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Depreciation on Vehicles to maximize tax benefit

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Grace, drops by the office on the Monday after Thanksgiving. She says that over the holiday she was reviewing her books and projecting the remainder of the tax year. She projects that her Schedule C will show a net profit of $300,000 this year. This is substantially higher than in the prior year.

She is concerned that she will owe too much tax this year. You advise her that since she is cash basis she should attempt to defer her income to next year and accelerate her expenses into this year to reduce her tax liability. She mentions that she had been planning on purchasing a new $50,000 vehicle next year but that she can acquire it before the end of the year to save taxes this year. She says that she is trying to decide between a little BMW sports car or a Chevy Suburban. Which vehicle should she purchase to maximize her combined depreciation and section 179 expense deduction this year? How much of a write off would she get for each vehicle this year? Ignore any issues related to the miles per gallon that each vehicle will get.

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Solution Summary

In tax planning for Grace for year end, the solution gives the depreciation rules for the two types of vehicles plus some additional data needed to form a good opinion for Grace. Since rules changes, the year is presumed to be 2007 for tax purposes. Tax calculations are made for each of the vehicles.

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As a tax preparer, the questions to ask are:

1. What will be the estimated business use percentage of the vehicle based on bus miles to total miles?
2. Has she bought any other substantial assets during the year?
3. What is the weight (GVWR) of each vehicle?
4. Is the tax return for 2007?

For purposes of this problem, the assumptions are 90% business use, no other assets were purchased this year, the weights of the vehicles are under ...

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