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

[MelaniainLA]

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!

 

[ebfio]

Thanks for this. My accountant is strongly recommending me against even coming close to Section 179. Maybe I need a new accountant...?

I’ll reach out over PM. Thank you again.

 

[pkodali]

Thanks for this. My accountant is strongly recommending me against even coming close to Section 179. Maybe I need a new accountant...?

I’ll reach out over PM. Thank you again.

Our accountant also suggested against it because apparently the use of section 179 increases the likelihood of an audit significantly

 

[MelaniainLA]

Our accountant also suggested against it because apparently the use of section 179 increases the likelihood of an audit significantly

Yes but if you are legit you’ll survive an audit. Just do things legally. For me it was very easy in fact!

 

[bayarea_joe]

Yes but if you are legit you’ll survive an audit. Just do things legally. For me it was very easy in fact!

The title says "loophole". I thought it always imply not legal.

 

[mattack4000]

Better hope GOP's plan to trim the IRS keeps working because this is an audit waiting to happen. Claiming the vehicle's cost in full and then not offset the $7500 credit that you get, that's already one flag. Any section #179 is an automatic flag. A luxury vehicle claimed as a work vehicle, that's another one.

 

[HankLloydRight]

If your taxes are legit, consider it a $50000 bonus for the chance of an sudit. Even if you're audited, isn't the trouble worth it?

Btw, by definition, loopholes are legal.

I know plenty of people that buy "luxury" SUVs for business. The MX isn't even luxury, it's just expensive.

 

[cpa]

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!

While I do not disagree with the majority of your thesis, I do have some comments:

If you receive the full $7,500 federal tax credit off your return, are you reducing your depreciable basis by the $7,500? If you also receive rebates from the State of California and your Air Pollution Control District and your utility are you reducing your depreciable basis by the cash received? Or are you claiming those rebates as miscellaneous income on page 1 of your 1040?

There ain't no free lunch. You might ask your tax lawyer about those items. Also ask your tax lawyer about depreciation recapture. That is the nasty little surprise at the bottom of every form 4562/4797 p2. And the new tax law eliminated like-kind exchanges on personalty. No more trade-ins to defer the gain on the sale or disposal of a business asset. Taxes are due in the year of trade-in, and there is no cash to pay those taxes.

If you report a loss on your business because of the depreciation expense your $7,500 tax credit may be limited the first year, but it will carry over to subsequent years. If you do not pay any income taxes at all in 2018, then the personal part of the credit in your 75%/25% example is gone forever. No carryover of the personal credit.

I hate to be the buzzkill in your excitement--seriously--but unless you give a tax lawyer or competent accountant ALL the relevant facts and ask not only about this year but also for future years, you might get surprised 4-5 years down the road. I can tell you from decades of experience, no one likes those kinds of surprises.

Since you do your own taxes on Turbo Tax, I suggest you prepare a dummy 2017 return with a November 2017 purchase date for your X. Do your mileage split. See exactly what happens to your return. Then do one with an assumed sale from a make-believe 2013 purchase of a Model S with a total write-off and see how much depreciation recapture you have and the taxes owed for a sale at --pick a number.

At least depreciation recapture is not subject to SE tax.

 

[MelaniainLA]

@cpa Thank you! Completely agree with you. The $7500 and any state and local incentives you get would be “income” (my naive non CPA term) as a percentage of business use claimed. TurboTax actually accounted this for me.

Depreciation recapture only applies if you drop below 50% business use in subsequent years and/or sell or dispose of the vehicle prior to that period expiring, no?

And YES, my $7500 credit carried forward into subsequent years as you said. Appreciate the insight and clarifications of this non-cpa

While I do not disagree with the majority of your thesis, I do have some comments:

If you receive the full $7,500 federal tax credit off your return, are you reducing your depreciable basis by the $7,500? If you also receive rebates from the State of California and your Air Pollution Control District and your utility are you reducing your depreciable basis by the cash received? Or are you claiming those rebates as miscellaneous income on page 1 of your 1040?

