Listed Property - Mixed Use

Client buys a $150k luxury SUV in year 1, gross weight over 6,000 lbs. He immediately turns around publicly advertises it as available for rent on a site like Turo. It is leased multiple times during year 1 at fair market rates. Client reports the activity on Sch C and uses bonus depreciation on the auto.

Year 2, client uses the auto personally when he wants "to floss", but keeps meticulous mileage logs. Rental use never falls below 51% of use during the year. All expenses are prorated for personal use.

Thoughts? Do we have any issues here?

What justifies $150K as ordinary expense? Was this an EV? I've done $100K EV CA Bay Area where $100K Teslas are common.

How is the vehicle insured?

Cant rent a $150k car out without buying a $150k car

My guess is Mercedes

What justifies $150K as ordinary expense? Was this an EV? I've done $100K EV CA Bay Area where $100K Teslas are common.

Don't know. Depreciation isn't subject to the ordinary and necessary standard. Does tangible rental property need to be justified as ordinary? Are individuals who buy $6 million beachfront vacation rentals in FL, rent them out at an arms-length rate and manage the activity in a bona fide business manner automatically disallowed all deductions and told they should have bought a $200k single family rental inland instead?

How is the vehicle insured?

Adequately and appropriately.

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I think the crux of the matter would be consistency. We're front loading depreciation here, sure. But years 2 and forward should show strong taxable income after expense proration. Otherwise there's going to be some question regarding whether or not this is an activity not engaged in for profit. Automobiles don't have the benefit of appreciation like real estate does so we need an objectively clear profit motive.

My point in challenging the $150K cost is it appears taxpayer buys luxury car for personal use as he drops business use to 51% in year after takes 100% bonus. If he kept business use at close to 100% could understand your argument.

So your concern is judge made law doctrines? e.g. Step-transaction doctrine, sham transaction doctrine, etc?

If the arrangement passes, what else would you not be comfortable with beyond the appearance?

Hard to judge without knowing more details about the taxpayer. Does he rent other vehicles, has he rented cars before, is this a main source of income for him.$150K deduction maybe $35-40K in Fed tax.