Any Accountants Out There???

[SONA]

In fact you need neither be an LLC, S or C corp to take the deduction. Only be an independent contractor. The differnce is the rate at which tax liability is incurred, your personal rate or a corprate rate. It costs money to set up the corps LLC, S, C and they anual costs must be offset by any savings. In my case, not all of my income comes from my contracting jobs, but a good 40% does. What you use the vehicle for and the record keeping you use is more important then the corprate status you carry. If you have all of your income from contracting or business, and no other job... then you gain tax breaks by incorprating, but if not, then it is not worth it the cost and book keeping and legal fees required to incorprate.

"Let me show you my gun collection"

[MAC]

In my case, I printed the tax codes and the news story posted on this site, I will simply hand it over to my accountant, together with all the 02 tax bundles, and he will figure out everything. I did not know about this tax issue when I bought Hummer, if nothing else, this single issue(if and when proven to be true and correct) has made my participation at this Hummer forum well worth the time and effort, not to mention the pleasure of making Hummer friends.

Based on first year tax credit of $24000 + additional first year depreciation of approx. $2000, total $26000, gas at $1.60 a gal., that is 162,500 miles of free gas, courtesy of Uncle Sam.

Or if you take the tax saved off the Hummer price, Hummer is even cheaper than those Japanese econo boxes.

[x-mst.com]

My accountant told me that I would get the $24,000 first year, and then and extra 30% on the remainder because after Sept11, Bush added the extra 30% first year capital depreciation to stimulate spending. After that 30%, I would then get the standard $2000-$4000 deduction. All this adds up to a whopping first year depreciation of the H2!

Anyone else heard of the 30% rule?

[Rory]

All,
I just saw a piece about this very tax break that's being discussed on the ABC national news. They even mentioned and showed a yellow H2 on a dealers lot.
Maybe some of you on the West coast can catch it still.

Rory
'94 Wagon

[MAC]

Rory, Thanks for the advance notice. I saw the ABC News @ 530PM West Coast. Didn't fully comprehend some of the numbers in the news, such as $37K depreciation during the first year on a $47K SUV, the deal gets better and better by the day. I am running out of fingers and toes to count this tax deal. If any members have any solid B/W stories or codes(similar to post on page 1 of this subject), pleazzzee post them. Not every accountant is on top of these areas, B/W copies save everyone lots of time and debate come tax filing time.

[Nancy]

You guys have confused this a little but bits and pieces in this thread have the correct info.

First, assume the vehicle is used for business purposes. If not used business none of this applies anyway. And it does not matter whether or not the business is incorporated, a partnership, sole proprietorship or what have you.

The "Section 179" deduction refered to is the (currently) allowed deduction for otherwise depreciable assets. This means you can expense this amount straight away instead of spreading it over a specific number of years. This applies to tangible personal property used in a trade or business, of which a car is one. Note that the deduction cannot exceed the taxable income derived from the business activity. In other words, the Section 179 deduction is the lesser of taxable income or $24,000.00

Additionally, President Bush signed into law last March, tax legislation that allows "bonus" depreciation of 30% for all qualifying assets first placed into service by the taxpayer after Sept. 11, 2001 and prior to Sept. 11, 2004.

After the above rules are exhausted, any remaining basis is depreciated over a specified period.

Above are the general rules for depreciable tangible assets used in a trade or business.

But....there is a special rule about cars. It's how the tax code tries to "soak the rich" just like with phase-outs on itemized deductions on personal returns. Cars are limited to about $3500 of depreciation a year. That's really only has an impact for high cost vehicles like Mercedes, BMWs, etc. And...it would apply to the H2 except for this little thing:

Ta da...while limiting the deduction for luxury vehicles they realized that their target would also catch farm tractors, heavy duty road equipment and the like, so the tax law says that limitation only applies to vehicles with a gross vehicle weight of LESS than 6,000 pounds. The H2 exceeds that weight so the luxury automobile depreciation limitation does not apply.