There ain't no free lunch. You might ask your tax lawyer about those items. Also ask your tax lawyer about depreciation recapture. That is the nasty little surprise at the bottom of every form 4562/4797 p2. And the new tax law eliminated like-kind exchanges on personalty. No more trade-ins to defer the gain on the sale or disposal of a business asset. Taxes are due in the year of trade-in, and there is no cash to pay those taxes.

If you report a loss on your business because of the depreciation expense your $7,500 tax credit may be limited the first year, but it will carry over to subsequent years. If you do not pay any income taxes at all in 2018, then the personal part of the credit in your 75%/25% example is gone forever. No carryover of the personal credit.

I hate to be the buzzkill in your excitement--seriously--but unless you give a tax lawyer or competent accountant ALL the relevant facts and ask not only about this year but also for future years, you might get surprised 4-5 years down the road. I can tell you from decades of experience, no one likes those kinds of surprises.

Since you do your own taxes on Turbo Tax, I suggest you prepare a dummy 2017 return with a November 2017 purchase date for your X. Do your mileage split. See exactly what happens to your return. Then do one with an assumed sale from a make-believe 2013 purchase of a Model S with a total write-off and see how much depreciation recapture you have and the taxes owed for a sale at --pick a number.

At least depreciation recapture is not subject to SE tax.

 

[jtdiddy]

@cpa Thank you! Completely agree with you. The $7500 and any state and local incentives you get would be “income” (my naive non CPA term) as a percentage of business use claimed. TurboTax actually accounted this for me.

Depreciation recapture only applies if you drop below 50% business use in subsequent years and/or sell or dispose of the vehicle prior to that period expiring, no?

And YES, my $7500 credit carried forward into subsequent years as you said. Appreciate the insight and clarifications of this non-cpa

Yes, our cpa said that we would have to keep the X for at least 5 yrs to avoid recapture. He also said that Sec. 179 is not a red flag for audit. But definitely, the car should be bought by the business and a good log kept to make passing any audits easy, if one occurs.

Sec. 179 plus the 100% depreciation (thx Trump) really makes the X a great value for businesses.

 

[cpa]

To clarify:

I would argue that the rebates from the state are reductions in basis. I would not claim the rebate on page 1 as income. The utility rebate should be claimed as miscellaneous income on page 1. I have dealt with farmers who have participated in a program to receive a sizable rebate from the SJVAPCD for buying the latest and greatest tractors. Those rebates are used to reduce their depreciable basis in the tractors.

You are correct that the percentage of the federal tax credit used for your business purposes would serve to reduce the depreciable basis in your Model X. The personal portion would just be used to reduce your personal basis for any reportable gain upon disposition.

Depreciation recapture and Section 179 recapture:

These are similar, but not identical. The other poster is correct when he states that if business use drops <50% within five years, that the Section 179 deduction must be recaptured. This includes the sale of the vehicle.

Recapture of depreciation is mandated when the vehicle is sold or disposed of, whether in three years or thirty years. Makes no difference. You report the sale on form 4797 page 2.

Cost basis--business use: $70,000
less 179 25,000
deprec 45,000 (70,000)

Adjusted basis: -0-

Sales price 22,000

Gain (ordinary) 22,000

This eventually plops out on page 1, line 14 of your 1040.

 

[cpa]

Last add:

Remember, commuting is a personal, not a business expense. If your place of work is home, fine and dandy. But your commuting mileage is part of the non-deductible personal use of your vehicle. If you go immediately to a customer from home, I would deduct your commuting mileage from your total that day.

 

[MelaniainLA]

Last add:

Remember, commuting is a personal, not a business expense. If your place of work is home, fine and dandy. But your commuting mileage is part of the non-deductible personal use of your vehicle. If you go immediately to a customer from home, I would deduct your commuting mileage from your total that day.

You’re amazing. Thanks so much for this valuable advice. Consistent with everything else I was told by my pro. Thankfully in my case I’m a home-based consultant and when I visit clients it’s businesa miles. I even drove to a client from
The delivery center to count that as business!

 

[cpa]

You’re amazing. Thanks so much for this valuable advice. Consistent with everything else I was told by my pro. Thankfully in my case I’m a home-based consultant and when I visit clients it’s businesa miles. I even drove to a client from
The delivery center to count that as business!

I cannot believe that you received a "disagree" on your statement. Oh well.

 

[MelaniainLA]

I cannot believe that you received a "disagree" on your statement. Oh well.

Yeah, for some reason, @GayForEllon has been systematically hunting down all my posts, irrespective of their content or thread, and disagreeing with them. Perhaps he doesn't like my husband's policies as President hahah JK of course - my name here is in jest. That said, "Elon" is misspelled there.

 

[GayForEllon]

Yeah, for some reason, @GayForEllon has been systematically hunting down all my posts, irrespective of their content or thread, and disagreeing with them. Perhaps he doesn't like my husband's policies as President hahah JK of course - my name here is in jest. That said, "Elon" is misspelled there.

I call them as I see them...nothing systematic. =p

This forum doesn't let you create a screen name that has anything "Elon" in it. Sounds like lawyers were involved...

 

[speedzer]

Yes, our cpa said that we would have to keep the X for at least 5 yrs to avoid recapture. He also said that Sec. 179 is not a red flag for audit. But definitely, the car should be bought by the business and a good log kept to make passing any audits easy, if one occurs.

Sec. 179 plus the 100% depreciation (thx Trump) really makes the X a great value for businesses.

Does the car have to be registered under the business? Is that a requirement to file under Sec. 179? I was under the assumption that it could be registered under yourself so long as the car was used for business purposes.

 

[speedzer]

While I do not disagree with the majority of your thesis, I do have some comments:

If you receive the full $7,500 federal tax credit off your return, are you reducing your depreciable basis by the $7,500? If you also receive rebates from the State of California and your Air Pollution Control District and your utility are you reducing your depreciable basis by the cash received? Or are you claiming those rebates as miscellaneous income on page 1 of your 1040?

There ain't no free lunch. You might ask your tax lawyer about those items. Also ask your tax lawyer about depreciation recapture. That is the nasty little surprise at the bottom of every form 4562/4797 p2. And the new tax law eliminated like-kind exchanges on personalty. No more trade-ins to defer the gain on the sale or disposal of a business asset. Taxes are due in the year of trade-in, and there is no cash to pay those taxes.

If you report a loss on your business because of the depreciation expense your $7,500 tax credit may be limited the first year, but it will carry over to subsequent years. If you do not pay any income taxes at all in 2018, then the personal part of the credit in your 75%/25% example is gone forever. No carryover of the personal credit.

I hate to be the buzzkill in your excitement--seriously--but unless you give a tax lawyer or competent accountant ALL the relevant facts and ask not only about this year but also for future years, you might get surprised 4-5 years down the road. I can tell you from decades of experience, no one likes those kinds of surprises.

Since you do your own taxes on Turbo Tax, I suggest you prepare a dummy 2017 return with a November 2017 purchase date for your X. Do your mileage split. See exactly what happens to your return. Then do one with an assumed sale from a make-believe 2013 purchase of a Model S with a total write-off and see how much depreciation recapture you have and the taxes owed for a sale at --pick a number.

At least depreciation recapture is not subject to SE tax.

just a question. Could you apply a percentage of the deduction to prior years as well? Say for example, you made $50,000 in 2018 for your side job (consulting). If we wanted to depreciate the value of the car, could you expense depreciation of $50K towards 2018 and the residual amount from you 2017 income?

 

[cpa]

just a question. Could you apply a percentage of the deduction to prior years as well? Say for example, you made $50,000 in 2018 for your side job (consulting). If we wanted to depreciate the value of the car, could you expense depreciation of $50K towards 2018 and the residual amount from you 2017 income?

Nope.

 

[jtdiddy]

Does the car have to be registered under the business? Is that a requirement to file under Sec. 179? I was under the assumption that it could be registered under yourself so long as the car was used for business purposes.

it can but my cpa is a bit on the conversative side and advised that it was more kosher to buy it and register it under the business to make qualifying for Sec. 179 less of a red flag. Not sure if it really matters for audit purposes but we heeded our cpa's advice and purchased it under the business. For registration, we were able register the X under our both our business and my wife's name (as she is listed as 100% owner of our business on paper). This allowed us to get favorable non-commercial insurance rates, which was huge.