• Skip to content
  • Skip to primary sidebar

Header Right

  • Home
  • About
  • Contact

Archives for November 2012

Not Patching the AMT Will Affect the Middle Class

November 30, 2012 by curcurucpa

Share This:

Overview of AMT

The Alternative Minimum Tax (AMT) was created to ensure that high income taxpayers paid a minimum amount of tax each year by limiting certain deductions.  Everyone who files a tax return technically computes her tax liability under the regular tax and under AMT, and pays the higher tax of the two systems.

The purpose of this post is to explain how the AMT will hit many taxpayers who may not consider themselves super-rich if the AMT patch is not extended into 2012.

A very simplified explanation of the AMT is that the AMT begins with regular taxable income and adds back certain deductions.  Taxpayers take this sum and subtract from it the AMT exemption.  The remainder is subject to a 26% or 28% tax bracket.

What is the AMT Patch?

The AMT patch mainly refers to the amount of the AMT exemption.  In 2011, the AMT exemption amount was $74,450 for joint filers and $48,450 for single taxpayers.  If the AMT patch does not get enacted during the fiscal cliff negotiations, the AMT exemption amounts for 2012 will be $45,000 for joint filers and $33,750 for single taxpayers.

How Will Not Passing the AMT Patch Affect Taxpayers?

Michael and Kay are married and file a joint return.  Michael has wages of $50,000 and Kay has wages of $60,000.

They have the following expenses:

  • Property Taxes $8,000
  • State Income Tax $5,000
  • Charity $5,000
  • Mortgage Interest $10,000

If the AMT patch is extended, then Michael and Kay’s tax liability will be:

Regular Tax

Gross Income                                    $110,000

Less:

Property Taxes                 $8,000

State Income Tax             $5,000

Charity                           $5,000

Mortgage Interest           $10,000

Personal Exemptions          $7,400

Total Deductions                              $35,400

Taxable Income                                $74,600

Federal Income Tax                          $10,880

 

 

AMT

Regular Taxable Income                                     $74,600

Add Deductions Disallowed by AMT:

Property Taxes                                 $8,000

State Income Taxes                          $5,000

Personal Exemptions                          $7,400

AMT Income                                                      $95,000

Less: AMT Exemption                                          $74,450

Balance                                                            $20,550

Times 26% AMT Rate                                          $5,343

 

Since regular tax ($10,880) exceeds AMT ($5,343), Michael and Kay are not subject to AMT.  Their total tax for the year is their regular tax of $10,880.

However, if the AMT patch is not extended, Michael and Kay’s AMT will be:

AMT

Regular Taxable Income                                      $74,600

Add Deductions Disallowed by AMT:

Property Taxes                                 $8,000

State Income Taxes                          $5,000

Personal Exemptions                          $7,400

AMT Income                                                      $95,000

Less: AMT Exemption                                          $45,000

Balance                                                            $50,000

Times 26% AMT Rate                                          $13,000

Since Michael and Kay’s AMT of $13,000 exceed their regular tax of $10,880, their AMT liability will be $2,120 ($13,000 AMT less regular tax of $10,880) and their total tax for the year equals their AMT liability of $13,000.

Therefore, a couple that probably doesn’t consider themselves to be super-rich gets hit with a $2,120 AMT bill.

 

If you need help with small business taxes,

sign up for a FREE tax consultation.

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

 

Filed Under: Uncategorized

Depreciation Limits on Heavy SUVs

November 29, 2012 by curcurucpa

Share This:

Since 2003, the Section 179 deduction has exceeded $100,000.  For a brief period of time, business owners could purchase SUVs with a gross vehicle weight rating over 6,000 pounds and write off the full purchase price via the Section 179 deduction.

Example:  It is 2003 and Andy buys a $60,000 Cadillac Escapade that he uses 100% for business.  Since this vehicle’s gross weight rating was over 6,000 pounds, Andy could take a full $60,000 Section 179 deduction for the purchase price of the vehicle.

The party ended on October 22, 2004.  After this date, the Section 179 deduction is limited to $25,000 for SUVs with a gross weight rating between 6,001 and 14,000 pounds.

Example:  It is 2005 and Barney buys a $60,000 Cadillac Escapade that he uses 100% for business.  Since the vehicle’s gross weight rating is between 6,001 and 14,000 pounds, the Section 179 deduction is limited to $25,000.  Barney may then claim regular depreciation on the remaining $35,000 purchase price of the Escapade (which will be deducted over the 5 year life of the vehicle).

Depreciation per Year is as Follows:

                Section 179         Regular Depreciation

2005       $25,000                $7,000

2006                                  $11,200

2007                                  $6,720

2008                                  $5,040

2009                                  $5,040

 

The heavy SUV rule applies to Section 179 expense, it does not limit the amount a taxpayer can deduct through bonus depreciation.  Therefore, the heavy SUV rule will not affect the amount a taxpayer can deduct through 50% bonus depreciation for 2012.

Example:  It is 2012 and Opie buys a $60,000 Cadillac Escapade that he uses 100% for business.  Since the vehicle’s gross weight rating is between 6,001 and 14,000 pounds, the Section 179 deduction is limited to $25,000.  However, Opie may still claim the full amount of 50% bonus depreciation on the vehicle.   