So we can do some numbers here. For simplicity, the H2 cost $60,000 to place into service. 100% business use. No other depreciable assets were bought during the year so the whole $24,000 Section 179 expense is applied to the H2. Now the basis is $36,000. Next we take the 9/11 bonus depreciation of 30% which is $10,800. After that, regular depreciation, 20% of the remainder is taken, or $6,960. This means the first year we can expense $41,760 of the car, leaving a depreciable basis of only $18,240 for future years. 40% of this you get to take in year 2.

And there you have the current tax impact of buying an H2 for business use. If your business use is less than 100% then the numbers are adjusted proportionately.

Very cool. But keep it quiet. If Congress figures this out, the jig will be up!

Nancy (CPA)

[Steve R]

Dear Nancy....I love when you talk this way!!

In the end...we still depreciate only the difference between the cost of aquisition and the residual value when we eventually sell the thing? That and all the operating expenses?

All we are doing is accelorating the expense, right? If you figure it cost $60,000 and will be worth $18,000 in 5 years...then our depreciable base is $42,000. Normally that would be expensed as $8,400 for each of the 5 years....but instead we can take a larger amount today and have less later? In the end...it only comes down to the tax money we don't spend today we can invest and have longer?

[MAC]

In the case of a commercial property (example: an office bldg.), when I sell it, the capital gain is sale price less depreciable base, which means the depreciation I used in the past years will be added back in, uncle Sam gets his hands on the money eventually.

If that is also true with my equipment (Hummer), if I sell it 1 year later for $50000, my gain is $50,000 - $18240 = $31,760. I sell it $10K less than I bought it, but because of the depreciation I use in the first year, I actually make $31760 taxable income on the next year‘s returns. Is this correct? And is it regular income or is it capital gains with higher tax rate?

[Nancy]

Steve,

Yes, all you are doing is accelerating the expense. But a dollar today is worth way more than a dollar five years from now, so it's of great value.

And in the case of the H2, because of its gross vehicle weight rating, it means you will see depreciation you would pracically never seen due to the personal vehicle limitation that does not apply to the H2. The limitation of $3,000-3,500 (the number changes every year and there is also special this and that..I don't know the exact number for 2002 off the top of my head) means high cost vehicle'd depreciation is so many years out the it is beyond the life of the car. While you have the right to it in future years, you just can't get there.

There is no salvage value considered in the depreciation of a car used primarily for business us. Salvage value adjustments to basis are only used for straight-line depreciation calculations. Business use cars are depreciated using the declining balance method under MACRS (Modified Accelerated Cost Recovery System). The first and last year, the depreciation is 20% of the adjusted basis. The other years it is 40%. You can see how it works in the example I posted earlier.

Nancy

[Nancy]

Note: before I forget, the dates for the 30% bonus depreciation is Sept. 11, 2001 through the end of 2004, not 9/11/04.

Mac,

Yes, if you sell the car, you must recapture excess depreciation. If you do not replace the car then that amount is taxed as ordinary income.

However, if you replace the car then that amount is an adjustment to the basis of the replacement car and is not included in taxable income.

Example:

Car originally cost $60,000. Depreciated basis is $30,000. Sell the car for $50,000 then there is depreciation recapture of $20,000 subject to taxation as ordinary income. But buy another car to replace it for $70,000. The depreciable basis of the replacement car is now $50,000.

Basis adjustments happen with like-kind exchanges, involuntary conversions and the like.

Nancy

[Nancy]

Congratulate me! I finally got my husband to place his order for a 2003 H2 today! Hurrah!

He's been eyeing it since it was introduced. The man denies himself everything and the rest of the family nothing. He finally let himself do it.

Black, adventure series, wrap-around brush guard, carbon fiber dash, can't remember what else. But it's black on black on black. Just like the Suburban it's replacing. Supposed to be here in 5-6 weeks.

