Small Business Tax Strategy: Heavy Vehicle Plus a Home Office
Small business owners are always looking for easy ways to lower their taxes. Here's a simple, but effective, tax planning technique that's available under the Tax Cuts and Jobs Act (TCJA) for 2018 through 2022. To take advantage, you need to purchase a "heavy" vehicle, work from a qualifying home office and keep detailed business expense records.
Under the TCJA, new and pre-owned heavy SUVs, pickups, and vans acquired and put to business use in 2018 are eligible for 100% first-year bonus depreciation. The only requirement is that you must use the vehicle more than 50% for business. If your business usage is between 51% and 99%, you can deduct that percentage of the cost in the first year the vehicle is placed in service. This generous tax break is available for qualifying vehicles that are acquired and placed in service between September 28, 2017, and December 31, 2022.
The 100% first-year bonus depreciation write-off will reduce your federal income tax bill and self-employment tax bill, if applicable. You might get a state tax income deduction, too.
Setting up a business office in your home can help you collect additional tax savings. There are three steps required to combine the benefits of these two tax breaks.
1. Pick Out a Suitably Heavy Vehicle
The 100% first-year bonus depreciation deal is only available for an SUV, pickup or van with a manufacturer's gross vehicle weight rating (GVWR) above 6,000 pounds. The vehicle must be purchased, not leased. First-year depreciation deductions for lighter vehicles are subject to a maximum limit of only $18,000 for 2018.
Examples of the many vehicles above the 6,000-pound threshold include:
- Audi Q7,
- BMW X5,
- Buick Enclave,
- Cadillac Escalade,
- Chevy Tahoe,
- Ford Explorer,
- Jeep Grand Cherokee, and
- Lincoln Navigator.
Many full-size pickups also qualify. You can usually find the GVWR on a label on the inside edge of the driver's side door.
100% first-year bonus depreciation deal is allowed only if you use your heavy SUV, pickup or van over 50% for business. The business-use percentage is calculated by dividing business mileage by total mileage for the year.
2. Set Up a Home Office
It's easier to pass the over-50%-business-use hurdle for a heavy vehicle if you have an office in your home that qualifies as a principal place of business. Then, all the commuting mileage from your home office to temporary work locations — such as customer offices and job sites — is considered business mileage. Commuting mileage between your home office and any other regular place of business (such as another office you keep downtown) also counts as business use.
What about the miles you drive from your other regular place of business (for example, that downtown office) and temporary work locations? According to the IRS, that counts as business mileage, too.
The point is, when your home office qualifies as a principal place of business, you can easily rack up plenty of business miles, making it easier to pass the over-50%-business-use test for your heavy vehicle.
Self-employed individuals (sole proprietors, partners and limited liability company members) have two different ways to qualify a home office as a principal place of business:
- Conduct most of your income-earning activities in the home office.
- Conduct your administrative and management chores in the home office. To take advantage of this qualification rule, however, you can't make substantial use of any other fixed location (like another office downtown) for administrative and management functions.
Under either option, you must use the home office space "regularly and exclusively" for business purposes during the whole year. Exclusively means no personal use at any time during the year, so you might have to wait until next year to set up your deductible home office and buy your heavy vehicle.
Important note: If you're an employee of your own corporation, you can't write off home office expenses under the current rules. The TCJA eliminated unreimbursed employee business expense deductions for 2018 through 2025.
3. Keep Detailed Business Expense Records
Detailed, contemporaneous expense records are a must-have when using this small business tax planning strategy — in case the IRS questions your heavy vehicle's claimed business-use percentage or your home office deductions.
That means you'll need to keep track of the miles you're driving for business purposes, compared to the vehicle's total mileage for the year. Recordkeeping is much simpler today, now that there are apps and mobile technology you can use. Or simply keep a small calendar or mileage log in your car and record details as business trips occur.
In addition to keeping your sales invoice when you purchase a heavy vehicle, your vehicle records should include the trip mileage, destination, purpose and date of the business trip and (if applicable) who you were meeting.
As previously discussed, home offices must pass the 1) regular-and-exclusive-use test and the 2) principal-place-of-business test. If your home office fails either test, your allowable business mileage could be significantly reduced.
In addition, you'll need to keep records to support the amount of your home office deduction. Taxpayers typically deduct actual expenses when they claim a home office deduction, including:
- Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,
- A proportionate share of indirect expenses, such as mortgage interest, property taxes, utilities, repairs and insurance, and
- A depreciation allowance for the office portion of your home.
Keeping track of actual expenses can be time consuming. Fortunately, there's a streamlined method that's allowed under a tax law change that went into effect in 2013: You can simply deduct $5 for each square foot of home office space, up to a maximum total of $1,500.
Tax-Saving Double Play
You can potentially combine the 100% first-year bonus depreciation break for heavy business vehicles with the home office deduction privilege to reap major tax savings. If you have questions or want more information about this strategy, contact your tax advisor.