Like many of you, the economy has been strong for many businesses, especially those involved in the building trades. They come to your dealership having been told that there are big tax advantages to buying a new vehicle, but quite frankly, are unclear about the how’s and why’s. While customers should always consult their tax advisors, here are a few facts that may entice them to buy, especially trucks, cargo vans and large SUVs, all of which are the backbone of their business.
For a profitable business and one that uses its vehicles more than 50% for business, they may be entitled to a substantial write off the first year (in this case 2013), whether the vehicle is new or used. An SUV that has a gross vehicle weight of more than 6,000 lbs. can elect to write off $25,000 of the cost of the vehicle in the first year. If it is a new SUV, they can also take advantage of the 50% bonus depreciation on the remainder and on top of that, expense regular depreciation on the balance. All of that may seem complicated, so let’s use an example:
Customer who uses a “large” SUV, all for business purposes.
Let’s assume that the new SUV costs the customer $50,000. He/she would be able to expense $40,000 in 2013. The breakdown is as follows:
| First year write off allowed | $25,000 |
| 50% bonus depreciation on remaining cost (50,000-25,000)*50% | $12,500 |
| 20% of remaining cost after allowed first year write off(50,000-25,000-12,500)*20% | $ 2,500 |
| Total allowed deduction on a new SUV | $40,000 |
In this example, the customer would be able to expense 80% of the cost of the vehicle! If the customer is in the 28% tax bracket, that means Uncle Sam has helped to pay for over $11,000 of the vehicle, not to mention the potential state income tax savings.
If the SUV is used, the customer would still be able expense $30,000, a tax savings of $8,400. Compare this to passenger vehicles and smaller SUVs, trucks and vans, which are limited to only $11,160 of expense, and it may make sense for the customer to look at the larger vehicles. While the first year expense is lower for these types of vehicles, it should be noted that it does include $8,000 of additional expense than had previously been allowed. So, if a vehicle in those categories makes sense for the customer, you can still emphasize this expiring tax savings.
The news is even better for trucks (those whose bed is six feet) and cargo vans (those that have no seating behind driver) with a gross vehicle weight over 6,000 lbs. Because of the vehicle’s size, a profitable business may be able to expense in 2013 the full cost of that vehicle. A $35,000 truck for a customer in the 28% tax bracket would result in a tax savings of $9,800.
If those aren’t strong enough incentives to get a customer to buy, they should also be aware that the increased levels for first year expensing is set to expire on December 31, 2013, and there is no assurance that Congress will reinstate them.
Our experience is that dealers who educate their sales staff with respect to these tax benefits see an increase in sales. With December traditionally being a slow sales month, dealers should take advantage of this information to end the year on a high note.
If you have any questions about this article, please contact Paul McGovern at 800-849-6022 or PMcGovern@DowneyCoCPA.com.
