Dentists intrigued by the new tax treatment of large SUVs may need to make a decision quickly. "Much has been made of the tax law passed earlier this year that allowed bigger deductions for a business vehicle than in the past," says Jan Neri, CPA, a partner at Filomeno & Company in West Hartford, Conn., whose practice concentrates on professionals such as dentists and doctors. "And much needs to be made about the fact that it may go away quickly."
Here's where things stand. In early 2003, the IRS ruled that small businesses could write off up to $100,000 of the cost of an SUV in one year for vehicles that qualify as business equipment. To qualify, the vehicle had to have a gross vehicle weight over 6000 pounds and be used more than 50 percent of the time for business. This was part of a package that raised the IRS's Section 179 business deduction limit from $25,000 in qualifying assets to $100,000, up to the taxable income of the entity.
"So, a dentist with multiple offices who needed a vehicle to go between them might well consider buying a Cadillac Escalade at $58,000 as opposed to a BMW with a cost of $54,000," says Ms. Neri. She points out that the Escalade has a gross vehicle weight of over 6,000 pounds. This would allow the dentist whose practice purchased it to take a $58,000 deduction, provided the vehicle was exclusively used for business. By contrast, the BMW, which only weighs 3,759 pounds, would only allow for a maximum deduction of $10,710.
But, that law is in jeopardy. A new bill moving through the US Senate would rewrite the part of the tax code that has been boosting the interest in SUVs. The Senate Finance Committee voted in early October to grant a 3 percent across-the-board tax break to manufacturers, hoping to support this sector of the economy. Among the bill's provisions was one aimed at lowering the overall cost of the legislation, including reducing the so-call "SUV Tax Loophole". The bill, which has already been approved by the Senate Finance Committee, would reduce the business equipment deduction (as it applies to SUVs among other equipment) from $100,000 back to $25,000. Currently the bill still has to go through the full Senate (which observers think it will) and the House (which is less likely). So the bill's fate is still undetermined.
Dentists considering taking advantage of the current deduction before the possible change need to take certain precautions to make sure the accounting on the vehicle meets the standards set by the IRS.
1) More than one location is key. "Dentists who use the vehicles to go to more than one office have an easier time justifying the business use of the vehicle," says Ms. Neri.
2) A business log of the travel to contemporaneously document the business use should be maintained. (Remember that commuting to your main office is not considered a business use.)
3) Substantiate more than a 50 percent business use. "So, instead of going straight into the office, stop off for another essential business need, like the post office or another office first and then head to your main office," suggests Ms. Neri.
4) Buy, not lease. In the past, leasing often made more sense from a tax standpoint. With the current 179 deduction, buying is more advantageous.
5) Beware of the recapture rule. "If you dispose of the property at a gain (and you would because you expensed it to a zero tax basis) then you'd have to recapture that gain as ordinary income," points out Ms. Neri.
6) Remember the $400,000 business acquisition limit. Even though it's been raised, there is still a limit on the total cost of equipment purchased in one year (including the vehicle). In other words, total acquisitions to entitle you to be eligible for the $100,000 depreciation deduction cannot exceed $400,000.
"The use of this deduction has been given a lot of visibility recently and new stories make it sound like people are essentially getting their large SUVs for free. That's a dangerous and gross simplification," cautions Neri. "I urge any dentists considering using this tax treatment to contact his or her accountant."
About the author's company: Filomeno & Company, P.C. is a Certified Public Accounting and Business Advisory firm in West Hartford, Conn. For over 35 years, the firm has been advising business owners on financial matters as partners in helping them grow their businesses. In addition, the firm helps its clients maintain and increase their wealth. For more information, see www.filomeno.com or call (860) 561-0020. For questions about the SUV tax treatment, contact Ms. Neri at [email protected] or call her at Filomeno & Company.