Depreciating Assets vs Appreciating Assets

As the year ends, business owners in the livery, limousine, and chartered bus industry often face a mixed bag: celebrating another successful year but bracing for tax season. A common way to reduce that tax bill has been through bonus depreciation—a strategy that allows businesses to deduct a big chunk of the value of new vehicles in the year of purchase. However, with this tax break gradually phasing out, it’s time to explore other options to minimize taxes and keep your business financially strong.

The Phase-Out of Bonus Depreciation

For years, bonus depreciation has been a go-to strategy, letting businesses deduct up to 100% of a new vehicle’s value in the first year. This was a big tax saver, especially for capital-heavy industries like yours. But starting in 2023, that benefit is phasing out, eventually reaching 0% by 2027. As a result, the tax advantages of purchasing new vehicles will shrink significantly. Plus, when you sell depreciated vehicles, they could generate taxable income, potentially making your tax situation more complex.

With this change on the horizon, it’s time to shift your focus to other tax-saving strategies. One smart option is a cross-tested 401(k), profit-sharing, and pension plan—a retirement strategy that offers both tax deductions and long-term financial benefits.

A Tax-Deductible Retirement Strategy

Instead of relying on depreciating assets like vehicles for short-term tax relief, a cross-tested 401(k) and pension plan provides ongoing tax deferral and wealth-building potential. Here’s why it’s a great option:

1. Cross-Tested 401(k) Plan
   This plan lets employers offer different contribution levels to different groups of employees. Business owners can contribute up to $66,000 annually (as of 2023) and deduct those contributions from taxes. It’s a tax-advantaged way to grow your retirement savings.
2. Profit Sharing
   You can share company profits with employees via retirement contributions, helping reduce taxable income. The beauty of profit-sharing is its flexibility—you can contribute more during profitable years and adjust in leaner times, all while enjoying tax deductions.
3. Pension Plan (Defined Benefit)
   If you’re looking to make larger contributions, a pension plan is the way to go. You could contribute over $300,000 annually, allowing for significant tax savings. These plans provide guaranteed benefits, making them a solid choice for long-term financial planning.

Eligibility and Flexibility

One key detail: only employees who work at least 1,000 hours per year are eligible for employer contributions. This helps you manage costs while ensuring your most dedicated employees get the benefits.

Why Work With a Tax Advisor?

Navigating these retirement strategies can be complex, but they offer long-term financial benefits beyond just tax relief. A tax advisor or financial planner can help you design a plan that fits your company’s goals and maximizes your tax savings, while ensuring you stay compliant with IRS rules.

Conclusion

As bonus depreciation fades away, business owners in the livery, limousine, and chartered bus industry should explore alternative strategies. These retirement programs offer tax savings now and build long-term wealth for the future. Consult with a tax advisor to create a plan that works for you and secures your financial future.