Depreciation per Year is as Follows:

                Section 179         50% Bonus Depreciation               Regular Depreciation

2012       $25,000                $17,500                                      $3,500

2013                                                                                  $5,600

2014                                                                                  $3,360

2015                                                                                  $2,520

2016                                                                                  $2,520

As you can see, 50% bonus depreciation helps taxpayers accelerate the timing of their depreciation deductions.

The reduced Section 179 deduction applies only to vehicles that are SUVs.  The following types of vehicles are not considered SUVs and are allowed a full Section 179 deduction ($139,000 in 2012).

  • Vehicles designed to fit more than nine passengers behind the driver’s seat—for example, a shuttle van
  • Vehicles equipped with a cargo area that is not readily accessible directly from the passenger compartment and that is at least six feet in length.  Many pickups with full-size cargo beds will qualify for this exception
  • Vehicles with (1) and integral enclosure that fully encloses the driver’s compartment and load carrying device, (2) no seating behind the driver’s seat, and (3) no body section protruding more than 30 inches ahead of the leading edge of the windshield.  Many delivery vans will qualify for this exception

The IRS’ concern was that luxury SUVs which are purchased primarily for personal reasons were being rapidly depreciated.  The three exceptions above are for vehicles that are essentially purely business vehicles that have no personal pleasure element.

If you need help with small business taxes,

sign up for a FREE tax consultation.

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

 

Filed Under: Small Business Tax Tagged With: bonus depreciation, heavy SUV, Section 179

Depreciation Limits for Business Cars

November 1, 2012 by curcurucpa

Share This:

The luxury auto limitations were developed because the IRS believed that there was abuse when taxpayers claimed depreciation deductions for business cars.  The concern is that business owners claim excessive depreciation deductions for luxury vehicles which have a personal enjoyment component to them.

Example:  Maximilian buys a new $50,000 Cadillac sedan that he uses 100% for business.  Automobiles are five year property and Maximilian would claim depreciation in the following amounts:

Year 1:                          $10,000

Year 2:                          $16,000

Year 3:                          $9,600

Year 4:                          $7,200

Year 5:                          $7,200

Total Depreciation:          $50,000

To combat this perceived abuse, the luxury auto limitations were enacted.  The luxury auto limit applies to passenger vehicles that have a gross unloaded vehicle weight of 6,000 pounds or less and are manufactured primarily for use on public roads.  Very few cars will exceed this weight limit and will therefore be subject to the luxury auto limitations.  When a vehicle meets this definition, it is subject to the following annual depreciation limits:

Year 1:                                                                  $3,160

Year 2:                                                                  $5,100

Year 3:                                                                  $3,050

Year 4 and each year thereafter:                               $1,875

Based on these depreciation limits, it would take Maximilian over 20 years to fully depreciate his car.

Also, based on the first year depreciation limit of $3,160, the IRS believes that cars costing over $15,800 are luxury autos ($3,160 divided by 20% first year depreciation rate).

Interaction with 50% Bonus Depreciation

In 2012, taxpayers are allowed to immediately depreciate 50% of qualifying assets.  In the context of this post, new (not used) vehicles generally qualify as qualifying assets.   Vehicles qualifying for bonus depreciation are allowed an additional $8,000 of depreciation in the first year.

In the above example, Maximilian would be able to deduct $11,160 in the first year ($3,160 plus $8,000 bonus depreciation).  Because of the additional first year depreciation, it would take a fewer number of years to fully depreciate the vehicle.

Less than 100% Business Use

When a vehicle is not exclusively used for business, the annual depreciation amounts must be reduced by the percentage that the auto is used for personal reasons.

Example:  Maximilian uses his car 80% for business and 20% for personal uses.  His annual depreciation expenses are as follows:

Year 1:                                                                  $8,928 ($11,160*80%)

Year 2:                                                                  $4,080 ($5,100*80%)

Year 3:                                                                  $2,440 ($3,050*80%)

Year 4 and each year thereafter:                                $1,500 ($1,875*80%)

It will take Maximilian roughly 17 years to fully depreciate the 80% of his car that is depreciable.

Special-Use Vehicles

The IRS’ main concern with luxury autos is that a business owner will gain personal satisfaction from driving his expensive business car.  There are certain vehicles that, because of their special uses, do not provide much personal satisfaction to the driver.  These vehicles include taxicabs, hearses, ambulances, and certain specially modified trucks and vans (that are designed in a way that makes non-business use unlikely).  These vehicles are not subject to the annual depreciation limits regardless of their weight.

If you need help with small business taxes,

sign up for a FREE tax consultation.

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

Filed Under: Uncategorized

Primary Sidebar

Search

Archive

  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • June 2020
  • December 2019
  • November 2019
  • October 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • April 2017
  • February 2017
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • June 2016
  • May 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • July 2014
  • June 2014
  • May 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • March 2012
  • February 2012
  • January 2012
  • October 2011
  • June 2011
  • May 2011
  • January 2011
  • December 2010
  • November 2010
  • October 2010
  • September 2010
  • August 2010
  • June 2010
  • May 2010
  • April 2010
  • March 2010
  • February 2010
  • January 2010
  • December 2009
  • November 2009
  • October 2009
  • August 2009
  • July 2009
  • June 2009
  • November 2008
  • October 2008
  • September 2008
  • May 2008
  • April 2008
  • March 2008

Category

  • Best Business Practices
  • Business Tax
  • Estate Planning
  • Michigan Tax
  • Personal Tax
  • Restaurants
  • Small Business Tax
  • Uncategorized

Copyright © 2012 · https://curcurucpa.com/blog