Model X IRS 100% Deduction “Hummer Loophole” - 2018 Edition

[cpa]

Once you take Section 179 on a vehicle, does the asset stay on the tax forms in subsequent year?

Yes. Automobiles are listed property, and the taxpayer must complete the questions on page 2 of the depreciation form (4562.) Autos are listed on the upper part of page 2, including the business use percentage. And if for whatever reason his business use percentage falls below 50%, some of the previously deducted Section 179 is recaptured, even though the vehicle has not been disposed.

Over the years I have advised my clients to add phantom income to their personal returns to pay taxes on their personal usage or to write a personal check to the business to pay for their personal use, thereby increasing the profit to the business. Both methods passed muster with IRS agents.

He really ought to engage a competent person to review the audit findings. Sometimes the agents make errors. The examiners are evaluated on cases closed and not necessarily on getting every detail right. The person so engaged can also amend the state return timely. California usually waits until six months remain on the statute before sending a bill. If the person hired does see an error on the revenue agent report, he can file a claim for refund after the taxpayer pays the audit assessment.

 

[mattack4000]

In his situation, he definitely screwed up as he was a W2 employee in his own company. He failed to document the personal use of a company car as a fringe benefit and forgot to tax himself on it.

If the car stays on the return, that means any personal use even after you claim the credit in full would be subject to recapture. If you take 100% in 2017, but you use the car 25% of the time as personal, you would have to add back some of the depreciation you took in 2017 on your 2018 return.

 

[mongo]

In his situation, he definitely screwed up as he was a W2 employee in his own company. He failed to document the personal use of a company car as a fringe benefit and forgot to tax himself on it.

If the car stays on the return, that means any personal use even after you claim the credit in full would be subject to recapture. If you take 100% in 2017, but you use the car 25% of the time as personal, you would have to add back some of the depreciation you took in 2017 on your 2018 return.

For 179, you need to recapture only if the business use drops below 50%.
https://taxmap.irs.gov/taxmap/pubs/p946-013.htm

 

[cpa]

If the car stays on the return, that means any personal use even after you claim the credit in full would be subject to recapture. If you take 100% in 2017, but you use the car 25% of the time as personal, you would have to add back some of the depreciation you took in 2017 on your 2018 return.

Not exactly. You describe a timing difference. In this matter there is no timing difference. Whatever value he received from his personal usage must be reported in the same calendar year. Your friend received the benefit throughout 2017, so the income must be reported personally in 2017.

A brief example: Total costs for 2017 were $8,000 for electricity, insurance, interest on the auto loan, license fee, and other. Depreciation/179 is $12,000. Business usage is 75%.

Business deducts $6,000 of operating costs and $9,000 of depreciation/179 on the 2017 return. The remaining costs of $5,000 are non-deductible and appear as a reconciling item on Schedule M-1 of the 1120. The technically proper way to report the personal use of the car would be to add $5,000 to his 2017 W-2 that would appear as wages in box 1, but not be subject to FICA or Medicare tax withholding. But most employers are unaware of this technicality, and most payroll services/payroll clerks/bookkeepers won't pursue this method of reporting. And some payroll software is incapable of having these one-off events and accounting for them properly on the quarterly and annual payroll tax returns submitted to the IRS and EDD. So, the company could issue him a 1099-MISC reporting $5,000 in Box 3, other income instead.

This gets tricky and hard to understand for a lot of people because wages on the W-3 transmittal <> wages deducted on the corporate tax return, even when we reconcile an accrual basis corporation to the cash basis W-3 transmittal. Moreover, total wages in box 1 will not reconcile with Social Security wages and Medicare Wages in their boxes, even factoring in wages > SS limitation.

As I stated above, a sensible solution for your friend would be to have the company deduct 100% of the expenses, and then he writes the company a personal check on December 30, making darn sure that his check is deposited into the bank before Jan. 1.

