Q:

Subject: Question submission

 

Hi Kerry,

 

I asked a while ago and am still trying to understand the implications.  I wonder if you could help out.

 

In August, 2004 I purchase a 2004 Chevy Suburban for business use and depreciated the entire ~$48,000 cost under sec. 179 that year.

 

It's now 3.5 years later and I'd like to know the tax ramifications of trading in the 2004 Suburban for a 2008 Suburban (cost ~$54,000).

 

I understand that right now the cost basis of the 2004 chevy is $0.

 

Given that taxes and depreciation are not my strong suit, can you explain what the tax consequences are for such a transaction?

 

Specifically, how much of the new vehicle will be available to depreciate, and can it be depreciated all in a single year (2008)? 

 

With that information, I can understand the real (net) cost (that is, for example, if the trade-in value of the 2004 chevy is $30,000, leaving me paying $24,000 in cash for the new 2008, but if I can depreciate all of that, then my post-tax dollars cost will be somewhere in the $14,000 range (40% taxes) -- do I understand this correctly)?

 

Thank you,

A:

I have already discussed this exact thing in several previous posts; so I am not going to give as detailed an answer as I have already done.

Basically, the additional price you pay for the new vehicle after the trade-in credit is what will be eligible for depreciation and Section 179 expensing.  In your example, that would be the $24,000.

As always, the amount of Section 179 you will be able to claim will be based on the business mileage percentage for the year, your net earned income, and the total amount of new qualifying property you acquire during the year.

In regard to the actual after tax cost of the new vehicle, that will depend on your marginal tax bracket, as well as whether your income is subject to the 15.3% SE tax.  You didn't say where you will be deducting the vehicle costs, such as on Schedule A for W-2 employee expenses or on Schedule C for a sole proprietorship.  The actual tax savings will be dramatically different for each schedule. 

If you are deducting your vehicle costs on Schedule A, you will also have to deal with the Insane AMT, which severely penalizes people with high Schedule A deductions.  A reduction in your regular income tax could be more than offset by the AMT.

If a certain level of tax savings is a critical component in your decision to go through with the Suburban trade, the only smart approach would be to have your personal professional tax advisor run your pro forma numbers for whichever year you are considering the trade under both assumptions; with the new Suburban and keeping the old one.

If, as I suspect, you don't have a personal professional tax advisor, trying to answer this critical question by asking strangers on the internet for help is a dangerous way to handle this. 

Good luck.  I hope this helps.

Kerry Kerstetter

Labels: Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/19/2007 11:36:00 AM Send this post: