Is Now the Time to Buy an SUV?
November 2003
IRS tax laws allow family child care providers who use their vehicle in their business to deduct 100% of the cost of the vehicle, under certain circumstances. As a result, some people are advising providers to buy a new SUV for their business to take advantage of this tax law change. Is this a good idea? Probably not.
Here's why.
The new law allows providers who purchase a computer, furniture, appliances, or equipment to deduct up to $125,000 of the cost in the first year if the purchase meets the following conditions:
- The item must be purchased in the year in which it's claimed.
- The item must be used more than 50% of the time in the business.
- Claiming this expense cannot create a loss on your tax return.
This Section 179 rule also applies to vehicles. But to use this rule for vehicles, providers must meet an additional condition: the vehicle must weigh more than 6,000 pounds and the vehicle must hold more than nine passengers. Such vehicles include: Durango SUV, Ford Econoline Van E150, Ford Excursion or Expedition, GMC Safari AWD Passenger Van, and more. So if you bought one of these vehicles for $30,000 and used it 60% for your business, you could deduct $18,000 ($30,000 x 60%) on your tax return.
This sounds like a great deal! So, what's the problem?
First, if you use this Section 179 rule and use it 50% of the time or less in the five years following your purchase, you will have to pay income taxes on some of the deduction you claimed. To do this you must file another tax form (Form 4797) and pay back some of the tax benefit you claimed earlier. This would also be true if you went out of business or sold the vehicle within five years of buying it.
But the bigger problem is this: It is not a good idea to buy something for a tax deduction because the tax deduction will never equal the cost to you of the vehicle. For example: Let's say you bought a $30,000 Durango SUV and used it 100% in your business. You can deduct the entire $30,000 as a business expense. But your taxes won't be reduced by $30,000. How much you save on your taxes will be based on the tax bracket your family is in. If you are married and your family's taxable income is between $56,800 and $114,650, you are in the 25% federal tax bracket and you will pay 25% in federal income taxes, plus about 15% in Social Security taxes, for a total of about a 40% tax rate. Therefore, your $30,000 vehicle purchase will save you about $12,000 in taxes ($30,000 x 40%). So, you spent $30,000 to save only $12,000 in taxes.
If you need to buy a new vehicle for use in your business, then do so. But don't make a decision on what kind of vehicle to buy based on the tax consequences. In other words, if you can meet your needs by buying a cheaper business vehicle that weighs less than 6,000 pounds, buy the cheaper vehicle rather than shopping for something more expensive. Don't spend more money on a larger vehicle to get the extra tax deduction. When you spend more money than you have to, you still end up with less money in your pocket, even after taking tax deductions into consideration.
Note: If you buy a heavier, more expensive vehicle your car insurance and gasoline expenses will always be higher than a cheaper, lighter vehicle.
In conclusion, if you are in the market for a vehicle, make your decision based on what is the best vehicle that will meet your needs that's costs the least. Do not spend more money than you have to, and ignore the lure of a higher tax deduction. It doesn't pay.
