Jose is considering acquiring a new luxury auto- mobile costing $45,000 that wil

Question

Jose is considering acquiring a new luxury auto- mobile costing $45,000 that will be used 100% in his business. The salesperson at the automo- bile dealership states that Jose will be entitled to substantial tax benefits in the initial year (2017) 1:10-8 including: If Sec. 179 is elected: . A deduction of $45,000 of the acquisition cost under Sec. 179. If Sec. 179 is not elected: the A $9,000 ($45,000 0.2) depreciation deduction. a. Assuming Jose elects out of bonus deprecia- b. Would your answer to Part a differ if the c. Would your answer to Part a differ if Jose tion, are the salesperson's assertions relative to the tax benefits accurate? Explain. automobile were used only 60% for business purposes? e for amor- instead were to lease the automobile? Show ail

Explanation / Answer

Part a:

Assuming the luxury automobile purchased by Jose does not qualify for passenger vehicle then there is no depreciation limit to the vehicle. In that case since the vehicle has been used 100% for the business hence, the assertion of the sales executive in relation to the tax benefit as far as 100% cost depreciation is correct. However, in case bonus depreciation does not apply then the limit of depreciation is $3160. Hence, the assertion of the sales executive is partially correct, i.e. correct in respect of full depreciation of $45,000 and also partially incorrect, i.e. in respect of $9,000 in case the client opts out of bonus depreciation.

Part b:

The full cost of a vehicle is allowed as depreciation only if the vehicle is not a passenger vehicle and the bonus depreciation is allowed only if the vehicle has been used 100% for business purposes. Thus, in case the vehicle has been 60% time for business purposes then the assertion of the sales executive is not correct.

Part c:

The depreciation provision does not changes even if an asset is leased thus, the answer to part (a) would not change even if the automobile is taken on lease.

Part d:

In case of large vehicle weighting 6000 pounds or more the vehicle will not be classified as passenger vehicle thus, the depreciation deduction limits shall not apply to the automobile. Hence, the full cost of $45,000 will be allowed as deduction in the first year in which the vehicle has been used in the business.

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