Disadvantages of Writing Off Your Car in 2023 - Section 179

as an accounting firm we get asked all the time how can I write off my vehicle and while that is a good question a better question is should you write off your vehicle because the truth is for most people writing off your vehicle may not be the smartest thing to do so let's clear up any confusion and truly figure out who should and who shouldn't write off their vehicle let's get right into it okay so let's start with the benefits of writing off your vehicle right like why would someone want to do that in the first place when you use a vehicle for your business it becomes a business asset and allows you to write off nearly all of the cost of owning the vehicle and there are two ways that you can write off vehicle expenses with the actual method you can literally write off almost all of the actual expenses of owning that vehicle so this includes any repairs and maintenance this includes insurance payments and registration heck you can even write off the cost of tires tolls Insurance windshield wiper fluid and the depreciation of your vehicle and then we have the standard method which is the second way that you can write off a vehicle and the standard method allows you to write off the mileage that you accumulate for that vehicle and to get that deduction you simply multiply your miles driven for business times the standard mileage rate so we have two ways that you can write off your vehicle sounds pretty good right well let's talk about the obvious and not so obvious reasons that you likely shouldn't write off your vehicle starting with number one people who don't make enough business profit may not need to write off their vehicle you see tax deductions help you to lower your taxable income but tax deductions like writing off your vehicle only become beneficial if they can actually lower your business income therefore if the business has low profits the tax savings are likely going to be minimal especially if your business isn't making much profit at all to help illustrate this let's look at an example let's say you have fifty thousand dollars in income and sixty thousand dollars in expenses leaving you with a net loss of ten thousand dollars now let's say you want to write off five thousand dollars for a vehicle you use for the business here's the thing that vehicle expense is just going to add to the loss and will not offset any income so you're basically just adding to the loss and not getting any tax benefits now here's the catch you can carry forward your net operating losses into future years to offset any income in the future but that may not always be the case and if you are making profit in your business depending on your tax bracket the effect of writing off your vehicle may be minimal and then we have the second reason and that's people who don't use their vehicle mostly for business they may not need to write off their vehicle you see something you may not know is that if you use the actual method of writing off your vehicle you can only deduct the percentage of vehicle expenses related to the business use so in simple terms if you only use your vehicle for business twenty percent of the time you can only write off 20 of the expenses when using the actual method and this becomes an even bigger issue when using Section 179 or bonus depreciation to write off the purchase price of that vehicle in year one when that vehicle is over six thousand pounds you see Section 179 and bonus depreciation have become very popular methods of writing off your vehicle in recent time and for a good reason Buy using Section 179 and or bonus depreciation on a vehicle that weighs over six thousand pounds you have the ability to write off nearly all of the vehicles purchase price in year one and that's even if you bought that vehicle on the last day of the year and this is why so many business owners own G wagon Lamborghini trucks Tesla Model X's Audi q8s and BMW x5s why they all have a gross weight rating of over 6 000 pounds making them eligible for Section 179 or bonus depreciation deduction but what most people don't know is that to use that deduction you must use your vehicle for business at least 50 percent of the time because if you don't it will cost you if you drop below 50 within the first five years of using that deduction you will have have to pay back the IRS for all of the depreciation that you took on the vehicle and this is something called depreciation recapture and it's something that I rarely hear people talking about when discussing Section 179 and or bonus depreciation so imagine buying a G wagon for say a hundred and thirty thousand dollars writing off a hundred thirty thousand dollars in the first year and then later being hit with a hundred and thirty thousand dollars in extra taxable income when you file your taxes yeah that's gonna hurt and for some that's upwards of over forty thousand dollars in extra unexpected taxes that they will have to pay all because of depreciation recapture now I can think of a scenario where that problem depreciation recapture isn't such a big issue like if you fall into a lower tax bracket in the future but it's important to plan for that situation or any tax situation with your CPA or tax planner because without proper tax planning you're bound to pay unexpected penalties and cause yourself a ton of stress but this isn't the only way that depreciation recapture can sneak up on you but before we get to that I totally forgot to introduce myself welcome to the channel I'm Karan from Life accounting where we help you save on taxes and increase your wealth and if you are enjoying the video so far do me a favor you already know hit that like button for me it truly helps other people to see this video and I know there are some people who are looking and wanting to write off their vehicle and I'm just looking to provide another side of the story that I don't hear talked about too often because everybody talks about the pros right but nobody talks about the cons or the things that you just need to look out for when taking these deductions which leads me to my next Point number three people who won't keep the car for long may not want to write off their vehicle imagine for a second that you just purchased a sweet new ride for your business and you're looking at a 50 000 price tag the good news is that thanks to Section 179 and or bonus depreciation you can write off at least 80 percent of the cost on your taxes and boom just like that you've saved yourself fifty thousand dollars in taxable income savings but here's the catch we forgot something on your books that vehicle is now worth zero dollars and that's because of the depreciation that you took and that's where things get a bit tricky if you later sell that vehicle say for thirty thousand dollars some of the money you receive may be considered recapture depreciation by the IRS and will be subject to regular income tax the reason for this is that on your company's record that vehicle is worth zero dollars or your purchase price minus the depreciation that you already took so any money that you get from selling that vehicle or trading that vehicle in that is above the cost basis of the vehicle now will be considered ordinary income now those who decide to depreciate their vehicles using straight line depreciation will not have to worry about depreciation recapture but those of you who decide to use Section 179 and or bonus depreciation will have to be mindful of depreciation recapture and speaking of being mindful number four is people who do not know the rules of the IRS you may not want to write off your vehicle in that case and that's because one of the most important rules of the IRS is that the expenses that you deduct must be ordinary and necessary and the thing is that you in the IRS may not see eye to eye on what is ordinary and necessary for your business so let me help you out expenses are considered ordinary when they are common and accepted in your industry or trade and necessary when they are deemed helpful or appropriate for the operation of your business you know like a company may consider a yacht ordinary and necessary for their business but the IRS might tell you no no no and will not allow you to deduct it on your taxes and truthfully this is where a lot of entrepreneurs get into big trouble most advocate for buying expensive Vehicles over six thousand pounds to take bigger depreciation benefits but you have to ask yourself is it ordinary or necessary for a business that isn't even making a hundred thousand dollars in profit to buy a business vehicle worth over a hundred thousand dollars it depends and like we discussed profit is not the only thing you need to look at when trying to write off your vehicle even if the profit is there or isn't there at all that vehicle has to be ordinary and what necessary for the operation of your business quite frankly with all things considered I do believe that writing off your vehicle using the actual method the standard method Section 179 bonus depreciation all of those things are great ways to lower your taxable income just make sure that the write-off is right for you yeah I came up with that all by myself and if it is I'm going to place a video in the description that shows you how to write off your vehicle step by step and if you found this video helpful do me a favor hit that like button for me it helps others to see this video And subscribe to the channel for more information that helps you save on taxes and increase your wealth I'm Quran from Life accounting and I'll see you in the next video

Channel: LYFE Accounting

Views: 61,338

Keywords: vehicle tax deduction, vehicle tax deduction 2023, vehicle tax deduction 2022, how to write off car, section 179 vehicle, vehicle section 179, bonus depreciation vehicle, bonus depreciation, what vehicles qualify for section 179, Lyfe accounting

Id: ev7g4lpxiEQ

Length: 10min 57sec (657 seconds)

Published: Wed Jan 25 2023