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

[Strawwoodwork]

Hi all, i have a 2017 MX, paid out the door, $104k. I am a business owner and my accountant took advantage of the hummer loophole at that time.
I am considering trading it in for a new X or a Y. Mainly for longer range/faster charging. With the Y i wont have to pay more money... maybe there is a tax incentive that makes buying a x smarter?
Any discussion would be appreciated.
J

 

[mongo]

Hi all, i have a 2017 MX, paid out the door, $104k. I am a business owner and my accountant took advantage of the hummer loophole at that time.
I am considering trading it in for a new X or a Y. Mainly for longer range/faster charging. With the Y i wont have to pay more money... maybe there is a tax incentive that makes buying a x smarter?
Any discussion would be appreciated.
J

You'll need to repay any depreciation included in the sales/ trade in price. If you depreciated the whole thing originally and get a 50k trade in credit, that is 50k of depreciation to add back to your taxes.

Getting another X would allow you to claim the bonus on the new one which cancels out the repayment. A Y won't do that due to being under 6,000 GVWR (less favorable depreciation schedule).

All assumes 100% business use.

 

[msm859]

You'll need to repay any depreciation included in the sales/ trade in price. If you depreciated the whole thing originally and get a 50k trade in credit, that is 50k of depreciation to add back to your taxes.

Getting another X would allow you to claim the bonus on the new one which cancels out the repayment. A Y won't do that due to being under 6,000 GVWR (less favorable depreciation schedule).

All assumes 100% business use.

Correct. It is called recapture. And your depreciation will be based on the percentage of business use (assuming at least 50%).

 

[jason1466]

You'll need to repay any depreciation included in the sales/ trade in price. If you depreciated the whole thing originally and get a 50k trade in credit, that is 50k of depreciation to add back to your taxes.

Getting another X would allow you to claim the bonus on the new one which cancels out the repayment. A Y won't do that due to being under 6,000 GVWR (less favorable depreciation schedule).

All assumes 100% business use.

Correct. It is called recapture. And your depreciation will be based on the percentage of business use (assuming at least 50%).

What if anything changes after the car is 5 years old and fully depreciated and gets sold? In 2017 there was the 25K section 179 and bonus depreciation, but it wasn't 100% back then.

 

[mongo]

What if anything changes after the car is 5 years old and fully depreciated and gets sold? In 2017 there was the 25K section 179 and bonus depreciation, but it wasn't 100% back then.

If the car's full price was depreciated, then any value at sale triggers recapture, regardless of the schedule. Depreciation assumes no end value.
Depreciation Recapture Definition

 

[jason1466]

If the car's full price was depreciated, then any value at sale triggers recapture, regardless of the schedule. Depreciation assumes no end value.
Depreciation Recapture Definition

Would there be any additional penalty prior to 5 years for the section 179, or it's just simple recapture of the sold value minus the depreciation not taken yet?

 

[mongo]

Would there be any additional penalty prior to 5 years for the section 179, or it's just simple recapture of the sold value minus the depreciation not taken yet?

Caveat: not an accountant
No penalties exist for properly claimed depreciation recapture, other than cases where it being taxed as ordinary income is worse for you.

recapture= depreciation claimed - (initial cost - sales price)

 

[cpa]

Read Code Section 1245 and the regulations thereunder. They explain recapture quite well if your eyes don't glaze over first.

Section 179 is a slightly different beast. Generally, but not always, the deduction for Section 179 is treated the same as depreciation for recapture purposes.

If you trade in, you have no cash to pay the income taxes on the recapture, so there is that small matter of ponying up taxes without corresponding cash in your pocket. The good news is that 1245 recapture is not considered SE income.

A slight correction to mongo's equation: Purchase price (net of any tax credit) minus depreciation allowed or allowable = adjusted basis.

Sales price minus adjusted basis = gain or loss upon disposition.

This tax situation is figured on form 4797, page 2 for gains, and form 4797, page 1, for losses.

 

[Simon21]

Read Code Section 1245 and the regulations thereunder. They explain recapture quite well if your eyes don't glaze over first.

Section 179 is a slightly different beast. Generally, but not always, the deduction for Section 179 is treated the same as depreciation for recapture purposes.

If you trade in, you have no cash to pay the income taxes on the recapture, so there is that small matter of ponying up taxes without corresponding cash in your pocket. The good news is that 1245 recapture is not considered SE income.

A slight correction to mongo's equation: Purchase price (net of any tax credit) minus depreciation allowed or allowable = adjusted basis.

Sales price minus adjusted basis = gain or loss upon disposition.

