The TRUTH About Writing Off Your Vehicle

are you one of the many entrepreneurs who've fallen for the hype around bonus depreciation Section 179 and writing off your vehicle maybe you've even heard of YouTubers claiming you can get a tax-free Tesla but the truth is it's easy to let the tax tale Wag the Dog in this video I'm going to reveal the reality Behind These Tax Strategies and show you why you may not be saving any money in taxes at all in fact you could be paying even more than you'll ever save so if you're ready to uncover the truth about bonus depreciation and avoid falling for these sort of false promises then stay tuned because this video is going to change the way you think about Vehicle tax deductions all right so let me explain what I've got going on here on my screen so that you can fully understand I wanted to use very reasonable numbers when I did this analysis what we're looking at here is a scenario where we have a single taxpayer or earn a profit of 175 000 in their business in this particular example the business is taxed as an S corporation and so the 175 thousand dollars is allocated between reasonable compensation which I'm saying is sixty five thousand dollars and the remaining amount the hundred and ten thousand dollars will likely be taken out of the business as a distribution which I'm referring to here as a K1 because that is the tax form it usually appears on if I already lost you don't sweat it okay the fact that this business as an S corporation doesn't matter that much just follow along with me here and we'll go through this together okay what I've done here is kind of gone through the examples of what would happen if you know that was the profit I had in my business and I didn't buy a vehicle at all then I'm going to compare that with buying a reasonably priced vehicle and then buy more of like a luxury type of vehicle okay so in my examples I'm choosing the uh Toyota RAV4 then I don't know if you're aware of this but apparently that was like the top selling SUV in 2022 with I believe like 400 000 units sold or close to it and so that's why I picked that vehicle it really doesn't matter what vehicle you choose and then I chose like sort of the Copper Mill comparable like luxury model up from that which would be the Lexus GX at a price of like 70 grand but let me take you through the math and so you can kind of understand what's going on here okay so with no vehicle purchased at all then what's Happening Here is the adjusted gross income is a hundred and seventy five thousand dollars that's a tax term don't worry about it too much if you don't understand what that is um the standard deduction we're just using a single taxpayer here so the standard deduction is twelve thousand nine fifty the qbid qualified business income deduction is a percentage of the K1 so that's where this number is being derived from um and so your taxable income you take the 175 and you minus the standard deduction and qbi deduction and you get a hundred and forty thousand fifty dollars as your taxable income so how much do you have to pay in taxes if that's your taxable income well it's twenty seven thousand four hundred and forty eight dollars okay that's sort of the base case if you don't buy vehicle and you have that much profit in your business now let's look at the next column is I'm saying you bought a reasonably priced car at thirty five thousand dollars so in this case the business profit obviously gets reduced right because you were able to take a deduction for the vehicle in the first year in this case it's nineteen thousand two hundred dollars okay so that's why this amount is reduced by about 19.2 so your W-2 amount your reasonable compensation that you paid yourself is sixty five thousand I'll come to this later on why I didn't reduce that number um and then the K1 is ninety thousand eight hundred dollars okay so the AGI is reduced 155 800 still get the same standard deduction the qualified business income deduction is reduced because it's a percentage of this number so now that's eighteen thousand one sixty and so your taxable income is reduced to down to a hundred and twenty four thousand six ninety the amount you know you sorry the amount you now o is twenty three thousand seven sixty one so your tax savings is just the difference between these two numbers right three thousand six hundred and eighty seven dollars and not only that but you are still able to use some of these you know Tax Strategies if you want to call them that section 179 whatever um in year two so you you now have sort of like uh Ace in your pocket if you will of fifteen thousand eight hundred dollars that you can use in year two to use as a tax deduction all right um next up we have the Lexus GX which I you know priced it at seventy thousand dollars which is like the base price I think but anyway your business profit because you're writing off the full 70 grand right 175 is before writing off anything you wrote off the whole thing by using bonus depreciation is a hundred and five thousand dollars your W-2 is 65 000. your K1 is 40 000. what does this do for the other numbers well your adjusted gross income is reduced dramatically right by 70 grand from the base case so 105 000 your standard deduction is the same you do get a A reduced qualified business income deduction right so it's way down to eight thousand dollars at this point and your taxable income is now only eighty four thousand fifty so what's the amount you owe in taxes now well it's fourteen thousand one hundred and fourteen dollars so your tax savings is 13 314 if you're wondering what the math is on that it's just the difference between this and this number here so thirteen thousand three thirty four and again your year one tax deduction is seventy thousand dollars now let's look at some of these numbers down here that I have for you I think this is where you'll really kind of put the puzzle together here and make sense of all of this the cost of the vehicle was thirty five thousand dollars right that's what we have here in this cell here your taxes owed was twenty three thousand seven sixty one so your total cash outflow is fifty eight thousand seven sixty one right it's the cost of the vehicle plus the amount of taxes that you owe you have to dish out fifty eight thousand seven sixty one to get into this scenario okay let's look at the other scenario here of the Lexus well now you paid seventy five thousand dollars for the vehicle and you owe fourteen thousand hundred and fourteen dollars so you greatly reduce the amount of tax you have to pay but your total cash outflow has increased