top of my head from doing extensive reading a few months ago to advise my clients for what is in store.
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