The owners and operators of many security businesses will have to live and, in many cases, suffer, with today’s tax laws — especially the deduction limits for cars, vans, light trucks and SUVs. In fact, those purchasing or leasing a vehicle during 2015 — whether for use in the security industry service provider, by the business, or for the owner and/or key employees — face severely limited depreciation deductions. These restrictions can substantially increase the out-of-pocket cost of acquiring any business vehicle.
Every security dealer, VAR, integrator or reseller that uses a truck or van in their business — whether for sales calls, installation or other functions — may be limited to writing off only a few thousand dollars each year during the vehicle’s depreciable life; or, they might be able to write off a large part of the vehicle’s purchase price in the year it is first used for business purposes.
Expense Now, Deduct Later
Section 179 of the tax law allows an immediate tax write-off for the cost both new and used equipment acquired during the tax year. While the amount that may be taken as a Section 179 first-year expensing deduction has been significantly higher in the past and may be increased once again, the current limit is $25,000. There is also a $200,000 cap on the amount that can be spent on equipment before the deduction must be reduced on a dollar-for-dollar basis.
When it comes to routinely deducting the cost of vehicles, years ago Congress decided that taxpayers should not be asked to subsidize what they viewed as “extravagant” vehicles used by business. To prevent that, the law squeezes otherwise allowable depreciation deductions for “luxury cars.” But don’t think Rolls Royce or Ferrari — Congress has a much less extravagant view of luxury.
The tax rules contain a specific annual dollar limit (adjusted each year for inflation) on the amount of depreciation allowed for any “passenger automobile.” Under the so-called “luxury vehicle” rules, the maximum first-year depreciation write-off for a new (not used) vehicle other than a truck or van, placed in service during calendar year 2015, is $3,160 — the same as in 2014. For passenger automobiles after year one, the limits are $5,100 in year two, $3,050 in year three, and $1,875 in all following years.
The same “luxury automobile” annual deduction limits are higher for vans and trucks than for other passenger automobiles. The limits apply to four-wheeled vehicles that are manufactured primarily for use on public streets, roads and highways, and that are rated at 6,000 pounds gross vehicle weight (GVW) or less (except for trucks and vans where a vehicle’s “unloaded” GVW rating is used).
Under the tax rules, “vans and trucks” are defined as passenger automobiles that are built on a truck chassis, including minivans and sport utility vehicles (SUVs) that are built on a truck chassis. For trucks and vans, the limit is $3,460 for the first tax year, which is $100 higher in 2015 and $5,500 for the second tax year; $3,350 for the third tax year; and $1,975 for each successive tax year.
The tax law also limits deductions for the cost of leasing automobiles and regularly publishes updates of the amounts that lessees must include in income for both passenger automobiles and trucks or vans. Naturally, any write-off disallowed because it exceeds the annual limit can be deducted in later years — although still subject to the annual limits in those later years.
Fortunately for many security service providers there is an exclusion from the annual depreciation limits for “qualified non-personal use vehicles” — these are described by the IRS as vans or light trucks whose design makes them “not likely to be used more than a de minimis amount for personal purposes.”
Trucks (including SUVs) and vans that are configured in such a way that they can be used only minimally for personal purposes are usually not subject to the dollar limits that apply to passenger vehicles weighing no more than 6,000 pounds. The modifications likely to render a truck or van as a qualified non-personal use vehicle include having front bench seating, permanent shelving filling the cargo area or advertising or a company name printed on the side. Easily-removed, magnetic signs alone rarely create a non-personal use vehicle.
Bigger Vehicles, Bigger Write-offs
Not too surprisingly, larger vehicles, such as trucks or tractor-trailers are treated differently for tax purposes. While trucks 6,000 pounds or under are considered passenger automobiles for tax purposes and subject to the luxury automobile limitations, trucks more than 6,000 pounds are not subject to those limits.
However, in order to claim a tax deduction for either a car or truck, the security dealer or installation business must have “ordinary and necessary” costs related to business usage. There is more good news if the vehicle is leased — the lease inclusion tables do not apply if the weight limits are exceeded. So, the security business can write-off the entire lease costs (at the business use percentage) and is not required to reduce lease payments by the yearly lease inclusion limit.
Personal Usage and Expenses
If a car, van, pickup, panel truck or other vehicle is used more than 50 percent of the time for business purposes, is not classed as “listed property,” and its use does not require it to be treated as a “fringe benefit” provided to the business’s owner or key employees, the expenses of operating it can be deducted as “transportation” expenses.
An employer must treat an employee’s personal use of an employer-provided auto as fringe benefit income and value it using any one of several methods. One of methods permitted allows an employer to value personal use at the standard mileage allowance of 57.5 cents per mile (for 2015).
Similarly, any security service provider or business that leases an auto may deduct the part of the lease payment that represents business usage. If the vehicle is used 100 percent in the business, the full amount of the lease is deductible. As mentioned, since the rules require a certain amount to be included in income during each year of the lease to partially offset the lease deduction auto lessees cannot avoid the luxury auto limits.
If the security operation ceases using a vehicle for business purposes, or if business usage drops to 50 percent or less, the rules require “recapture” of some of the write-offs already taken. The amount recaptured is the deduction taken in excess of what would have been allowed had the vehicle been depreciated using the straight-line method of depreciation over a specific time frame (in the case of a truck, five years).
Converting a business vehicle to personal use reduces the business percentage to zero, so recapture income would be recognized as of the conversion date.
Mileage and Maintenance
A simplified, standard mileage allowance deduction now replaces separate deductions for lease payments (or depreciation if the vehicle is purchased), maintenance, repairs, tires, gas and oil, insurance and license and registration fees. In lieu of the actual expense of operating a vehicle for business purposes, the tax rules allow a flat 57.5 cents per mile write-off.
Unfortunately, the standard mileage rate may not be used if a Code Section 179, first-year expensing election was claimed for the auto in earlier years, or if the vehicle was depreciated. Also, under the current rules, the standard mileage rate cannot be used for computing deductible expenses if five or more autos are owned or leased by the security business (such as in a fleet).
While using the standard mileage rate is often easier for record-keeping purposes, a larger deduction might result using the actual cost method. Also remember the standard mileage allowance prevents the dealer, service or installation business from claiming regular MACRS depreciation deductions (subject to the luxury auto dollar caps) for the vehicle in later years.
To prove eligibility as a business vehicle as well as substantiate car and truck expenses, mileage logs should be maintained. A mileage log should contain the date of each tax-deductible trip made, showing how many miles were driven and the purpose. Because the total number of miles driven for the year is also a factor, each vehicle’s odometer reading on the first of each year should be taken. It is also important to track actual vehicle expenses.
Whether vehicles play a role in the operation of the security business, are used by the business, or are provided by the business for use by owners, shareholders or key employees, our tax rules can limit the deductions allowed – or help offset the expenses. Guidance by a qualified professional is always strongly recommended, especially when it comes to the deduction limits imposed on recovering the cost of those vehicles.
Mark E. Battersby is a freelance writer that specializes in tax-related issues. Please email him at [email protected].
