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Posted: 8/14/2007 7:37:36 AM EDT
Si I'm looking to replace my worn out old Chevy truck. As an additional wrinkle, this truck will be used for my side business. The way I understand it depreciation, fuel and maintenence costs, and interest will be tax deductable. For a vehicle over 6000 lbs, I can depreciate the entire cost of the vehicle over five years, and up to $10k the first year alone, as long as I charge myself for personal use. That said, most anything I do other than driving to my primary job I can put under business use by simply going to a bar to see a band or a meeting with one of my friends for my business (music). The only realistic limit cost wise is that I need to figure out how to best balance the benefits of getting tax breaks with a nice vehicle vs. maximizing "take home" profit after taxes. So here is a rough idea of what the costs actually look like:

Total cost of vehicle - tax benefits+residual value = total cost.....as long as my tax liability is equal to or greater than the monthly cost of ownership.

Example - I had to use a couple different loan calculators since it seems none of them calculate sales tax, total interest, and all that stuff for you....all of some but none of the calculators I had quick access to did it all. So don't mind the couple math errors that I'm sure are in here. This is just a rough idea.

97 Dodge (or any truck at this cost)- figure $6000 - 2000 down + 5.5% sales tax + $100 reg/fees + interest $496 - tax benefit (total cost) + residual (trade in) value ($500) = +$500 after paying off in three years with a payment of $136.79/mo. (6000-2000 down +tax and reg, 36 months @ 7%)

Total cash outlay - $6924.44
Tax benefit - $2308.14 / yr. - $6924.44 over 3 years
Residual value - $500

2002 Truck, any brand with low miles - $15000 - 2000 down + 5.5% sales tax + $100 reg/fees - 2000 down + interest 3000 - tax benefit (total cost) + residual value (trade in) value ($4000) = $4000 after paying off in five years with a payment of $287.02/mo. (15000 - 2000 down + tax and reg, 60 months @ 7%)

Total cash outlay - $15925
Tax benefit - $3185/yr. - $15925 over 5 years
Residual value - $4000

2006 Hummer H3 and trailer - $25000 - 2000 down + 5.5 sales tax +100 reg/fees interest 4960 - tax benefit - (total cost) + residual (trade in) value = +18000 after paying off in five years with a payment of $520/mo. (25000 - 2000 down + interest, tax and reg. 60 months @ 7%).

Total cash outlay - $33335.60
Tax benefit - 6667.12/yr. - 33335.60 over 5 years
Residual value - $18000

Right now my side business is only bringing in around $400-$600 a month, which makes my additional tax liability in the area of $150-$200 per month. So if I want the tax benefits to pay for the vehicle, it needs to cost me around that much per month. Essentially, I can either give that $150-$200 per month to Uncle Sam or use it to pay for a vehicle that is primarily used for the business. In this scenario, if I want an H3 and a trailer and want it to pay for itself with NO cash outlay on my part, I need to gross around $1800 a month with the side business. I can see doing around $2000-$2500 a month in 1-2 years.

Am I seeing this situation correctly, or even close?


Link Posted: 8/14/2007 7:52:36 AM EDT
You are not really that close. It doesn't matter how much money you are making in your business, you can deduct the associated costs for your truck.

However, you cannot legally deduct "most anything I do other than driving to my primary job I can put under business use by simply going to a bar to see a band or a meeting with one of my friends for my business (music)".

What you can deduct, and what are actually legitimate deductions are two different things. You CAN deduct hookers and blow, but that doesnt make them legit.

Basically if you are audited, and you have only 1 vehicle, and you claim that every single trip other than going to work was a business trip will not stand. Also, you have to keep DETAILED written record of every trip you take in order to substantiate your claim.

Really you have not given enough info on this, but if you take a look at www.irs.gov, they have a lot of info on deductions of vehicles used in a business.
Link Posted: 8/14/2007 8:09:31 AM EDT

Originally Posted By igorthesmall:
You are not really that close. It doesn't matter how much money you are making in your business, you can deduct the associated costs for your truck.

However, you cannot legally deduct "most anything I do other than driving to my primary job I can put under business use by simply going to a bar to see a band or a meeting with one of my friends for my business (music)".

