Mehanna CPAs & Advisors | 199a deduction

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2018 Last-Minute Vehicle Purchases to Save on Taxes

Two questions:

1. Do you need a replacement business car, SUV, van, or pickup truck?
2. Do you need tax deductions this year?

Here are some ideas for you to consider:

1. Buy a New or Used SUV, Crossover Vehicle, or Van with a GVWR Greater than 6,000 Pounds

Let’s say that on or before December 31, 2018, you or your corporation buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck and that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you four big benefits:

1. Bonus depreciation of 100 percent (new, thanks to the TCJA)
2. Section 179 expensing of up to $25,000
3. MACRS depreciation using the five-year table
4. No luxury limits on vehicle depreciation deductions

2. Buy a New or Used Pickup with a GVWR Greater than 6,000 Pounds

If you or your corporation buys and places in service a qualifying pickup truck (new or used) on or before December 31, 2018, then this newly purchased vehicle gives you four big benefits:

1. Bonus depreciation of 100 percent
2. Section 179 expensing of up to $1,000,000
3. MACRS depreciation using the five-year table
4. No luxury limits on vehicle depreciation deductions

To qualify for full Section 179 expensing, the pickup truck must have

• a GVWR of more than 6,000 pounds, and
• a cargo area (commonly called a “bed”) of at least six feet in interior length that is not easily accessible from the passenger compartment.

Short bed. If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, tax law classifies it as an SUV. That’s not bad. It’s still eligible for expensing of up to the $25,000 SUV expensing limit plus 100 percent bonus depreciation. See Section 1 above for how this works.

3. Buy a New or Used Qualifying Cargo or Passenger Van with a GVWR Greater than 6,000 Pounds

A new or used cargo or passenger van bought and placed in service on or before December 31, 2018, can qualify for four big tax benefits:

1. Bonus depreciation of 100 percent
2. Section 179 expensing of up to $1,000,000
3. MACRS depreciation using the five-year table
4. No luxury limits on vehicle depreciation deductions

Cargo van. To qualify for full Section 179 expensing, the cargo van must

• have a GVWR of more than 6,000 pounds,
• fully enclose the driver compartment and load-carrying area,
• not have seating behind the driver’s seat, and
• have no body section that protrudes more than 30 inches ahead of the leading edge of the windshield.

If the van passes the GVWR test but fails one of the other qualifying tests listed above, the law deems it an SUV.

Passenger van. If the van has a GVWR of greater than 6,000 pounds and seats more than nine people behind the driver’s seat, it is a tax law–defined passenger van, not an SUV, and it qualifies for full Section 179 expensing of up to $1,000,000 and 100 percent bonus depreciation.

4. Buy a Depreciation-Limited New or Used Car, SUV, Truck, or Van

If you or your corporation buys and places in service a new or used passenger vehicle such as a car (or a pickup, SUV, or van with a GVWR of 6,000 pounds or less) on or before December 31, 2018, then you or your corporation may claim up to $8,000 in bonus depreciation.

Tax reform increased the 2018 luxury passenger vehicle depreciation limits to

• $10,000 for the first taxable year in the recovery period,
• $16,000 for the second taxable year in the recovery period,
• $9,600 for the third taxable year in the recovery period, and
• $5,760 for each succeeding year in the taxable period.

Here’s how this works: Say you buy a car. You add the $8,000 in bonus depreciation to the $10,000 car limit, for a 2018 limit of $18,000. To get to this limit, you can use a combination of bonus depreciation and regular depreciation. You reduce the $18,000 limit by any personal use.

The vehicle tax rules can be confusing. If you need my help, don’t hesitate to call me on my direct line at 313.790.0356

Sincerely,
Bill

These benefits must be weighed against costs to the federal government and to employers. The federal government must borrow for the tax credits that are going to subsidize mandated paid leave. Employers will face a considerable new compliance burden, they will temporarily lose services provided by workers, and they will lose much-needed cash flow that must be diverted to bridge the gap between paid leave payroll and the realization of benefits from tax credits.

The Families First Coronavirus Response Act (H.R. 6201), which the Senate passed and President Trump signed into law March 18, provides exceptions from paid leave requirements to three classes of employers. It puts limits on the amount each employee can receive. It expires at the end of 2020. It has an estimated revenue cost of $105 billion. And it defines what employee characteristics and situations (“qualifying needs”) make an employee eligible for paid leave.

If employer and employee are in the scope of the provisions, paid sick leave can be provided for that employee for up to 10 days. Following that period, paid family leave can be provided for up to 10 more weeks. Paid sick leave can be either 100 percent of regular pay (subject to a $511-per-day cap) or two-thirds of regular pay (subject to a $200-per-day cap). Paid family leave also is two-thirds of regular pay (subject to a $200-per-day cap). The $511 daily cap limits paid leave for employees earning more than $133,000 per year. The $200 daily cap limits paid leave for employees earning more than $78,000 per year.

In general, the more generous sick leave benefit is available for an employee who is ill, symptomatic, or self-isolated. The less generous benefit is available for an employee who cares for others with coronavirus-related issues. The family leave benefit is only available for parents of children out of school or without day care. Those descriptions are way too general. We think interpretation of the statutory language will matter a lot, so we are providing that text in the accompanying box.

