By Ian C. Perry and Roman A. Basi / Published December 2022
When planning on purchasing or financing a new or used vehicle for your business, you may be eligible for a great tax benefit in doing so. A Section 179 tax deduction allows a taxpayer to deduct a portion of the cost of the vehicle within the first year of use. To do this, you need to meet the requirements of Section 179 of the Internal Revenue Code.
Before you jump the gun and finance a new supercar, there are a few rules that you need to be aware of. First, every vehicle is not eligible for the Section 179 treatment. Vans, pickups, and heavy SUVs being used for business for more than 50 percent of the time and exceeding 6,000 lbs. gross vehicle weight are eligible. Vehicles that are obviously used solely for business purposes with no potential for personal use also qualify. An example of this would be a box delivery truck with no passenger seating or a classic cargo van. You could also include vehicles such as a hearse or an ambulance, which have almost no value for personal use.
Let’s move on to the price limits of Section 179. The limit for 2022 allows for up to $1,080,000 in eligible equipment to be deducted, with the “total equipment purchased” by a business being $2,700,000. If the equipment exceeds that amount, the deduction then calls for a reduction in the deduction on a dollar-for-dollar basis. Many business owners are surprised when they learn you do not have to purchase a vehicle outright in order to qualify. The tax deduction also qualifies on vehicles that are being financed. It also surprises taxpayers when they learn that the vehicle does not have to be brand new. As long as the vehicle is new to your business and meets all the other requirements, it is eligible for Section 179.
Business owners need to make sure not to confuse Section 179 with bonus depreciation. Bonus depreciation is meant to be taken after the Section 179 deduction. It is typically used by large businesses that spend more than the spending limits for Section 179 during the year. Another great thing about bonus depreciation is that businesses with a net loss in a given tax year qualify to carry forward the bonus depreciation to a future year. New and used heavy SUVs, pickups, and vans acquired and put to business use in 2022 are eligible for 100 percent first-year bonus depreciation. The only requirement is that the vehicle has more than 50 percent business use.If you happened to make a purchase in a prior year and want to claim the Section 179 deduction, unfortunately, that is not permissible. To qualify for the Section 179 deduction in any given tax year, the equipment must be acquired and placed into service between January 1 and December 31 of that given tax year. On the bright side, Section 179 can be used every year. It was made to be a permanent part of our tax code.
This last step is very crucial for business owners to note. Section 179 is NOT automatically applied. To receive the benefit of the deduction, the taxpayer MUST elect Section 179 treatment on their tax return. Form 4562 must disclose the acquisition in the year the vehicle is obtained to take the deduction.
Section 179 does not only apply to vehicles but also applies to a variety of material goods, including equipment that is purchased for business use, tangible personal property used in a business, computers, off-the-shelf software, office furniture, office equipment, property attached to a building that is not a structural component of the building, and other items. It is just a more common occurrence for Section 179 to be used for vehicles due to their high costs. Section 179 is meant to provide businesses with an incentive to purchase new equipment. All businesses are going to need equipment, whether it be computers, software, machinery, office furniture, vehicles, or other tangible goods. If you are a business owner, it is very likely that your business will be purchasing these goods during the year and will have to continue doing so year after year. Section 179 is designed to make purchasing/leasing look attractive as an incentive to stimulate the economy.
If business owners are purchasing/financing new vehicles for their company and are not knowledgeable about taking the Section 179 deduction (and bonus depreciation), then they are simply leaving money for the company on the table. These tax benefits could save tens of thousands for their business. If you are a business owner and have any questions regarding Section 179 or bonus depreciation or would like to discuss any other tax benefits you may be missing out on, reach out to the professionals at The Center for Financial, Legal, and Tax Planning Inc. at our website, www.taxplanning.com, or by phone at (618) 997-3436.
Ian C. Perry is a staff accountant for the Center for Financial, Legal & Tax Planning Inc. Roman A. Basi is an expert on closely held enterprises. He is an attorney/CPA and the president of the Center for Financial, Legal & Tax Planning Inc.