to 89 114 dollars so although you saved nine thousand six hundred forty seven dollars your cash outflow difference is thirty thousand three fifty three so you spent an additional thirty thousand dollars to sort of save nine thousand six forty seven in taxes so it doesn't make much sense let me uh in a moment here kind of go over the considerations that I've written it's important that you kind of understand all of the different variables that go into this because it's much more than just the analysis I just did for you but before I do so allow me to take a quick break to introduce myself for those of you who are new to my channel my name is Navi Mirage I'm a certified public accountant who specializes in helping entrepreneurs like you save thousands of dollars in taxes and I do that by providing free and valuable content here on social media but I also developed a comprehensive course that transforms you from being a sort of tax novice to a Savvy entrepreneur preneur who knows how to implement Tax Strategies that will save you thousands of dollars in taxes and I do it in an easy to understand way that anyone can apply also if you visit my website which is Navi muradcpa.com you'll find free resources that will help you navigate the confusing world of taxes links to both the course and my website are listed in the description below depending on which social media platform you may be watching this on so let's look at these considerations I've listed here so the first one is you're probably not really using the 100 or the vehicle a hundred percent for business right if so do you also have a separate vehicle for personal use because you know if you get audited for this how are you going to tell the IRS auditor that um you know this is your 100 used vehicle if you don't have another vehicle that you can use personally unless you're going to tell them oh up there for everything personal I'm very strict about it I just kind of uber around town all right so the second one here is I mentioned it earlier you spent thirty five thousand dollars more for a vehicle that sort of qualified to be you know six thousand pound plus to save nine thousand six hundred forty seven dollars in taxes does that make sense to you it really doesn't to me now the argument that could be made is what about the time value of money Navi I now have ten thousand dollars in my pocket that I can invest and you know it will compound and what have you and I'll earn more money well I don't think you can do that right how can you take the ten thousand dollars in tax savings and grow it into thirty five thousand dollars in that short of period of time because you're gonna need to grow it that quickly in order to just break even on your decision making here in year two and I mentioned this earlier in year two you have a zero dollars in depreciation but if you purchased a reasonable vehicle you still sort of got fifteen thousand eight hundred dollar deduction in your back pocket than you could use and maybe it's more strategic for you to use it in year two versus Year One the next item is you should have reduced your W-2 amount that reasonable compensation I mentioned earlier you should have reduced it to reflect your business profit but you probably weren't thinking about that because you know not to give a knock on them I myself produce content on social media but if you're getting your advice from someone who's like not a tax professional and doesn't do this analysis for you then you might just not know any better and just pay yourself the 65 000 even though the profit in your business was greatly reduced and you probably could have gotten away with taking a way lower uh reasonable comp the next item here is you may have created a basis issue now this is a tax concept that you might not understand this issue of basis um so but what would happen here is you might actually pay long-term capital gains tax on any distributions that you took out of the business um that were in excess of your basis I had a client do this last year they didn't consult with me it's like Christmas Eve they buy a hundred thousand dollar literally a hundred thousand dollar vehicle okay well we didn't plan for this right and so the client already took all the money out of the business throughout the year and then they went ahead and bought this vehicle well now they just created a taxable event for them a distribution in excess of their basis if you don't quite understand that I have another video on my YouTube channel that will explain that I really recommend that you watch it so you can understand the issue that's happening here the next item is many states do not conform to the Federal Business depreciation tax laws so if you're in California good luck you're gonna pay the California income tax okay and it's not just California there are many any other states that don't conform to the federal bonus depreciation tax laws and so you'll get a much reduced tax deduction at the state level and the last comment here is just that there are many other factors if you think I missed something let me know in the comments below I'd be happy to hear what your opinion is and what you've got or if you've got questions about this let me know this in the comments below but in closing let me share with you the conversation I would have with a client who tells me they want to purchase a new vehicle it goes something like this hey Navi I want to purchase a new vehicle for my business and write it off this year to avoid a large tax bill okay do you need a new vehicle no my old one works just fine okay well then you shouldn't buy it that's kind of like step one if they say yes I need one my old one is uh 10 plus years old and it's having a lot of issues okay cool I understand that um let me ask you if you weren't going to get a tax deduction for purchasing this vehicle which vehicle would you be purchasing oh well I'd probably you know I like the new Mazda SUVs okay cool well buy that one and maximize the deductions we can get with that more conservative reasonable vehicle did I say the client ten thousand dollars in taxes no I didn't instead I saved them thirty five thousand dollars in money they didn't need to spend and their new car payment isn't twelve hundred dollars a month for the next six years so listen be smart don't let the tax tail ride the dog as they say and I hope in closing I hope to see you either in the course or in the next video [Music] foreign

Channel: Navi Maraj, CPA

Views: 4,026

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Id: W9sZQLYlkb8

Length: 12min 25sec (745 seconds)

Published: Thu Jul 13 2023