Out of Luck

The pie chart shows the composition of the U.S. workforce in 2019. Out of 159 million individuals, 59 million are ineligible for any paid leave under the bill because employers with more than 500 employees are not required to provide paid sick leave. Also under the bill, the labor secretary can exempt employers with fewer than 50 employees from the requirements to provide paid sick leave (but not paid family leave). In the United States, 34 million individuals work for employers with fewer than 50 employees.

 
 
 
 
 
 

Public sector employees (except perhaps healthcare workers and emergency responders) are eligible for all paid leave. But note that their employers, mostly state and local governments, are ineligible for payroll tax credits available to private sector employers. Self-employed individuals (9.5 million) are eligible for income tax credits of equal size to employer payroll credits. It will be extremely difficult for the IRS to prevent abuse in this area. After all, how can a self-employed person prove no work is being done during a period when that person is claiming the income tax credit?

Under the bill, presumably because we don’t want to provide any incentive for healthcare workers and emergency responders to stay home, their employers don’t have to provide them with paid sick and family leave. Exact definitions will matter. But a quick review of Labor Department data suggests that 18 million workers could be adversely affected by this provision.

Arbitrary Line-Drawing?

Based on the statutory language (in the box), the threshold for qualifying for full paid sick leave benefits seems low and nearly impossible for the government to police. If a healthcare professional (who presumably could be a family member) tells you to stay home, or if you sneeze or cough or have a fever and you call for a doctor’s appointment, you may qualify for full sick leave benefits.

The threshold for qualifying for two-thirds benefits also seems low. If you are caring for any individual — a family member, a neighbor, a friend — who needs to be isolated, you qualify. If your own child under 18 is kept out of school, you can qualify. As we write this, mandatory closure of schools nationwide is nearly complete, so it seems tens of millions of working parents can readily qualify. But note that if you have a dependent (for example, a grandchild) who is out of school, you do not qualify.

In contrast, eligibility for extended family leave seems disproportionately narrow. If your perfectly healthy child is out of school, you can get 10 additional weeks of paid family leave after paid sick leave is exhausted. But if you are ill with the coronavirus, say, for two weeks, and then you are taking care of others who are ill in following weeks, you are not entitled to any family leave (after the first two weeks of sick leave is exhausted).

Down and Out

Around the country, applications for unemployment compensation are skyrocketing. Many economists are now predicting the number of U.S. unemployed will increase by millions. This raises thorny legal and policy questions about how those workers will be treated under H.R. 6201.

Speaking generally, sick and family leave benefits seem to be all about the labor supply. What that means is that if a worker has a situation that requires attention at home, that worker can stay home. In other words, reduced labor supply.

In the coronavirus economy, the simultaneous collapse of labor supply (because workers are sick or want to minimize contact) is closely intermingled with the collapse of labor demand (because employers do not have demand for their products, because they are ordered — or it is recommended — that they close their doors, or they cannot get parts from their broken supply chains). From the perspective of an employee enduring hard times, the loss of pay due to a doctor’s order (affecting labor supply) is not very different from the loss of pay due to a temporary business shutdown (affecting the demand for labor). But examining the statutory language of the bill, there does seem to be a big difference.

If, as seems likely, this bill becomes law shortly, we all will need to be asking and answering important questions like these:

· If an employer voluntarily temporarily shuts down business because of concerns about the health of employees and customers, does an employee of that business qualify for paid leave?

· If an employer voluntarily temporarily shuts down business because business is slow (because of the coronavirus), does an employee of that business qualify for paid leave?

· If an employer is ordered to close or scale down business by a government official, does an employee of that business qualify for paid leave?

If, as we suspect (based on the statutory language), the answer to these questions is no, we can only ask, why not?

Coronavirus-Related Conditions That Qualify for Paid Leave

Under H.R. 6201, sick leave is available if:

1. The employee is subject to a federal, state, or local quarantine or isolation order related to COVID-19.

2. The employee has been advised by a healthcare provider to self-quarantine because of concerns related to COVID-19.

3. The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis.

4. The employee is caring for an individual who is subject to an order as described in (1) or has been advised as described in (2).

5. The employee is caring for a child of such employee if the school or place of care of the child has been closed, or the child care provider of such child is unavailable, because of COVID-19 precautions.

6. The employee is experiencing any other substantially similar condition specified by the secretary of health and human services in consultation with the Treasury secretary and the labor secretary.

Relationship To Paid Leave.—

“(1) UNPAID LEAVE FOR INITIAL 10 DAYS.—

“(A) IN GENERAL. —The first 10 days for which an employee takes leave under section 102(a)(1)(F) may consist of unpaid leave.“(B) EMPLOYEE ELECTION. —An employee may elect to substitute any accrued vacation leave, personal leave, or medical or sick leave for unpaid leave under section 102(a)(1)(F) in accordance with section 102(d)(2)(B).

 

Full sick pay (limited to $511 per day) is available for an employee in categories (1) through (3). Two-thirds of sick pay is available for employees in categories (4) through (6).

Family leave is available only for an employee who “is unable to work (or telework) due to a need for leave to care for the son or daughter under 18 years of age of such employee if the school or place of care has been closed, or the child care provider of such son or daughter is unavailable, due to a public health emergency” related to COVID-19.

 

MARTIN A. SULLIVAN

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