The owners and operators of many mobile entertainment businesses will have to live and, in many cases, suffer, with today’s tax laws— especially the deduction limits for cars, vans and SUVs. That’s right: Those purchasing or leasing a vehicle during 2013, whether for use in the mobile entertainment business, by the business, or for use by the owner and/or key employees, face severely limited depreciation deductions— restrictions that can substantially increase the out- of-pocket cost of acquiring any business vehicle.
Fortunately, every DJ, VJ and KJ who uses a car, truck or van in their mobile entertainment business—for sales calls, transporting equipment, or other functions—may be able to write off its purchase price in the year it is first used for business purposes. Or, in some cases, the operation may be limited to writing off only a few thousand dollars a year for several years. The tax treatment depends on the size of the vehicle and whether it’s suitable for personal as well as business use.
A simplified standard mileage allowance deduction replaces separate deductions for lease payments (or depreciation if the car is purchased), maintenance, repairs, tires, gas and oil, insurance and license and registration fees. Unfortunately, the standard mileage rate may not be used if a Code Section 179, first-year expensing election was claimed for the auto, or if the vehicle was depreciated. Also, under the current rules, the standard mileage rate can’t be used to compute the deductible expenses if five or more autos are owned or leased by a mobile entertainment business and used simul- taneously (such as in a fleet).
While using the standard mileage rate is easier for
record keeping, a larger deduction may result using the actual cost method. And don’t forget use of the standard mileage allowance prevents a mobile entertainer from claiming regular MACRS depreciation deductions (subject to the luxury auto dollar caps) for the auto in later years.
Trucks (including SUVs) and vans that are configured in such a way that they can be used only minimally for personal purposes, are not usually subject to the dollar limits that apply to passenger vehicles weighing no more than 6,000 pounds. These trucks and vans are referred to as “qualified non– personal use vehicles.”
Modifications likely to render a truck or van as a qualified non–personal use vehicle include having a front bench for seating, permanent shelving that fills the cargo area and advertising or a company name printed on the side.
LUXURY CAR WRITE-OFFS
Expenses related to the use of a car, van, pickup, or panel truck for business purposes can, of course, be deducted by the operation as “transportation” expenses if: the vehicle is used more than 50% of the time for business purposes; isn’t classed as “listed property;” and its use doesn’t require it be treated as a “fringe benefit” to the business’s owner or key employees.
Congress decided years ago that taxpayers should not have to subsidize extravagant vehicles used by business. To prevent that, the law squeezes otherwise allowable depre- ciation deductions for “luxury cars.” But don’t think Rolls Royce or Ferrari. Congress has a much less extravagant view of luxury. For 2013, the maximum first-year depreciation write-off for a new (not used car) that costs over $15,300 is $11,160. For a used car, the maximum first-year write-off for 2013 is a much lower $3,160. (These figures assume 100% business use.)
THE STRATEGIES OF CHANGE
Under the American Taxpayer Relief Act (the so-called “Fiscal Cliff ” taxes), an $8,000 increase in the first-year depreciation cap for vehicles on which bonus depreciation is claimed remains unchanged and continues to apply to vehicles placed in service in 2013.
Taking into account the $8,000 increase, if bonus depreciation is claimed, the first-year depreciation limit on luxury automobiles first put into use during the 2013 is, as mentioned, $11,160 for passenger automobiles, and $11,360 for trucks and vans.
If a vehicle does not qualify for bonus depreciation (e.g., a used vehicle is purchased or the business opts out of bonus depreciation), the first-year cap is $3,160 for passenger cars, and $3,160 for qualifying trucks and vans.
Larger vehicles, such as trucks or tractor-trailers are, of course, treated differently for tax purposes. Generally however, in order to claim a tax deduction for business use of a car or truck, a mobile entertainment business must have “ordinary and necessary” costs related to business usage.
More good news if the vehicle is leased—the lease inclusion tables do not apply if the weight limits are
exceeded. So, the DJ, VJ or KJ can write off the entire lease cost (at the business use percentage) and does not have to reduce lease payments by the yearly lease inclusion limitation.
BIGGER VEHICLES, BIGGER WRITE-OFFS
In general, there are two ways to recover the cost of a truck more quickly than the usual depreciation recovery period— if the truck is more than 6,000 pounds. The first is called a Section 179 deduction.
Section 179 of the tax law allows the mobile entertain- ment operation to expense and immediately write-off the cost of business property instead of taking the depreciation write-off. To qualify for this deduction, business use of the property must be more than 50 percent.
There are both dollar and business income limitations on the Section 179 amount that can be deducted for 2013. The maximum amount that can be elected as a Section 179 expense is $500,000. The amount of business income limits the amount that can be deducted each year to the lesser of the taxable income generated from the business or $500,000.
SPORT UTILITY VEHICLES (SUVS) AND PICK-UPS
Sport utility vehicles (SUVs) and pick-up trucks with a gross vehicle weight rating (GVWR) in excess of 6,000 pounds are exempt from the luxury car depreciation caps. However, no more than $25,000 of the cost of an SUV with a GVWR in excess of 6,000 pounds or a pick-up truck in excess of 6,000 GVWR with a bed length of less than six feet may be expensed under the Section 179, first-year expensing rules.
If the 50-percent bonus depreciation applies, a DJ business may treat as an immediately deductible “expense” as much as $25,000 of the cost under Section 179. It may also claim a 50-percent bonus depreciation deduction on the cost as reduced by the Section 179 allowance. Then a regular first-year depreciation deduction equal to 20% of the cost (reduced by the Section 179 deduction and the 50% bonus allowance) is claimed—assuming the 200% declining-balance method and half-year convention are used to depreciate the vehicle, of course.
PERSONAL USAGE AND THE END
An employer must treat an employee’s personal use of any employer-provided auto as fringe benefit income that can be valued using any one of several methods. One of the permitted methods allows an employer to value personal use at the mileage allowance rate (56.5 cents per mile for 2013).
A mobile entertainment business that leases a business vehicle can deduct the business use part of the lease payment. If business use is 100%, the full lease amount is deductible. So that lessees can’t avoid the effect of the luxury auto limits, however, they must include a certain amount in income during each year of the lease to partially offset the lease deduction.
If the DJ, VJ or KJ stops using the truck for business purposes, or if the business purpose drops to 50 percent or less, the rules require “recapture” of some of the benefits received. The recaptured amount or amount paid back is the
amount of the excess earlier deduction. In other words, the amount taken in excess of what would have been allowed had the vehicle been depreciated using the straight-line method of depreciation over a specific time frame (in the case of a truck, five years).
To prove eligibility to deduct car and truck expenses, every mobile entertainer should keep a mileage log. A mileage log should contain the date of each tax-deductible trip made, show how many miles were driven, and for what purpose.The total number of miles driven for the year is also a factor, so it would be a good idea to indicate each vehicle’s odometer reading on the first of each year.
It is also important to track vehicle expenses. In addition to documenting the use of the vehicle, an expense record gives every DJ, VJ and KJ the option of deducting the actual expenses where the standard deduction would not result in a lower tax bill.
Whether vehicles play a role in the operation of the mobile entertainment business, are used by the business, or are provided by the business for use by owners, share- holders or key employees, our tax rules can help offset the expenses. Guidance by a qualified professional is, however, strongly recommended especially when it comes to the deduction limits imposed on recovering the cost of those vehicles.
Filed Under: Issue #150, Video
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