This tax situation is figured on form 4797, page 2 for gains, and form 4797, page 1, for losses.

Very helpful, thanks. So it's better to trade it in than to sell it?

 

[cpa]

Very helpful, thanks. So it's better to trade it in than to sell it?

Like many questions, it depends. What I was trying to convey was that if you trade your car in, you will not have any cash to pay the income taxes on the depreciation recapture, while if you sell the car, you will have the cash. It may be moot in your case if you have other sources of cash available. You might realize a higher selling price if sold for cash instead of accepting a trade-in value.

Then there is that human frailty that many of us have in that we worry about taxes only in April. Just be sure you rathole your money between the day you do your Tesla buying/selling/trading and when you file. Then, and only then, is your money actually yours!

 

[mattack4000]

I am not a business owner, but isn't section 179 just allow you to accelerate the depreciation from 5 year to 1? You don't get any bonus right. If your car is 100K, you still only get to take 100K, just all in current year instead of over 5 years? Also if your car fully depreciated, doesn't the trade in value get added back as income and depreciate the new car at the new schedule?

 

[2020-X]

First off. Amazing post. I've read through all 13 pages.

Thinking of buying the X with the 6000 lb weight for qualification.

Part of a 3 owner-LLC

The business is an entertainment venue where we have to be there to set up the experiences and personally talk and watch the customers go through the games.

Is the commute to the business considered business use? We also drive around to pick up supplies, but more often it'll be to driving to the business to take care of customers. Which is about 60% of our annual miles come from.

Thanks!

 

[mattack4000]

It depends on how you purchase the vehicle. Personally use of a dual purpose vehicle is technically taxable income as salary if you issue yourself salary. You driving to work is not deductible, but driving to buy supplies is.

 

[rjdoc74]

Exactly. As a physician, commute to primary office or a hospital is not deductible, but driving to 2 or 3d office or hospital is. BUT you may be confusing mileage deduction and section 179 deduction. For mileage deduction, your vehicle doesn’t have to weigh over 6000 lbs, any car will do. Section 179 deduction is completely different and allows you to take a business deduction based on the price of the vehicle. Talk to your accountant.

 

[2020-X]

Ya'll are amazing. Thank you for the responses. I had hoped driving out to the business to meet with customers would count as section 179 use of over 50% for business related driving, but unfortunately it appears not.

I also spend quite a bit of time working from home in my office. The administration/employee management/phone calls with customers/phone call sales/book keeping are all done at home.

I wonder if that would make a difference.

I'll keep reading and make sure I have all my questions in order before I make that 150$ phone call to my CPA.

Thanks!

 

[JamesG]

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!

 

[JamesG]

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!

Remember when you sell the car the proceeds are regular income taxed at highest marginal rate

 

[Jp12687]

Hi
So I am looking to get an X this year. I’m going to buy it as part of a side business I have (consultant and realtor) that brings in about $40k per year in side income.

my goal is to get it late December and use it primarily for business to get 90-100% business use this year.

my understanding is id be able to fill write off the car and roll the entire business income to 0 this year and roll over additional loses to next year.

Is that understanding accurate? When I sell the car sometime in the future I could have depreciation recapture issues if I sell it for anything.

 

[wbhokie]

Hi
So I am looking to get an X this year. I’m going to buy it as part of a side business I have (consultant and realtor) that brings in about $40k per year in side income.

my goal is to get it late December and use it primarily for business to get 90-100% business use this year.

my understanding is id be able to fill write off the car and roll the entire business income to 0 this year and roll over additional loses to next year.

Is that understanding accurate? When I sell the car sometime in the future I could have depreciation recapture issues if I sell it for anything.

Pretty much all true yes. Just did our taxes and we pretty much did the same thing. Purchased an X mid December. Drove it business only as we had other cars. Wrote it off as 100% business use depreciation using the hummer loophole. Assuming your income/profits are high enough, your deduction is massive. (on year one)

Of course, you go into that knowing as a realtor you will lose the normal annual depreciation deductions you would have over time during the loan because you claim it all at once instead. (You still get your other vehicle expenses but don't claim depreciation the next year for it)

And you already seem to be aware of the recapture if you sell it within 5 years.

 

[mongo]

And you already seem to be aware of the recapture if you sell it within 5 years.

There is no time limit on recapture due to sale.
https://taxmap.irs.gov/taxmap2013/pubs/p946-013.htm
If business use drops below 50% during 5 years, recapture kicks in. https://taxmap.irs.gov/taxmap2013/pubs/p946-023.htm#en_us_publink1000107524