Question

Hey There! .... I am Joseph the Pizza Maker!

I operate a thriving pizzeria and I am generating a significant amount of profit.

So much profit ... that I have to find a way to offset the income and avoid the income taxes.

So I bought this cool Corvette for $60,000 and I am going to use it to deliver a few pizzas.

That will allow me to write off about $15,000 per year over the next four years.

That should should save me a lot of money in taxes!

Mr. Zappia (my amico) says you are a great student and I should get some advice from you.

What do you think?

Answer 1

Since the new Corvette is going to be used to deliver a few pizzas, it means that the car is going to be partially used in business. Joseph has to keep a log to record the business miles in order to claim depreciation .

Let us say that the total miles logged by Joseph in the first year was 15,000 miles. Out of this miles recorded for business purpose that is for delivering pizzas is 6000 miles. This implies that 40% (6000/15000 x 100) of the car is used for business.

Original cost of the Corvette is $ 60,000.

Business used % =40%

Hence basis to be depreciated is $ 24,000.

As per the Modified accelerated recovery system (MARS) a depreciation of 20% is the rate for the first year as per the 5 Year recovery table under which the car qualifies.

Hence depreciation for 1st year as per MACRS= 24000 x 20% = 4,800.

However there is a restriction on the maximum depreciation that can be claimed for certain vehicles which includes a Corvette as per publication 946 which is $ 3160. Hence the business used 40 % of $3160 equals a depracition of    $ 1264.

Hence the lower of the MACRS depreciation amount and the limited vehicle depreciation can be only claimed as a depreciation deduction from business income.