Archive for Section 179

Own Two Cars? Claim Business Tax Deductions on Both!

If you use your car for business, you’re well aware by now that you can deduct your business mileage. If you have a tax-deductible home office, you can even deduct your commute to and from work each day. But, did you know that you might also be able to claim expenses for more than one vehicle? For business owners who fit the requirements, you can significantly increase your tax savings with deductions on both your vehicles.

Marriage Status Makes a Difference

It seems like married couples often get the most benefits when it comes to tax savings, but deducting business mileage for two vehicles is actually easier for the single folks. A single person who drives more than one car has a good chance of deducting expenses for both. The married person, on the other hand, will have a bit of a harder time justifying this deduction on their tax return. It can be done, though.

Here’s what you need to prove for the deduction if you’re married:

  1. You drive more miles than your spouse.
  2. Most of your miles are business miles.
  3. The two vehicles are of comparable value.

Figuring Out if You Qualify

So, either you’re a single person with two cars, or a married person who uses both vehicles for business miles. Either way, you’ll need to know four numbers regarding your vehicles and mileage. They are:

  1. How many business miles you drive,
  2. How many total miles you drive,
  3. The cost of each vehicle, and
  4. The estimated proceeds if you were to sell each of the vehicles.

These numbers should be pretty easy to produce. After all, you are keeping track of your business mileage already, right?

Get ready for some really easy math. It turns out the deductions work the same regardless of whether you’re married, single, a sole proprietor, or the owner of a corporation. No matter your circumstance, you can take those four numbers above and determine whether the two car deduction creates an advantage for you.

Tip: One thing that does make a difference is if you have the car on a lease. In the case of a lease, you must use IRS mileage rates and cannot use the formula below.

How to Do the Math

Let’s do an example. For this example, you own two cars: Yellow Car and Blue Car. Yellow Car cost you $23,000 and Blue Car cost you $21,000, so you know those numbers for the formula already.[1]

Say you used to drive only one of the cars for business purposes, and you drove a total of 28,000 miles. In this scenario, you drive Yellow Car 30,000 total miles and Blue Car 8,000 total miles, for a grand total of 38,000. That gives you 93.3 percent business use for Yellow Car and 0 percent business use for Blue Car.

Given this scenario, you are putting more miles on Yellow Car, so it will be worth less at the time of sale—$2,000. Blue Car could sell for $5,000. These numbers, of course, will be an educated guess. Now, you get your total tax deduction by calculating the net cost of your vehicle (purchase price minus sale price), and then multiplying by your business-use percentage. For the single-car scenario, your deduction equals $19,593.

Now, let’s see what happens if you start dividing your business mileage between two vehicles. Your 28,000 business miles are now divided between two cars—14,000 miles each. And, your total mileage is also divided between both vehicles—19,000 total miles each (the grand total remains the same, 38,000 miles). This means you are now driving both vehicles for business use 73.7 percent of the time.

Your estimated sales proceeds in this case are $3,500 for each vehicle, since they are being driven the same number of miles. Now what are the tax deductions for each car? Yellow Car: $19,500 (net cost, or basis minus proceeds) multiplied by 73.7 percent equals $14,372. Blue Car: $17,500 multiplied by 73.7 percent equals $12,898. This gives you a total tax deduction of $27,270.

You just added an extra $7,677 to your tax deduction! When you file your tax return, these deductions will be claimed (and adjusted) under depreciation, Section 179 expensing, and/or gain or loss on sales. These three elements equal the business percentage of the net cost of your vehicle. Before you decide to start using two cars for business, run the numbers through this easy formula, and see if it would save you money. Regardless of whether you claim these deductions using IRS mileage, actual expenses, or Section 179 expensing, the formula accurately determines whether claiming expenses for two vehicles is a better solution for you.

  1. If you traded in an older vehicle for one of these, you may want to use the adjusted basis rather than the original basis, or cost of the vehicle.

Why You May Want to Consider Antiques as Business Assets

It’s already well-known that antiques can make a wonderful personal asset for collectors. If you know how to choose the right pieces, you can see a nice return on investment from quality antiques. But, have you ever thought of doing the same with your business? Let’s put it this way, if you could choose between two desks for your office, both for the same price, do you go with the regular desk or the antique?

In many cases, the antique could be a better choice. Thanks to newer tax laws, antiques are now assets under Section 179, just like any other standard business equipment. That means you’ll get the same business tax deductions regardless of which desk you choose. So, why opt for the antique? For the same reason you might buy an antique for a personal collection. A regular desk will likely depreciate over the years, but the antique is a money-maker, likely to increase in value. The final difference could be thousands of extra dollars for your business.

Antiques as Smart Choices

Let’s put together an example so you can see just how the numbers work. Both desks cost $5,000 to purchase. In 10 years, the antique desk would be worth $15,000 and the regular desk would be worth $500. For the sake of this example, we’ll say you’re in the 35% income tax bracket and 15% capital gain bracket when you sell the piece of furniture. Here’s what your federal taxes would be on the antique:

  • 15% of the $10,000 in capital gain equals $1,500
  • 35% of the $5,000 in depreciation recapture equals $1,750

That means you’ll keep $11,750 after taxes from the sale of your antique desk. Compare that to only $325 from the sale of the regular desk ($500 from the sale minus 35% in recapture taxes). You can see how choosing antiques for multiple items in your office can quickly increase your business’s gains!

