How Do I Get a Tax Deduction for Buying a Vehicle for Business?

Section 179 Deduction for SUV
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You can get a tax benefit by taking a Section 179 deduction by purchasing and using a new pr "new to you" vehicle for your business. 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. 

A disclaimer: The purpose of this article is to provide you with general information about lowering your business taxes by taking Section 179 deduction on the purchase of business vehicles. The process of taking these deductions is complicated and limits may change. Discuss the deduction with your tax professional before you make any decisions.

Why Section 179 Deductions are Good for Your Business

Section 179 deductions work in a similar way to depreciation. The purpose of depreciation is to spread the expense (and tax deductions) of owning a business asset like a vehicle over the life of that asset.

Normally, depreciation is deducted as an expense to the business over the life of the equipment or vehicle. But Section 179 allows you to accelerate the depreciation, taking more of the expense of the purchase in the first year.

In addition to Section 179 deductions, you may be able to take bonus depreciation for buying a new or "new to you" vehicle. As of 2018 and through 2022, bonus depreciation is 100 percent, in addition to the Section 179 deduction.

Qualifications for Section 179 Deductions

First, these deductions are only for vehicles used more than 50% of the time for business purposes. The deduction is limited to the amount of use. Some vehicles (like taxis, airport shuttle vans, and limousines) are considered only as business vehicles, so they can be deducted at 100%.

Second, the vehicle must be purchased and put into service (used) during the year in which you are applying for the Section 179 deduction.

Limits on Section 179 and Bonus Depreciation Deductions

According to the IRS, there are two limits of Section 179 deduction for the years 2018 through 2023;

If you don't claim bonus depreciation, the greatest allowable depreciation deduction for passenger vehicles is:

  • $10,000 for the first year,
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for each later taxable year in the recovery period.

If you claim 100 percent bonus depreciation, the greatest allowable depreciation deduction is:

  • $18,000 for the first year,
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for each later taxable year in the recovery period.

There are also maximum limits on Section 179 deductions for all business property, at $1 million for the year, on up to $2.5 million for all property.

Calculating a Section 179 Deduction

For the calculation, you will need to enter the percent of business use. Here's how the calculation might work, in general, for a passenger vehicle purchased and put into use during 2018 and forward through 2022: 

Cost of vehicle            $25,000

Less trade-in value        -5,000

Section 179 basis        $20,000

This vehicle was used 75% of the time for business purposes so your basis for Section 179 calculation is $15,000. This is $5,000 more than the first-year limit, so you can deduct $10,000.

Vehicle Requirements for Section 179 Deductions

Before you run out to buy a car or truck for your business, you should know about the requirements for this depreciation deduction:

  • For SUV's and other larger vehicles, 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." 
  • The limit does not apply (the full Section 179 may be taken on) these types of vehicles:
    • Designed to seat more than nine persons behind the driver's seat,
    • Equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible directly from the passenger compartment, or
    • That has an integral enclosure fully enclosing the driver compartment and load carrying device does not have seating rearward of the driver's seat ​and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

    More Requirements and Restrictions

    • The vehicle must be new or "new to you," meaning that you can buy a used vehicle
    • The vehicle may not be used for transporting persons or property for hire. 
    • You can't expense (deduct as a business expense) more than the cost of the vehicle.
    • You must put the vehicle "into service" (use it in your business) by December 31. 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 can only deduct the business use of the vehicle, not for personal use. So if the vehicle is used 50% for business and 50% for personal use, only 50% of the cost can be deducted.

    Get Help from Your Tax Professional

    There are many limits, exclusions, and special rules for different types of businesses. You may also find benefits and drawbacks to purchasing this year or the next. Discuss the possible purchase of a vehicle with your tax professional to make sure you can get the best tax benefit. 

    Read more from the IRS

    IRS Form 2106: Employee Business Expenses (includes a section on Section 179 deductions)