What you can deduct, and what are actually legitimate deductions are two different things. You CAN deduct hookers and blow, but that doesnt make them legit.

Basically if you are audited, and you have only 1 vehicle, and you claim that every single trip other than going to work was a business trip will not stand. Also, you have to keep DETAILED written record of every trip you take in order to substantiate your claim.

Really you have not given enough info on this, but if you take a look at www.irs.gov, they have a lot of info on deductions of vehicles used in a business.


I also own a sedan that is paid off that I use for non music related stuff....i.e. commuting to my primary job and running around town type stuff......my truck is literally only used for non-business related trips 4-5 times a year.
Link Posted: 8/14/2007 8:12:07 AM EDT

Originally Posted By igorthesmall:
You are not really that close. It doesn't matter how much money you are making in your business, you can deduct the associated costs for your truck.



And here is where I run into the problems. If I gross 52k a year at my primary job, but only gross $5k a year in my music business, my tax liability for the second job is $2k, and my vehicle expenses are $3k, does the additional $1k of tax benefit apply to my entire tax liability? Or am I missing out on that $1k of tax benefit because I am spending too much on the vehicle?
Link Posted: 8/14/2007 10:40:41 AM EDT
If you keep your first truck, so that you have one for personal use and one for business use, most of the documentation requirements go away.
Link Posted: 8/14/2007 10:55:47 AM EDT

Originally Posted By TheKill:

Originally Posted By igorthesmall:
You are not really that close. It doesn't matter how much money you are making in your business, you can deduct the associated costs for your truck.



And here is where I run into the problems. If I gross 52k a year at my primary job, but only gross $5k a year in my music business, my tax liability for the second job is $2k, and my vehicle expenses are $3k, does the additional $1k of tax benefit apply to my entire tax liability? Or am I missing out on that $1k of tax benefit because I am spending too much on the vehicle?


You can deduct the $3k even if you have less than that in revenue. There are stipulations that you must meet in order that your business is not classified as a hobby.

Here is some info from the IRS.gov website

Business or Hobby? Answer Has Tax Implications


IRS Summertime Tax Tip 2007-13

Fishing, Gardening, Golf, Sewing, Woodworking, Horsemanship, Scrap Booking, Stamp and Coin Collecting, etc.

The IRS isn’t trying to spoil your fun but if your favorite activity makes a profit every year or so, there may be tax implications that surprise you.

What is a hobby? Hobbies, also called not-for-profit activities, are those activities that are not pursued for profit. What is a business? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.

If you are not sure whether you are running a business or simply enjoying a hobby, here are some of the factors you should consider:

* Do you run the activity in a businesslike manner?
* Does the time and effort you put into the activity indicate an intention to make a profit?
* Do you depend on income from the activity?
* If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
* Have you changed methods of operation to improve profitability?
* Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
* Have you made a profit in similar activities in the past?
* Does the activity make a profit in some years?
* Can you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is usually considered a business if it makes a profit during at least three of the last five tax years, including the current year.

An exception is breeding, showing, training or racing horses. Such activity is presumed to be a business if it makes a profit during at least two of the last seven years.

If you are conducting a trade or business you may deduct your ordinary and necessary expenses. An ordinary expense is an expense that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.

Losses from a not-for-profit activity (hobby) may not be used to offset other income. It is possible to claim some deductions for hobby activities as itemized deductions on your Form 1040 income tax return. However, there are special rules and limits to the deductions you can claim, and those deductions may not exceed the gross income from your hobby.

Still confused? More information is available at IRS.gov. A good resource is Publication 535, Business Expenses, found on the web site or by calling 800-TAX-FORM (800-829-3676).


If your business is actually a hobby, then you are limited in the deduction in that you can only deduct up to your hobby income.

If your business is termed a business by the IRS, then you do not have that same limitation. However if you lose money every single year and never end up with a tax liability, that is where you will generally run into the problems.
Link Posted: 8/16/2007 8:33:26 AM EDT

Originally Posted By ricky_45:

What you need to do is sit down with a CPA for an hour and let that CPA guide you. Putting this on the internet will get you all kinds of wrong answers. Just pay the CPA for the advice. Some CPA's charge around 150/hr. That's what I bill at.


This is the best advice you'll get.
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