Business owners can secure tax breaks when they purchase eligible business assets such as vehicles. The entire purchase price is deductible under Section 179 of the Internal Revenue Code rather than gradual depreciation over several years. Find out how to incorporate Section 179 into your business and cut your tax bill.
Businesses can deduct 100% of the purchase price of eligible vehicles and equipment during the first year of use. This type of deduction contrasts with standard straight-line depreciation, where part of the equipment cost is written off over several years. Section 179 encourages businesses to invest in themselves and, at the same time, serves to boost the economy. The tax savings can incentivize the growth of many businesses as they invest in necessary vehicles and equipment.
The deduction is capped at about $1.08 million for the 2022 tax year and includes new and used depreciating assets. The amount a company can spend on property within a calendar year is limited. If property purchases exceed $2.7 million, the deduction will be reduced by that amount. The deduction phases out if more than $3.78 million is spent on equipment in a year, making Section 179 a small business growth incentive. The Tax Cuts and Jobs Act gives bonus depreciation for 2022 at 100%, an amount that is usually taken after the spending cap is reached for equipment.
Companies cannot claim a deduction of more than their total annual taxable income. Amounts exceeding the company’s annual income can be carried forward and used as deductions in subsequent years. For businesses operating at a 35% tax bracket, Section 179 can effectively make a $1 million equipment purchase cost closer to $700,000 after deductions are applied. Caps for Section 179 are indexed for inflation for tax years after 2018.
Many business assets qualify for a Section 179 deduction, including vehicles, machinery, office equipment, computers, refrigerators, and air conditioners. Property improvements such as security systems, roof replacement, and HVAC upgrades would also qualify. Any purchase using the deduction must be used for business purposes at least 50% of the time during its first year of ownership. Purchases must be with cash and not inherited or received as a gift. Property cannot be purchased by a direct relative such as a sibling or spouse.
New and used property qualifies for Section 179 deduction. It must be purchased during the calendar year and placed into service for business use by midnight on December 31.
Vehicles used on the job to drive to work locations or deliver products qualify for multiple methods of tax deductibility. Section 179 is designed to deduct the cost of equipment in the same year it was purchased. Likewise, vehicles and other business assets must be purchased in the same year they’re put into service for business purposes. Section 179 applies to business vehicles purchased with cash, leased, or financed with qualifying financing.
The Internal Revenue Service has imposed tighter regulations about which cars, sport utility vehicles, or other models can be expensed. Four-wheel passenger vehicles such as cars, trucks, and SUVs weighing 6,000 to 14,000 pounds can qualify for at least a partial Section 179 deduction. To qualify, a vehicle must be used for business purposes more than 50% of the time. If used for 50% or less, it will not qualify for any Section 179 deduction. Some SUVs or crossover vehicles weighing between 6,000 and 14,000 pounds may be eligible for a $25,000 deduction.
Exceptions to the passenger vehicle limitations include:
Industry-specific vehicles such as hearses or ambulances.
Shuttle vans, taxis, and other vehicles used for transporting people or property.
Qualified non-personal use vehicles modified for business. For example, a cargo van without seating behind the driver, permanent shelving installed, and the exterior painted with the company logo.
Heavy non-SUV trucks and vehicles with cargo areas of at least six feet.
Designated work vehicles don’t have deduction limits since they are seldom used for personal purposes. Such vehicles include cargo vans, semi-trucks, hearses, and ambulances.
Examples of work vehicles that qualify for the full deduction include:
Shuttle vans that seat nine or more passengers behind the driver’s seat.
Cargo vans with an enclosed cargo area of at least six feet and no seating behind the driver’s seat.
Forklifts and other heavy construction equipment.
Consider your tax deduction options when preparing to complete your taxes or even when contemplating a vehicle purchase. Several free Section 179 calculators are available online, or your tax preparer can help you determine how much you’ll save with Section 179 and other deductions. Since taxable income can’t exceed the Section 179 deductions for any given year, be mindful of your company’s anticipated annual income. Taxable income is calculated by adding net income and losses in a year.
Qualifying vehicles must be titled under the company’s name and not the company owner’s name. The business use must exceed 50%, with personal use reducing the deduction by a corresponding percentage. Vehicles and equipment must be purchased for designated business use and not changed from personal to business use over the year. Determining business versus personal use is complicated and can be vague. Helpful information is available in the Instructions for Form 2106 document and Instructions for Form 4562 .
Due to the complexity of tax law, it’s wise to consult a qualified tax preparer when planning to make a large purchase in order to take advantage of Section 179 and other special programs. Deductions must be claimed correctly.
Filing for Section 179 requires filling out Form 4562 along with your taxes. This form is where you will list any acquired property, your maximum Section 179 deduction amount, and more. Be sure you can accurately report such details as business use percentage and annual miles driven for both business and personal use. Section 179 significantly boosts many small businesses, allowing expensive purchases to provide a tax break that reduces overall operating expenses. Compared to standard straight-line depreciation over several years, this tax deduction will enable companies to take advantage of the tax break in one calendar year.
Before considering growing your fleet of business vehicles, check into Section 179 and other tax benefits. They can effectively reduce costs and allow you to invest more into your business, keeping you on the road to growth. The experts at Dan Cummins Chevrolet Buick of Paris can help you get started today. Contact us to visit one of our business vehicle and finance experts. New or previously owned vehicles can qualify for the deduction, regardless if they are acquired with cash, financed, or leased.