The Ultimate Section 179 Vehicle Deduction List
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At its core, Section 179 of IRS code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. In other words, a business can deduct the full purchase price of a piece of purchased or leased qualifying equipment from their gross income. The government instituted the incentive to encourage companies, particularly small businesses, to buy equipment and invest in themselves.
The Section 179 deduction is popularly used for vehicles. Several years ago the deduction was referred to as the “Hummer Tax Loophole” or “SUV Tax Loophole” because at the time it allowed businesses to purchase large vehicles and write them off. This particular use of the tax code has been modified over the years. However, Section 179 is still extremely advantageous when buying or leasing vehicles for your business.
What are the specifications for Section 179 vehicle deductions?
First and foremost, a vehicle must be used for business purposes more than 50% of the time in order to qualify for the tax break. Furthermore, the owner cannot opt out of the deductions for the class of property that includes passenger automobiles (five-year property).
Additionally, the vehicle must be purchased and put in use between January 1, 2020 and December 31, 2020 to qualify for 2020 Section 179 deductions.
How much can your tax savings be with a Section 179 vehicle deduction?
The Tax Cuts and Jobs Act (TCJA) permanently increased the Section 179 expensing limit for qualifying asset purchases from $500,000 in 2017 to $1 million starting in 2018. Furthermore, the tax code limits the total amount spent on qualifying property at $2.5 million (raised from $2 million in 2017). This means the deduction begins to phase out on a dollar-for-dollar basis after the company spends $2.5 million. Therefore, the entire deduction is nullified if the business reaches $3.57 million in purchases. After 2018, these limits began to be indexed for inflation.
Ultimately, your tax bracket influences your savings. In order to estimate your savings, you need to know whether your business pays taxes through your personal income tax return or your business tax return. From there you can determine your tax bracket.
Most small businesses are pass-through entities. This means they pay business taxes through the owner’s personal tax return. Contrarily, corporations pay their own income taxes at the corporate tax rate.
What types of vehicles qualify for the Section 179 deduction?
Vehicles that qualify for the full Section 179 deduction:
- Vehicles which seat nine-plus passengers behind the driver’s seat (i.e. airport shuttles)
- Vehicles with: 1) a fully-enclosed driver’s compartment/cargo area, 2) no seating behind the driver’s seat, and 3) no body section protruding more than 30 inches ahead of the leading edge of the windshield (i.e. a classic cargo van)
- Heavy construction equipment (i.e. forklifts)
- Typical “over-the-road” tractor trailers
- Ambulances or hearses used specifically for your business
- Taxis, transport vans and other vehicles used to specifically transport people or property for hire
- Qualified non-personal use vehicles specifically modified for business (e.g. work van without seating behind driver, permanent shelving installed, and exterior painted with company’s name)
- Other heavy “non-SUV” vehicles and trucks with a cargo area at least six feet in interior length and not easily accessible from the passenger compartment
- For example, many pickup trucks with full-sized cargo beds will qualify for a full deduction (although some “extended cab” pickups may have beds that are too small to qualify).
For SUVs and other “heavy” vehicles to qualify, the automobile must be a “4-wheeled vehicle primarily designed to use or carry passengers over public streets, roads or highways.” The manufacturer’s gross vehicle weight rating (GVWR) must be at least 6,000 pounds and not exceed 14,000 pounds. Look for the manufacturer’s label, typically on the inside edge of the driver’s side door, to determine the GVWR.
If the vehicle is purchased and in service before December 31, and meets other conditions, it can qualify for a deduction up to $25,000.
Who can benefit from the Section 179 deduction?
Some consider the Section 179 deduction a form of “accelerated depreciation.” With the deduction, you can elect to depreciate the entire cost of the equipment in the year of purchase, rather than wait five, seven or even more years to deduct it. Thus, the Section 179 deduction is a reasonable option for any business trying to maximize their tax savings.
Currently, Section 179 is one of the few government incentives available to small businesses. While large businesses can benefit from the Section 179 tax code, the spending cap lends Section 179 to being truly a medium and small-sized business deduction. Even with the SUV deduction lessened over the years, Section 179 continues to be a beneficial option for small businesses.
Examples of situations in which the Section 179 tax code is particularly advantageous:
- Start Ups – Business owners tend to purchase vehicles and other long-lived assets in the early years of doing business. As such, deducting the full cost of these assets yields lower taxable income, resulting in lower taxes.
- Business Owners in High Tax Brackets – The higher your tax bracket, the more you save.
What is the difference between Section 179 and Bonus Depreciation?
Section 179 and bonus depreciation are similar in that they each enable a business to fully deduct the cost of equipment, machinery and other qualifying property. In fact, you can elect to take each tax break in tandem (with restrictions). However, it is important to understand the difference between the two.
One significant difference between Section 179 and bonus depreciation is that Section 179 allows a business to immediately expense a cost of qualified property. Bonus depreciation allows a business to recover that cost over time. Therefore, if taken together, Section 179 is taken first to reduce the cost and bonus depreciation is taken to decrease the remaining cost of the property over its useful lifespan. Companies that exceed the spending limit for Section 179 are still eligible to claim bonus depreciation tax breaks.
Under the recent TCJA, bonus depreciation increased to 100% and the list of eligible property expanded considerably. Individuals can now claim bonus depreciation on new and used equipment. Previously, bonus depreciation exclusively applied to new property. Furthermore, the amount of bonus depreciation is unlimited, is not phased out if the taxpayer puts a certain amount of qualifying assets in place in that year, and is not limited to the payer’s business income.
Comparatively, as mentioned above, the Section 179 deduction caps out at $1 million, is phased out once the payer reaches $2.5 million, and is limited to business income.
Specifically related to vehicles, the dollar amount between the two tax breaks varies by automobile type. Bonus depreciation includes a higher dollar limit of $18,000 for cars and passenger trucks, whereas the Section 179 deduction is limited to $10,000. On the other hand, the Section 179 deduction for heavy SUVs is greater at $25,000.
So why should the taxpayer consider Section 179 over bonus depreciation?
Section 179 deductions are useful for a taxpayer that is attempting to control their taxable income. For example, the payer may try to maximize their 20% flow-through deduction or limit the application of TCJA’s new $500,000 business loss limitation.
Using both Section 179 and bonus depreciation yields greater flexibility than just bonus depreciation alone. This is the case because Section 179 is elected on asset-by-asset basis, while bonus depreciation is applied on an asset-class-by-asset-class basis.
Are there any other Section 179 vehicle limitations to consider?
- You must put the vehicle “into service” by December 31 in order to qualify. If the vehicle is not in use, it cannot qualify for the deduction. Therefore, it is important to find ways to prove the vehicle was in use – like tracking your mileage – in case of a tax audit.
- The vehicle must be new or “new to you.” This means used vehicles do qualify.
- A vehicle once used for personal matters does not qualify in a later year if its purpose evolves to business.
- You cannot expense more than the cost of the vehicle.
- You cannot deduct more than your business net income for the year. For example, if your net come is $15,000, you cannot use the $25,000 deduction to generate tax loss for the year.
Please check your local state information for additional specifications and limits.
How can you claim your Section 179 deduction?
You must complete Form 4562 to claim your Section 179 deduction. This form is used to amalgamate information on business property acquired and put in use.
It is imperative to document the date of purchase of the vehicle, the date it was put into service and all costs associated with the purchase.
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Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.