I've been lurking on the site for a while and really appreciate all the information so freely given here. It's been very useful. I'm a member of a similiar group for Mercedes owners and you guys are just as great as they are. Too bad my almost Luddite husband won't post on groups! I'll just have to do it for him. [img]/infopop/emoticons/icon_razz.gif[/img]

I can't wait to get a load of what we will look like...his big black H2 next to my tiny red SLK320. Should be quite a sight!

Nancy

[Hummie2]

Thankyou for your posts on the tax questions. Its nice to have our own resident tax consultant on the forum and I hope your H2 arrives soon. Believe me the 8wk wait on ours has been killing my wife and I, its here at trainyard but hasn't been delivered to dealer yet because holidays put deliveries behind a little. Better luck to you and your husband.

Your explanation on tax write off this year and recapture taxes in future were very understandable to me ( usually when I talk to our CPA I am totally confused ). I also have another Question on this subject. I have income from employment and my wife runs a small business out of our home. Bussiness is off this year, but thats not all bad, as 3 yrs ago (before we incorporated and corp. pays wife a salary) bussiness was good and our taxes were over 30k [img]/infopop/emoticons/icon_eek.gif[/img]. H2 purchase won't help taxes much this year for us. While researching the "Section 179" question I read that a NOL (net operating loss) can be carried back 5yrs to previous yrs. My question is there anyway to use Sec.179 or 30% law to create a NOL this year and go back and file amended returns for previous years when business was better?

Thanks and Welcome to Forum [img]/infopop/emoticons/icon_smile.gif[/img]

Don & Phyllis

[Nancy]

Don,

Thanks for the compliment about being able to understand my explanations. I only hope I don't make them so simple as to obscure certain points and, on the other hand, use terms that aren't widely recognized. Example, upon re-reading my answer about recapture depreciation, I used the term like-kind exchange. Which is the term I use, but I really should have said "trade-in" to make that answer more understandable. I use like-kind because that rule applies to more than just cars. So when I say the depreciation recapture can be rolled into the basis of a replacement car, that is under the like-kind exchange rules. Which means trade-in. It occurs to me that someone might think they can private-sale the car then replace it in the same year and get that treatment. It must be a single trade-in transaction, not two distinct transactions. I hope that is more clear.

For your situation, yes, you can carry back losses. However, Section 179 in and of itself cannot create a loss since it is limited to a maximum, $24000 for 2002, or taxable income. You cannot take net income below zero with a Section 179 deduction. However, when you can't take 179 because of this you end up having a larger depreciable basis so therefore more depreciation. That depreciation DOES create a loss that can be carried back. This also applies to the 30% bonus depreciation. Just not the 179 deduction.

With limited understanding of your specific circumstances, generally if you have zero profit, you start with the 30% bonus on the car then apply the first year depreciation of 20% to the remaining, creating a loss that can be carried back.

If you do not place the car into service by this Tuesday (assuming the corporation has a December 31 year-end), and it sounds like you won't be able to since it's still sitting in the railyard, you will do this for the 2003 tax year.

Nancy

[MAC]

Nancy, thanks for the help. Surprised to see "like-Kind exchange" for vehicles, I have dealt with 1031 in commercial properties and in legal cases, but did not know about cars. I have more questions, but I will not take advantage of you and will refrain from asking any further questions.

I love your description: "The man denies himself everything and the rest of the family nothing." Not exactly myself, but I will save it and see if I can use it one of these days, sounds very nice and elegant. It will come in handy when I want something I shouldn’t buy down the road.

"The man denies himself everything and the rest of the family nothing." Boys and gals, write that down.

[Steve R]

...but are you an accountant?????

Nance...thanks for an excellent and thorough explanation. I myself am a contractor and being self-employed intend to take full advantage of the tax benefits available. Congrats on the H2 purchase...I'm quite certain you'll find the H2 being likew no other vehicle you've ever owned!

[Hummie2]

You have outdone yourself one more time. If you ever decide to start an online consulting service you can certainly pick up several customers here on this forum.

Be sure an post plenty of pictures of your H2 when you get it. We all love seeing another Hummer.

If you ever have any tech or mechanical questions please feel free to ask. I will do my best to answer as clearly as you have. If I can't, Steve R or one of the others always come to the rescue with a great answer.

Super nice people here.

Don

[Nancy]

Mac,

Yes, like-kind exchange rules apply to personal property as well as real property. It's so straight forward and simple with personal property that you probably have been doing it and haven't given it much thought that it was just that.

Personal property (and for those reading this who may not know, when I say personal property, I mean tangible property use in a trade or business and not personal use property) gets the deferred treatment when it is like-class, which mean they fall under the same General Asset Class or Product Class. Cars are obviously like-class. But you can also trade a computer for a printer and defer any depreciation recapture also since they are in the same "general asset class". But you could not do it when trading a car for say, an airplane, because, even though they are both modes of transportation they are not in the same asset class. Like-kind and like-class are treated the same.

You are probably more aware of the 1031 like-kind exchange rules for real estate and legal cases because those transactions are more of a to-do due to the nature and value of the assets involved. The Starker Ruling exchange provisions (3+ way exchanges) are commonly seen in real estate transactions, although these rules can be invoked for personal property transactions too. Personal property is just usually a lesser deal than real property so people might not be aware they are sometimes effectively doing the same thing under tax law.

Nancy

[bklynh2srock]

Thanks, congrats and welcome all wrapped up in one!

Your descriptions have made it possible for even my law school-addled brain to understand. I still have nightmares about FedTax.

[Nancy]

Steve,

Yeah, I'm an accountant too. Boring, huh? LOL

Even though I am an accountant, I don't do taxes. I hate them. I have a very deep and very narrow specialty to which I limit my area of practice. A couple sections of the tax code effect it and that's it.

I don't even do work on my own return. The entire U.S. Tax Code really p**sses me off, so I just stay away from tax prep. When you really get down in to it, and understand just what they are doing to people, it will infuriate you. If you just see the end result of how much you pay in taxes, you are riled enough. See how it got there and you'd really get p.o.'d. My blood pressure is 95 over 60 and I keep it that way by not preparing tax returns of any type. Ever. [img]/infopop/emoticons/icon_smile.gif[/img]

But I do keep up with the changes in the law. The general provisions such as this depreciation/179 discussion are pretty straight forward in their generalities. We have some people in our office who are incredibly good at this stuff so I can't help but keep up, almost by osmosis. My husband is also a CPA and I guess we have a very weird office. Everyone in it has some unique and extreme expertise in some area of something. We are not a large practice and all know a lot about each others expertise just by being exposed to it daily.

I can't tell you how often I am jaw-droppingly surprised that all CPAs, or at least those not in giant national firms, don't know or can't explain this stuff, even when they don't work in taxes every day just like I don't. Perhaps our firm is just the Hummer H2 of the accounting world. [img]/infopop/emoticons/icon_razz.gif[/img] We're different that way.

As you might be able to see from my prior post to Mac, there is not one simple answer to even a simple question. While generally the deferral of depreciation recapture on an automobile requires a trade-in transaction, there are actually ways to structure a deal so you can indeed tranfer it to a third party other than a dealer, buy a new car from a dealer and still have a roll-over adjustment to the basis in the new car instead of recognizing the depreciation recapture as ordinary income. It's usually not worth the expense and trouble since the difference can be negligible, but it can be done.

So even small questions require very big answers since every situation is different and there is often several correct answers, any one of which is better in a given situtation. Always seek competent tax advice for your own specific circumstances.

Nancy

[Nancy]

Don,

Thanks for the welcome. This is such a friendly group, I will not hesitate to take you up on your offer to pepper you with questions.

Honestly though, I am amazed I found so many answers already during my lurking days. Even though the members don't agree on certain options and such, the debate was so well presented it was really easy to weigh the arguments and make a decision of which way to go on certain things with the H2 order.

Nancy