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

How to Get a Section 179 Deduction for Buying a Business Vehicle

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 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.

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 speed up the depreciation, taking more of the expense of the purchase in the first year.

Tax Savings on Section 179 Deductions

The amount you save on taxes for a deduction always depends on your business tax bracket. The higher your tax bracket, the more you save.

To figure your estimated tax savings, you need to know whether your business pays taxes through your personal income tax return or your business tax return and then determine your tax bracket:

  • Most small businesses are pass-through, meaning they pay business taxes through the owner's personal tax return.
  • Corporations pay their own income taxes, at the corporate tax rate.

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.

You can only get the Section 179 deduction on business use of the vehicle. To figure the deduction, you must first subtract personal use. Commuting back and forth to work is considered personal use.

Section 179 and Bonus Depreciation

The Section 179 deduction can also be used with a depreciation method called bonus depreciation to save on taxes when you buy a business vehicle. Bonus depreciation allows a 100% deduction in the first year. But there is a limit on the amount of combined Section 179 deduction and bonus depreciation on a business vehicle.

Limits on Section 179 Deductions

According to the IRS, there are two limits on Section 179 deductions 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 a total of $1 million for the year on a single property, 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 and used 100% for business: 

Cost of vehicle            $25,000

Less trade-in value        -5,000

Section 179 basis        $20,000

If the vehicle was used 75% of the time for business purposes, your basis for Section 179 calculation would be $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 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 from the IRS on Section 179 Deductions