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Author: Steven W. Hays, Sr., CPA
As printed in Builder News, December 2007
A publication of the Home Builders Association of St. Louis & Eastern Missouri

THE MARKET

2007 will likely finish as the toughest year for the local home building market since the early 1980s. Surprisingly, despite decent traffic, attractive incentives, and reasonable interest rates, the market has been caught primarily in the tailwind of a poor national housing crisis. The collapse of the sub prime mortgage market, rising gas prices, and depressed resale housing have all combined in some manner to bring the local housing market to a standstill – all despite a generally good economy around us.

What to expect for 2008? Backlogs going into the year will be relatively low, which will again make first quarter operating results challenging. It is hoped the Fed will continue to provide interest rate cuts, which should provide some positive “psyche” to the market. With sales having slowed now for over 2 years, there also should eventually be some pent-up demand that results.

The good – we are not in Florida, California, Phoenix, Las Vegas, Ohio, or Michigan. The bad – we still may have a way to go before we see some turnaround. Builders, lenders, suppliers, subcontractors, and others must continue to work together as there will be a better day . . .

Stay tuned!

TAX TREATMENT OF AUTOMOBILES

We are often asked about the tax treatment of automobiles since this is a major expense of business owners. There are several issues that have tax ramifications to consider. Do you buy or lease an automobile? Do you use standard mileage rates or actual expenses? What records do you need to maintain to substantiate your automobile deductions?

Buy vs. Lease

The IRS’ decision to allow taxpayers with leased vehicles to use the standard mileage deduction has reduced much of the income tax impact for vehicles that are used partly for business and partly for personal purposes. However, there are still several factors to consider. The most important decision is at the time of acquisition of the automobile. An election must be made between using the standard mileage rate or actual costs. This decision is important because not only does it affect your tax treatment in future years, but also the amount of paperwork to substantiate your automobile deduction. If the vehicle is leased, then the election is permanent for the entire lease term. If you own the car and elect to use the standard mileage rate the first year, you have the option of changing to actual costs in future years. Financing the purchase of an automobile will give you an interest deduction from your business income equal to the percentage of business use of the automobile times the yearly interest paid. Electing to use actual costs could result in a substantial deduction from your business income. The downside is that you may be required to make a large down payment as well as large monthly payments.

Actual Costs vs. Standard Mileage Rates

Actual costs include all aspects of operating an automobile, such as gasoline, oil, tires, depreciation, lease payments, etc. One difference between using the standard mileage rate and actual costs that needs to be considered is the amount of paperwork required to accurately determine and substantiate your deduction. Perhaps the most significant of the cost components is depreciation. When deciding whether to use a standard mileage rate or actual costs, the impact of various limitations on the amount of depreciation that can be claimed (which caries by type of vehicle) should be considered.

Please consult your tax advisor to assist you in determining these limitations and other considerations regarding treatment of automobiles.

HAYS’ BITS

• The number of spec home inventory in the market appears to have decreased to very manageable levels. Total spec sales are likely to be over 40% of sales in 2007 . . .
• Much scrutiny is being given to the allocation of advertising and marketing dollars spent. Most appear to be strictly adhering to budget for the first time in many years . . .
• Is there any excuse that display homes should not present today at their very best?
• What about that Missouri Tiger football program . . .

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