2022 Tax Planning: Vehicle Depreciation and Deductions 

Preface: A car for every purse and purpose. -Alfred Sloan

2022 Tax Planning: Vehicle Depreciation and Deductions 

 In general, if you use vehicles in pursuit of a trade or business, you can deduct the ordinary and necessary expenses incurred while operating the vehicle. Taxpayers may use either the standard mileage rate method or the actual cost method to recover vehicle costs.

For purposes of these deductions, an “automobile” includes a passenger vehicle, van, pickup or panel truck.

 Standard mileage rate vs. actual cost method. In lieu of proving the actual costs of operating an automobile, self-employed individuals may compute the deductible costs for their business use of an auto using a standard mileage rate. The standard mileage rate may also be used to reimburse employees who use their own car for business. Businesses that operate up to four vehicles at the same time can deduct this standard mileage rate rather than keeping track of actual costs. The 2022 standard mileage rate is 58.5 cents per mile and for 2021 is 56 cents per mile for business. Alternatively, if you use the actual cost method, you may take deductions for depreciation, lease payments, registration fees, licenses, gas, insurance, oil, repairs, garage rent, tolls, tires, and parking fees.

 Substantiation. Proper recordkeeping is critical. The recordkeeping requirements vary depending upon which method you use. If you use the standard mileage rate, you should keep a daily log showing the miles traveled, destination and business purpose. Recordkeeping under the actual cost method is somewhat more onerous. You should also keep a mileage log if you use the actual cost method to establish business use percentage. In addition, you must keep receipts, invoices, and other documentation to verify expenses. Finally, you must be able to prove the original cost of the vehicle and the date it was placed in service for business use to claim depreciation.

 Personal vs. business miles. Regardless of the method used, if the vehicle is driven for personal as well as business purposes, only expenses or mileage attributable to the percentage of business use are deductible. As long as you use your vehicle more than 50 percent for business during the year, you can pro-rate your deduction. You also have the option of using the standard mileage rate, based on miles of business use for the year times the prescribed rate.

 Automobile depreciation and annual limits. The depreciation deductions for passenger automobiles are subject to annual limitations for the year the taxpayer places the passenger automobile in service and for each succeeding year.

Bonus depreciation. A taxpayer who acquires a business vehicle after September 27, 2017 and places the vehicle in service before 2023 is entitled to a 100 percent bonus depreciation deduction in the placed-in-service year. Under the luxury car rules, the actual bonus deduction for the year is limited to the first-year cap (e.g., $19,200 for a vehicle placed in service in 2022). However, without adopting an IRS safe harbor, no depreciation deductions may be claimed in any of remaining years of the vehicle’s regular depreciation period. This is because the basis of the vehicle for purposes of computing depreciation during the remaining years is reduced to $0 as if the taxpayer had claimed the full 100 percent bonus deduction. The amount of the 100 percent bonus deduction in excess of the first-year cap is recovered at a specified rate per year beginning with the first year after the last year in the vehicle’s depreciation period ($6,460 for a vehicle placed in service in 2022). 

This computational “quirk” may be avoided by adopting the IRS safe harbor method of accounting in the first tax year after the placed-in-service year. Under the safe harbor, a taxpayer deducts the first-year depreciation limit ($19,200 for 2022) in the placed-in-service year. In each subsequent year of the depreciation period, the taxpayer claims the depreciation deduction allowed by applying the applicable depreciation table percentage for the year to the cost of the vehicle as reduced by the first-year limit. However, if the depreciation cap for the year is less than this amount, the deduction is limited to the depreciation cap.

 Section 179 deduction. A new or used vehicle may qualify for expensing under Code Sec. 179 in the tax year that it is placed in service if business use of the vehicle exceeds 50 percent. However, the sum of the section 179 expense deduction and regular first-year depreciation deduction (including any bonus depreciation) cannot exceed the applicable first-year depreciation cap for that vehicle.

 Certain heavy vehicles not subject to limits. Sport utility vehicles, trucks, and vans with a gross vehicle weight rating (GVWR) greater than 6,000 pounds are not subject to the annual depreciation caps imposed by the listed property luxury car rules because they are excluded from the definition of a passenger automobile. This can provide a tax break for buying new or used heavy vehicle that will be used over 50% in your business.

Electric plug-in motor vehicle credit. There are potential opportunities for taxpayers who purchase electric vehicles. A tax credit may be available in the year a taxpayer places a new qualified plug-in electric vehicle in service. The maximum credit is $7,500 and is reduced once a manufacturer sells 200,000 eligible vehicles for use in the United States. Eligible vehicles must satisfy several tests, including energy savings standards. The credit is generally a nonrefundable personal credit; however, any portion that is attributable to depreciable property is part of the general business credit.

If you would like to evaluate the business use of your vehicle(s) to provide guidance on how to maximize deductions, please call us at your earliest convenience to review your situation.