 

[glusc2002]

I’m creating a new thread on this issue since the old thread was about 2017 rules and got confusing. Since there’s been some confusion around this and I just typed the following up for someone else in a PM, thought I’d clarify the new rules under the Trump Tax Law that would enable up to 100% immediate tax deduction for a Model X — See below and if you want to reach me personally with any questions PM me or my email is hdhemmati at gmail dotcom:

I was totally clueless about this 179 deduction and bonus business depreciation business for heavy SUVs (>6000 pounds GVWR or “Hummer Loophole”). Then my uncle did it and then I discovered some friends did it too. I hired a tax attorney to give me an official opinion (paid her $150 for 30 min time on phone) so that I would have this documented and protect myself in case of issues down the line and prove that I did my diligence on it.

Basically, under the new Trump tax plan (Effective late September 2017 and valid through at least 2018), you get to deduct up to 100% of the Model X value off your taxes as a proportion of its BUSINESS use in the year you buy it without needing to depreciate over several years as before. For example, say you buy a Model X in May, and you use it 75% for professional work (consulting, wedding photographer, private doc, whatever you do) and 25% personal, and the car cost $100k including tax, you deduct $75k off your federal taxes (and an appropriate proportion off state based on your state rules - you have to depreciate the state component over 5 years in my state of CA) -- you might report a loss but that way you get $$ back year of the following years. The business to personal ratio has to be DOCUMENTED and believable and must exceed 50% to trigger. You can't say easily 100% unless you did what I did: I bought it 2nd to last week of December. I kept my old car until Jan 2. I drove the X ONLY for business and then left it alone in my garage until Jan 1. That way, I got to say 100% business! $100k car, after tax, ended up costing me $50k. Not bad, eh? You MUST have documentation in the form of a mileage log (handwritten) ideally supported by odometer readings using Tesla Service records. The IRS can (and often does) request the documentation at audit time.

Math was as follows:
Car after tax: $100,000
Section 179 Deduction: $25,000 (heavy vehicles only)
100% bonus depreciation: $100,000-$25,000 = $75,000 (new Trump tax plan effective late September 2017 and beyond; previously it was 50% bonus, which meant $37500, not $75,000)
Total write-off from federal taxes: $25,000 + $75,000 = $100,000 (100% of the car)
The key, therefore, is to keep business use to a maximum level in 2018 so you get the maximal deduction upfront.

I do my own taxes btw... This was relatively easy to do in TurboTax but some accountants aren’t yet up to speed on the Trump tax changes. You can get a loan and pay the loan off over time, but take the tax deduction RIGHT away. So I have a loan from tesla at 1.49% interest and I deduct the interest as well!! But the PRINCIPAL (the cost of the car + tax) got written off immediately!

Moreover, through all/most of 2018 you'll get $7500 off your taxes from federal government for having an EV, ON TOP of the 100% immediate tax deduction, making it even cheaper. That is on top of any state and local incentives you might be eligible for ($2500 from CA state and $500 from LA City for us). And if you order through a referral link from an existing Tesla owner, you get free lifetime supercharging access.

Happy to discuss with anyone here in more depth (PM or email me) -- all this depends on your tax situation etc so might be worthwhile confirming with accountant (if you have one) re your personal situation before taking the plunge. For what it's worth, I'm VERY happy I did! You'll LOVE your car as well. A lot of people on Tesla forums and TMC bent over backwards to help me make purchase decisions (battery, colors, options, etc) and we are all here to help you with your choices as well.

Good luck!

Hi may i ask how this qualifies for a whole value tax write off if owning a business with the stated specs of the model x weighing less than 6,000lbs? how are people writing this off under the rules for 6000 and greater? thanks

 

[MelaniainLA]

Hi may i ask how this qualifies for a whole value tax write off if owning a business with the stated specs of the model x weighing less than 6,000lbs? how are people writing this off under the rules for 6000 and greater? thanks

The rules do NOT state weight of 6000 lbs or higher -- but rather a GVWR of 6000 or higher -- GVWR, which ALL Model X vehicles have >6000 lbs is a federal calculation and is listed on a sticker in the inside drivers door -- assumes you have loaded up the car FULLY.

 

[glusc2002]

The rules do NOT state weight of 6000 lbs or higher -- but rather a GVWR of 6000 or higher -- GVWR, which ALL Model X vehicles have >6000 lbs is a federal calculation and is listed on a sticker in the inside drivers door -- assumes you have loaded up the car FULLY.

Thank you for the fast reply! sent this to my accountant who stated 6000lbs pertaining to the weight, but this is good clarification. Are there any other document verbiage you could reference thats useful? thanks again

 

[SubSolar]

Hi may i ask how this qualifies for a whole value tax write off if owning a business with the stated specs of the model x weighing less than 6,000lbs? how are people writing this off under the rules for 6000 and greater? thanks

Gross vehicle weight rating - Wikipedia

The gross vehicle weight rating (GVWR), or gross vehicle mass (GVM) is the maximum operating weight/mass of a vehicle as specified by the manufacturer[1] including the vehicle's chassis, body, engine, engine fluids, fuel, accessories, driver, passengers and cargo but excluding that of any trailers

 

[⚡️ELECTROMAN⚡️]

I work for a hospital as a maintenance person. I've been trying to get management to buy a used LEAF to replace our electric golf cart pickup thing that is falling apart. If the hospital bought a Model X instead would they be able right it off? What would the yearly cost be?

 

[Brando]

company vehicles are a business expense

Consider a bike (or trike) as you might get more exercise?

have fun

 

[tamx3]

Hey guys, my first post and looking at the model x for my consulting business. My goal is to purchase in december, use for business and then park it till 2020 to reduce any confusion as to proving the 100% business use for 2019. Am i clear on any IRS audits in future years as to how the vehicle is leveraged for personal or business? I am not a W2 employee of my company but it is a single member LLC.

thanks,

 

[LowlyOilBurner]

So, I drive 30,000~miles a year, probably 25,000 of those miles are for work (outside sales, large territory). Thing is, my company gives us a monthly car allowance (a pretty decent one). Probably no way to make this 179 thing work, since I’m being compensated for personal vehicle usage? I can ring my accountant about this, or maybe someone can save me the $200.00 phone call? Thanks in advance!

 

[mongo]

So, I drive 30,000~miles a year, probably 25,000 of those miles are for work (outside sales, large territory). Thing is, my company gives us a monthly car allowance (a pretty decent one). Probably no way to make this 179 thing work, since I’m being compensated for personal vehicle usage? I can ring my accountant about this, or maybe someone can save me the $200.00 phone call? Thanks in advance!

If you're getting reimbursed at ICE levels plus a monthly stipend, then it might be a better deal. 179 and other depreciation come back to bite you when you dispose of the vehicle.
25k miles @ $0.58 a mile is $1,200 a month/ $14k a year on it's own. (Roughly $1,200 a year in electricity).

 

[cpa]

Not to mention, miscellaneous itemized deductions have been eliminated with the 2017 act. I do not know if New York conformed or not.

 

[ithinkmac]

You don't have to park it. Just keep track of you business use mileage. Microsoft's MileIQ is great for this.
You should have a justifiable use case for your vehicle.
There should be some logical sense in why you need the vehicle for your business.
I've seen people buy vehicles on the last day of the year and get the whole year's 179 benefits. They could have driven only 10 miles from dealership back to office and it counts.