What kind of items could be purchased as antiques?

  • Conference tables
  • Desks
  • Rugs
  • Business car
  • Cabinets
  • Clocks
  • Paperweights
  • Bookcases
  • Coatracks
  • Umbrella stands
  • Chairs

Think of the possibilities! Any antique that functions just as well as a new purchase is a great investment. It could increase in value, and thus increase your net worth. Just don’t try to buy an antique computer!

Many business owners don’t even consider antiques when purchasing equipment. But, why not? When you choose antiques, you usually get a quality piece of furniture that looks beautiful in your office. They still count as depreciable Section 179 assets. And, they could increase in value. Even if a particular antique choice doesn’t increase its value significantly, you’ve lost nothing (as long as you pay reasonable prices).

Cases Regarding Antiques as Business Assets

Several previous court cases have held up the ability to count antiques as business assets. In particular, Liddle[1] and Simon[2] allowed these two professional musicians to depreciate antique and collector violins as business assets. These musicians used the violins in their role with the Philadelphia Orchestra.

The instruments involved in the case were already 300 years old when purchased. They were bought for $30,000 and had increased in value to $60,000 in less than 10 years when the musicians had depreciated them to zero. Regarding this case, the court noted that the Economic Recovery Tax Act of 1981 (ERTA) had changed the rules for depreciation. Prior to ERTA, antiques could not be depreciated in a business, no matter how often they were used for business purposes.

The cases went through the Tax Court, the Second Circuit Court of Appeals, and the Third Circuit Court of Appeals. Thanks to the decisions made in these courts, the musicians (and you) may now depreciate antiques and count them as a Section 179 expense. ERTA set the path for this by changing the useful-life rules to statutory depreciation periods. So, what does all this mean for you? It means you qualify for tax-favored expensing and depreciation when:

  • During the normal course of business, you actually use the antiques (they are not decorative).
  • The antiques are subject to the same wear and tear that any other business asset would be.

Interestingly, the IRS did not agree with the decisions of the courts in the cases of Liddle and Simon. In 1996, they formally issued a non-acquiescence and stated that in the seven other circuits they would go after taxpayers who tried to depreciated antiques.[3] However, to date they have never done this.

The circuit for the above cases covers the areas of Vermont, Connecticut, New York, New Jersey, Pennsylvania, Delaware, and the Virgin Islands. This means that if you work in one of those areas, the IRS cannot attack your antique depreciation because the courts have already made their decisions regarding that circuit.

Further, it is unlikely that the IRS will actually go after you for business antique depreciation no matter where you live. That’s because courts can order the IRS to pay attorney’s fees for bringing a case that is “not substantially justified.” Per IRS Publication 556, that means:[4]

  • The IRS didn’t follow its own published guidance, such as announcements, private letter rulings, revenue rulings, and regulations.
  • The IRS has taken on substantially similar cases in another circuit’s courts of appeal and lost.

Therefore, even if you live outside the Second and Third Circuits, you are unlikely to be hassled by the IRS about depreciation of antiques. Bringing a similar case in other circuits could obligate the IRS to pay attorney fees, and the IRS has not tried since the time of these cases.

When Preparing Your Taxes

Just remember to follow certain rules established during Liddle and Simon. Artwork does not count as a depreciable business asset, as found in the Noyce case.[5] Any antique furniture or equipment you plan to depreciate on your taxes must be physically used as a part of your business and subjected to the wear and tear of ordinary office equipment.

It turns out you actually get a better deal on taxes than the antique dealer who sells you the piece. A dealer gets to deduct the antique’s cost as a cost of sale, but he pays both self-employment taxes and regular income taxes on the profit. A business owner, on the other hand, deducts the cost at the time of purchase with Section 179 expensing rather than having to wait for the sale. Also, because the item is counted as a business asset, when you do sell it the amount of profit that exceeds the purchase price is a Section 1231 gain, which is a tax-favored capital gain as long as you used the antique in your business for more than one year (assuming you have no offset from Section 1231 losses).

All of this sounds pretty good so far, right? Well, here’s some even better news. If you’re kicking yourself for having antiques that you have not deducted in your business because you weren’t aware of the rules, you can claim those benefits on this year’s tax return. You just claim the depreciation retroactively with a Form 3115.

For business antiques you buy this year, you can expense up to $125,000 of qualifying purchases. You get immediate deductions for this. Down the road, when you sell the items, you’ll get tax-favored capital gains benefits on the amount of appreciation. All in all, you come out way ahead, even with the price of recapture taxes on the depreciation. After all, a regular piece of office equipment is worth much less when you’re ready to sell it. It’s clear that antiques are a good financial choice when you need to select furniture or equipment for practical use in your business.

  1. Brian P. Liddle v Commr., No. 94 7733, 76 AFTR2d &95 5327, 3d Cir, September 8, 1995, aff’g 103 T.C. 285, 94 TNT 165 8 (1994).
  2. Richard L. Simon v Commr., No. 94 4237; 76 AFTR2d &95 5496; 95 2, 2nd Cir., October 13, 1995, aff’g 103 T.C. 247, 94 TNT 165 7(1994).
  3. AOD 1996 009, July 15, 1996.
  4. IRS Pub. 556, Examination of Returns, Appeal Rights, and Claims for Refund (Rev. August 2005), p. 10.
  5. Noyce v Commr, 97 T.C. 689.