EDITORIAL

Autos In Your Business? Get Better "Mileage" from the New '96 Tax Code Regs

08/27/96

Part one of two
By Gerald Levinson, CMA

With fall around the corner now is the time to start thinking about year-end automotive tax planning. Recent developments could influence your strategy.

IS THERE A SPORT UTILITY VEHICLE IN YOUR FUTURE? - THIS TAX SAVING WINDFALL MAY HELP YOU DECIDE.

For those of you who may be leaning toward the purchase of a Sport Utility Vehicle (SUV), a recent tax code interpretation could be beneficial.

If you buy an SUV over 6000 pounds gross loaded (e. g. Range Rovers, Chevy Suburbans, Toyota Land Cruisers), two major tax savings are available. The luxury tax is eliminated, and you gain greater acceleration in depreciation expense.

If your business leases your car, you escape the personal use income inclusion. Elimination of this income could be substantial since the base price of the SUV could easily start at $50000.

For example if you bought a Range Rover weighing over 6000 pounds for $50,000, and you use it 80% for business purposes, several tax saving options occur. First the luxury tax of about $1800 is eliminated and second the $40,000 business portion can be written off entirely in 5 years. In fact 71% in the first 3 years. For some taxpayers this could keep the precious NOL's going.

However, if your business purchased a $50,000 auto under 6000 pounds, you can only expense $2448 the 1st year, $3200 the 2nd year, $2360 the 3rd year and $1420 thereafter until fully written off.

Comment: The SUV approach results in a luxury tax saving of $1800 plus a write-off advantage of $29000 over five years. What a difference!!

Should you want to pursue this seriously contact your tax consultant or CPA and refer to the tax code IRC S280F(d)(5) and REG S1.179-1(d)(1). Their expertise can help you safely thru the tax maze.

LEASING OR BUYING REVISITED - A LOOK AT THE NEW 1996 NUMBERS

Several readers have requested that we elaborate on the Buying or Leasing of a car, specifically at what price point does it pay to lease.

You will recall that there are three ways to to write off the expense of a car:

1. The Mileage method. In 1996 you will be allowed 30 cents a mile for business mileage which covers all operating costs. Depreciation or leasing costs cannot be added.
2. The Buy method which allows operating expenses plus your business percentage use of depreciation.
3. The Leasing method which allows operating costs plus your business percentage use of leasing costs which is good news. The bad news in this case is that you will most probably receive a W2 for the personal use portion of the the lease cost.

Under the new depreciation caps for 1996 it turns out that the leasing method becomes advantageous at a capitalized purchase price of approximately $15500. At this point the lease payment expense curve crosses over the depreciation expense curve thus providing a faster write off.

Therefore if have a 3 year lease you will have theoretically written off your car at about the same rate it has depreciated in the market place. Whereas the buy method at the end of 3 years your book value may be far greater than what you could sell or trade the car for. Selling the car at this juncture would result in a loss.

For many business people this will reduce the personal Adjusted Gross Income on the 1040 proportionately.

If you are smart enough to plan your tax strategy 2 or 3 years in advance, a one-type loss of this type could help out should you expect an annual increase in business income.<p>

FINAL FOOTNOTE

If any of the circumstances above fit your economic or tax status be sure to calculate comparative buying and leasing plans taking into consideration the SUV advantages. A good decision now can save you a great deal money later.

The next article will explore some tax loop holes upheld by the tax courts.

Gerald Levinson -- The Auto Channel