Hey guys, my first post and looking at the model x for my consulting business. My goal is to purchase in december, use for business and then park it till 2020 to reduce any confusion as to proving the 100% business use for 2019. Am i clear on any IRS audits in future years as to how the vehicle is leveraged for personal or business? I am not a W2 employee of my company but it is a single member LLC.

thanks,

 

[mongo]

You don't have to park it. Just keep track of you business use mileage. Microsoft's MileIQ is great for this.
You should have a justifiable use case for your vehicle.
There should be some logical sense in why you need the vehicle for your business.
I've seen people buy vehicles on the last day of the year and get the whole year's 179 benefits. They could have driven only 10 miles from dealership back to office and it counts.

This is beyond the 179 deduction. If you can get 100% the first year (buy in late December, drive for business and park), then you can depreciate the entire Model X purchase price as bonus depreciation. After that, you need to stay above 50% business use via mileage tracker.

One caveat is that you must pay back depreciation when you eventually dispose of the vehicle.

Basically, under the new Trump tax plan (Effective late September 2017 and valid through at least 2018), you get to deduct up to 100% of the Model X value off your taxes as a proportion of its BUSINESS use in the year you buy it without needing to depreciate over several years as before. For example, say you buy a Model X in May, and you use it 75% for professional work (consulting, wedding photographer, private doc, whatever you do) and 25% personal, and the car cost $100k including tax, you deduct $75k off your federal taxes (and an appropriate proportion off state based on your state rules - you have to depreciate the state component over 5 years in my state of CA) -- you might report a loss but that way you get $$ back year of the following years. The business to personal ratio has to be DOCUMENTED and believable and must exceed 50% to trigger. You can't say easily 100% unless you did what I did: I bought it 2nd to last week of December. I kept my old car until Jan 2. I drove the X ONLY for business and then left it alone in my garage until Jan 1. That way, I got to say 100% business! $100k car, after tax, ended up costing me $50k. Not bad, eh? You MUST have documentation in the form of a mileage log (handwritten) ideally supported by odometer readings using Tesla Service records. The IRS can (and often does) request the documentation at audit time.

 

[RealDeal]

What happens if you don't stay above 50% business use in year 2 after writing off 100% in year 1 via bonus depreciation?

 

[mongo]

What happens if you don't stay above 50% business use in year 2 after writing off 100% in year 1 via bonus depreciation?

Bad, bad things.
Like repayment of the excess depreciation.

 

[cpa]

Bad, bad things.
Like repayment of the excess depreciation.

Yup. Or. . . .

Scenario (1): In May of year two, an unanticipated life-changing event occurs. Until this date, your business usage was around 60%. For the rest of the year, you have no additional business use, so that at December 31, your business usage for the year is 25%. Then you pick up as income in year 2 the recaptured amount as Mongo said. (Remember we have a "voluntary" tax system, so this would be a voluntary acknowledgement on your part.)

Scenario (2): Instead of the unanticipated event, you have a pretty good feeling that by May you will be hired as an executive for a company, and you will not need a car as part of your job. I would defer filing my taxes for Year 1 until you realize this executive position, and I would not--not--claim the 100% depreciation in Year 1. If you did file, then I would amend Year 1 and not take any depreciation; just the standard mileage rate and pay any additional tax due plus interest.

Scenario (3): Same facts as scenario 2. You take the 100% depreciation. You get the job. The X is now just a personal vehicle. You receive a notice in the mail in Year 3 that Year 1 is being audited. The examiner determines that you were never entitled to the 100% write-off for 63 business miles driven the last week of December, Year 1 because you knew that you would not be using the car >50% for business in future years. He will disallow the depreciation deduction (if lucky he will allow 63 miles @ 58 cents), and you owe back taxes and interest for a year or so. And since it is quite likely that this large deduction is >20% of your income, you will owe negligence penalties on top of the taxes and interest.

 

[XcelerateAuto]

We have clients that do this all the time but the key is they put it in the business name and they use it for business use. It doesn’t have to be a new X it just has to be new to the company. I’ve never heard of anyone doing a TRAC then buying the lease out at the end and claiming under sec.179 since the title changes hands from the lessor to the lessee/buyer. Any CPA’s want to tackle that one?