How Do I Get a Tax Deduction for Buying a Vehicle for Business?
You can get a tax benefit by taking a Section 179 deduction by purchasing and using a new 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. These are general descriptions, and the limits and details may have changed. 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
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.
This is obviously a huge advantage to a business because it reduces taxable income.
Section 179 Limits for Each Tax Year
The limit on taking a Section 179 tax deduction for purchasing a vehicle varies each year. For 2017 taxes, the limit for both Section 179 and bonus depreciation is
- $11,160 for smaller vehicles and
- $25,000 for sport utility vehicles (SUV's).
The vehicle must be used more than 50% of the time for business purposes. For the calculation, you will need to enter the percent of business use.
The total for all Section 179 deductions, as of 2017, is $510,000 per year, for property worth up to $2,030,000.
Here's how the calculation might work, in general, for an SUV purchased and put into use during the year:
Cost of SUV $25,000
Less trade-in value -5,000
Section 179 basis $20,000
This vehicle was used 75% of the time for business purposes.
The Section 179 basis is less than the $25,000 limit, so you would multiply that by 75% to get the amount of your Section 179 deduction:$15,000.
Vehicle Requirements for Section 179 Deductions
Before you run out to buy a vehicle 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) to 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 SUV must be new, not used.
- 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 personal use. So if the vehicle is used 50% for business and 50% for personal use, only 50% of the cost can be deducted.
- You cannot deduct more than your business net income for the year. So if your net income is $20,000, you cannot use the $25,000 deduction to generate a tax loss for the year.
- Some states have restrictions and additional limits on Section 179 deductions.
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 details:
IRS Form 2106: Employee Business Expenses (includes a section on Section 179 deductions)