Recordkeeping | Common Requirements for Personal Taxes

Preface: “That’s the thing about December: it goes by you in a flash. If you just close your eyes, it’s gone. And it’s like you were never there.” — Donal Ryan

Recordkeeping | Common Requirements for Personal Taxes

We previously explained the importance of keeping records so that your tax return can be properly prepared and so that claimed items can be backed up in the event of an audit. (Despite a popular misconception that the IRS Reform Act of 1998 shifted “the burden of proof” on audits to the IRS, the law does not relieve any taxpayer of the obligation to keep proper records to substantiate deductions and tax basis.) Here, we focus on common records that are needed in connection with taxes on your personal income.

You should keep records of expenses that can be claimed as itemized deductions. Thus, you should keep records of unreimbursed medical and dental expenses, including receipts showing the dates you paid them and receipts for transportation primarily for, and essential to, medical care; payments of state income tax including any Forms W-2 from employment and canceled checks of payments of state estimated tax and of any additional state tax paid with your return (which also should be retained); records and canceled checks showing interest payments on your home mortgage and payments of real estate and personal property taxes.

You also need records of charitable contributions. For cash contributions of any amount, keep a canceled check or a receipt from the charity showing the amount and date of the contribution. For a contribution of $250 or more, you need a written acknowledgment from the charity containing very specific information and you generally must get this before you file. Additional records are needed for contributions of property other than cash. If you perform services for a charity, keep records showing your out-of-pocket expenses. If you give clothing or household goods, you need proof that they are of “good or better” condition or they are not deductible at all.

You must keep records of stocks, mutual funds, bonds and other similar investment property. Retain information on how and when any such assets were acquired, including additional shares purchased by reinvesting dividends. For these items and other types of assets, you must keep track of your basis, which is used to measure your tax gain or loss when you sell an item. Basis is ordinarily your cost but is different for property acquired by gift or inheritance or in a divorce. It is especially important to keep records of the basis in your home, which you may not sell for several years. Records of sales also need to be kept, along with commissions and other selling charges.

If you have any questions about any of the matters in this letter or any particular transaction you are concerned with, please give us a call.

2022 Tax Planning: Meals and Entertainment Expenses

Preface: “I was at this restaurant. The sign said ‘Breakfast Anytime.’ So I ordered French Toast in the Renaissance.” – Steven Wright

2022 Tax Planning: Meals and Entertainment Expenses

Many businesses consider the occasional dining of customers and clients just to stay in touch with them to be a necessary cost of doing business. The same goes for taking business associates or even employees out to lunch once in a while after an especially tough assignment has been completed successfully. It’s easy to think of these entertainment costs as deductible business expenses. However, due to a recent change in the tax law, many of those expenses may not be deductible.

 Entertainment Expense Deduction Limited

 Congress has eliminated the deduction for most entertainment expenses paid or incurred after December 31, 2017. Entertainment includes fees or dues associated with any social, athletic, sporting club or organization. However, your company may still be able to deduct the cost of meals as a business expense if detailed substantiation and recordkeeping requirements are met.

 Business Meals

 As a general rule, your company can deduct 50 percent of the cost of meals as a business expense if the following requirements are met: 

        • the expense must be ordinary and necessary and paid in carrying on a trade or business;
        • the expense may not be lavish or extravagant;
        • the taxpayer or an employee must be present when the food or beverages are furnished;
        • food and beverages must be provided to the taxpayer or a business associate; and
        • if the food and beverages are provided during or at an entertainment activity, separate invoicing is required.

 The food or beverages must be provided to a person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective. This definition is applied to employer-provided food or beverage expenses by considering employees as a type of business associate as well as to the deduction for expenses for meals provided by a taxpayer to both employees and non-employee business associates at the same event.

 Coronavirus (COVID-19) pandemic. Congress provides for the temporary allowance of 100% deduction for business meal food and beverage expenses provided by a restaurant that are paid or incurred in 2021 and 2022.

Special rule for per diem rates. For a taxpayer properly utilizing for meal expenses, the IRS provides a special rule that allows the taxpayer to treat the full meal portion of a per diem rate or allowance as being attributable to food or beverages from a restaurant beginning in 2021 and 2022.

 Invoicing. Food and beverage expenses deductibility and treatment depends on how invoiced. Food and beverage expenses include delivery fees, tips, and sale tax. For food or beverages provided at or during an entertainment activity, the amount charged for food or beverages on a bill, invoice, or receipt must reflect the venue’s usual selling cost for those items if they were to be purchased separately from the entertainment, or must approximate the reasonable value of those items. However, if the invoices are not stated separately and no allocation can be made, the entire amount is nondeductible.

Please call our office and to discuss how your company’s typical meal and entertainment expenses fare under the new deduction rules and suggest changes to your meal and entertainment policies. We can also show you how to comply with the recordkeeping requirements.