Thanks to last December’s Tax Cuts and Jobs Act (TCJA), those snow removal and ice management operations with vehicles in their business, are finding it easier than ever to write-off the cost of buying and maintaining them. Many small businesses are taking advantage of these new rules with the National Federation of Independent Businesses (NFIB) recently reporting 61 percent of businesses surveyed have made capital outlays, with 43 percent spending it on equipment and 27 percent on vehicles.Knowing how and when to deduct the cost and expenses of the vehicles used in the snow removal business can have significant tax implications. It pays to understand the nuances of all costs associated with the operation’s vehicles including the revamped mileage deductions, buying versus leasing and writing off the cost of newly acquired vehicles.
COSTS BY THE MILE
The 2018 tax year began with new deductible mileage rates for vehicle usage. The standard deduction rate for using a car, van, pickup or panel truck for business purposes is up a penny from last year to 54.5-cents per mile, according to the IRS.
The standard mileage rate can also be used for a leased vehicle. Of course, if the standard mileage rate is used, switching to the actual expense method in a later year is a no-no. And, if the standard mileage rate is used for a leased vehicle, the lease payment isn’t deductable.
While every snow business, or at least those with fewer than five vehicles, can use the business standard mileage rate, using the actual cost of operating a vehicle or vehicles for business purposes is frequently more advantageous, especially for individuals.
The TCJA suspended all miscellaneous itemized deductions that are subject to the two-percent of adjusted gross income floor on Form 1040. This change affects not only un-reimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel. In other words, the business standard mileage rate can no longer be used to claim an itemized deduction for un-reimbursed employee travel expenses -– at least until 2026.
Business deductions, even those of the self-employed, are a different matter.
WRITING IT OFF
When it comes to writing off the cost of passenger autos, trucks and vans first placed in service during calendar year 2018, there are caps on the amount that can be deducted under the so-called “luxury” car depreciation rules.
For passenger automobiles that are not trucks and vans where the first-year depreciation deduction does not apply, the depreciation limits for the first three years are $10,000, $16,000 and $9,600 respectively, and $5,760 for each succeeding year. Passenger automobiles for which the additional first-year depreciation deduction applies have limits for the first three years of $18,000 ($26,000 with additional first year depreciation), $16,000 and $9,600 with $5,760 allowed each succeeding year.
Leased vehicles are not depreciated. Instead, only the business portion of the lease payment is deducted. The latest IRS rules contain lease inclusion tables for passenger automobiles with a lease term beginning in 2018. Because of the higher depreciation caps, this table starts with vehicles valued at $50,000 or more.
FASTER WRITE-OFFS COURESY OF THE TCJA
The TCJA made it easier than ever to write-off the cost of buying equipment such as vehicles. The TCJA offers a number of options for deducting vehicle costs immediately in lieu of regular depreciation.
The rules for the Section 179, first-year expensing have, for instance, been expanded. Expensing, which must be chosen, has traditionally been intended for buying equipment and machinery, whether new or used. Vehicle costs also qualify.
The cost of qualified property that can be expensed in 2018 is up to $1million (up from the $510,000 limit in 2017), as well as a $25,000 limit for buying heavy SUVs. However, the $1 million limit phases out once total investments for the year exceed $2.5 million. The phase out is dollar for dollar, limiting total investments to $3.5 million for even a portion of Section 179 expensing.
Unfortunately, despite the new generous dollar limits, expensing continues to be limited to the snow removal and ice management operation’s taxable income. In other words, if a business buys %500,000 of new equipment, machinery or vehicles, but has only $350,000 in income, the expensing deduction is limited to $350,000, although the excess can be carried forward.
A BUSINESS WRITE-OFF
There is now a silver bullet called “bonus depreciation.” Another first-year write-off, “bonus” depreciation is another way to write-off the cost of vehicles and other property in the year purchased and placed in service.
For 2018, bonus deprecation applies to 100% of the cost of qualified property, whether new or used -– with no limit. What’s more, bonus depreciation applies automatically unless the snow removal operation chooses to opt out.
The types of property eligible for bonus depreciation have also been expanded. In fact, the use of bonus depreciation means despite the $25,000 first-year expensing limit for writing off the cost of a heavy SUV (one with a gross vehicle weight rating of more than 6,000 pounds, but not more than 14,000 pounds), the full cost can be deducted in the year the SUV is placed in service.
NEW BUSINESS VEHICLE DEDUCTIONS AND LIMITS
Those businesses using vehicles in their operations face two, potential problems: the already-mentioned vehicle depreciation write-off limits and like-kind exchanges. Every business has long been able to swap vehicles in a like-kind exchange.
A vehicle used in the operation is turned over for a trade-in allowance and a new vehicle is purchased for the owners or employees to use. A like-kind exchange means there is no gain on the swap while depreciation is claimed on the new vehicle based on the cash paid for the new vehicle on top of the trade-in.
The TCJA removes like-kind vehicle exchanges as an option. The only property now allowed to be used in a like-kind exchange is now “real” property – which vehicles are not.