You can get a tax benefit from buying a new or "new to you" car or truck for your business by taking a section 179 deduction. This special deduction allows you to deduct a big part of the entire cost of the vehicle in the first year you use it if you are using it primarily for business purposes.
How Section 179 Deductions Work
A section 179 deduction is a special kind of tax deduction that businesses can take to reduce expenses. You can elect to take this deduction on the cost of certain types of business property. including business vehicles, instead of (or in addition to) recovering the cost by depreciating the property (spreading out out the cost over several years).
Section 179 Deductions Only for Employers
Most employees can no longer take a section 179 deduction for a business vehicle. This deduction was part of miscellaneous deductions on Schedule A, and these deductions have been suspended.
A few categories of employees, including Armed Forces reservists, qualifying performing artists, state or local government officials, or employees with impairment-related work expenses may still be able to take this deduction.
Qualifications for Section 179 Deductions
To qualify for a section 179 deduction for a business vehicle, it must be bought and put into service during the year in which you are applying for the section 179 deduction. Being placed in service means that a business asset is ready and available for specific use in a business or for the production of income.
In addition, the vehicle:
- Must be eligible property, including vehicles, machinery, furniture, and fixtures. Land and leased property are not eligible.
- Your company must buy it for business purposes.
The most important qualification for section 179 deduction purposes is business use. You can only take a section 179 deduction for vehicles used more than 50% of the time for business purposes. The deduction is limited to the amount of use and can't be taken on personal use.
Section 179 Deductions and Depreciation
Normally, depreciation is deducted as an expense to the business over the life of the equipment or vehicle. But a section 179 deduction allows you to take more of the expense of the purchase in the first year.
You may be able to combine a section 179 deduction with depreciation on a vehicle in a specific tax year. For example, a section 179 deduction can also be used with a depreciation method called bonus depreciation to save on taxes when you buy a business vehicle.
Check with your tax professional for qualifications and limits on depreciation.
Limits on Section 179 Deductions
There are two limits on the amount you can elect to deduction under section 179.
Dollar Limits. The total amount you can take as section 179 deductions for most property (including vehicles) placed in service in a specific year can't be more than $1 million. In other words, all section 179 deductions for all business property for a year can't be greater than $1 million. The dollar amount is adjusted each year for inflation. There is also a "phase-out" limit of $2.5 million.
in addition to the general dollar limits, the maximum section 179 expense deduction for sport utility vehicles placed in service in tax years beginning in 2019 is $25,500, based on a specific IRS description of the vehicle type.
The IRS specifies that the vehicle must be a "4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight."
Business Income Limit. After you apply the dollar limit, the total cost you can deduct each year – including section 179 deductions – is limited to the taxable income from your business during that year. In other words, you can't use a section 179 deduction to cause your business to have a loss. If you can't take all or part of a section 179 deduction in one year, you can carry it over to the next year.
The calculation for this limit is complicated and it's different for each business. See the instructions for IRS Publication 946 for more details.
How to Take the Deduction
You or your tax preparer will need to complete IRS Form 4562 Depreciation and Amortization. Follow the instructions for Part I.
Key Requirements and Restrictions
- The vehicle must be new or "new to you," meaning that you can buy a used vehicle if it is used first during the year you take the deduction.
- The vehicle may not be used for transporting people or property for hire.
- You can't deduct more than the cost of the vehicle as a business expense.
- You must put the vehicle "into service" (use it in your business) by December 31 of the tax year. If you don't use it, you can't get the deduction, so make sure you can prove the vehicle was used in your business by the end of December, in case of a tax audit.
- You cannot deduct more than your business net income for the year.
Some states have restrictions and additional limits on section 179 deductions. Check with your state's taxing authority for the details.
A disclaimer: The purpose of this article is to give you general information about lowering your business taxes by taking section 179 deduction on buying a business vehicle. The process of taking these deductions is complicated and there may be changes to the tax code. Get help from your tax professional before you make any decisions.