When you purchase a vehicle for your business, you may be curious as to just how much of the sale price can be deducted on your next tax return. After all, there certainly is a more convincing argument to invest in a new vehicle for your business if you can rely on valuable tax savings to help offset the initial cost.
The IRS has created guidelines that help business owners determine precisely what portion of their vehicle purchase can be deducted. As a general rule, purchasing a 6,000 pound vehicle may help you qualify for up to $25,000 in deductions. Other vehicles can also qualify for valuable tax savings through Section 179.
Section 179 of the federal tax code outlines situations in which items purchased for professional purposes can be deducted. When a business owner purchases a vehicle that weighs more than 6,000 pounds but less than 14,000 pounds, they should be able to qualify for a $25,000 Section 179 deduction.
The Basics of Section 179
Section 179 of the federal tax code details a variety of deductions that taxpayers may qualify for based on expenses made throughout the year. These expenses are directly associated with purchases that qualify as property. More specifically, Section 179 targets expenses that have been made on depreciating equipment used for business.
When a taxpayer chooses to use the cost of the item in question as part of an immediate deduction rather than a more prolonged depreciation, they can take advantage of benefits offered through Section 179. Generally speaking, Section 179 is designed to incentivize business owners to purchase new equipment for their operations. For many business owners, Section 179 provides a bridge to connect them with the tools and infrastructure they need to make a strong start on the path to longevity and success.
A Closer Look at Deductions
Although Section 179 offers benefits to business owners across a broad array of industries and specializations, it is important to note that the scope of qualifying purchases remains deliberately limited. Some of the most common items that can be deducted as part of Section 179 include essential office equipment/supplies, vehicles and productivity tools, such as computers and monitors.
In order to qualify for the Section 179 deduction, the items in question must not only be purchased in the given tax year, but must also be put into full use during the same time period. Essentially, the business owner seeking the deduction must be able to fully prove that the item they purchase is actually being used for work rather than for personal reasons.
Section 179 Vehicle Deductions
By far, one of the most often used Section 179 deduction applies to the purchase of vehicles. Although the rules dictating this deduction have changed over the years, business owners can still deduct a portion of their vehicle purchase on their tax return.
The exact amount of the deduction depends largely of the type of vehicle that has been purchased. For example, vehicles that can easily be used for personal and professional applications, such as sedans, will often qualify for up to $11,160 in deductions. Trucks are eligible for up to $11,560 in tax deductions.
If, however, the IRS considers a vehicle to be exclusively designed for business applications, the size of the deduction increases. Some of the more common examples of these types of vehicles include vans that seat more than nine passengers, tractor trailers and vehicles that feature a fully-enclosed compartment for the driver.
The 6,000 Gross Vehicle Weight Tax Deduction
When a vehicle purchased for business purposes weighs over 6,000 pounds, the IRS allows the owner of the vehicle to claim up to $25,000 in deductions. Certain guidelines must be observed, however. Although there is no specific Section 179 deduction vehicle list for 2019 or other years, the IRS provides ample information about eligibility criteria for vehicles.
For example, the vehicle in question must be purchased and used for business purposes before Dec. 31 of the same year. Also, in order to qualify for these deductions, the vehicle must have been purchased using one of the IRS-approved financing platforms. These include a variety of eligible lease and loan opportunities. Finally, the business name must appear on the title of the vehicle rather than the individual making the purchase.
Failure to meet these guidelines could result in the inability to claim the Section 179 deduction.
Vehicle Deductions and Business Use
If the vehicle in question is not being used 100 percent of the time for business purposes, it may still qualify for a partial Section 179 deduction. The percentage of the maximum possible deduction available to filers will fluctuate in direct proportion to the amount of time the vehicle is used for business purposes. That being said, all deductions will be rendered void if the owner uses the vehicle for business less than 50 percent of the time it is in operation.
It is in the best interest of the owner to carefully document all uses of the vehicle in order to ensure that this can be demonstrated to the IRS. This type of documentation could be as straightforward as keeping a record of mileage that also describes the destination and purpose of each trip taken.
Section 179 Deduction Limits
According to IRS guidelines, the maximum value of Section 179 deductions cannot exceed $1 million. This sum can encompass not only vehicles purchased for business purposes, but also any of the aforementioned types of business items that Section 179 also covers.
It is also important to note that some of the items purchased by a business owner that qualify for a Section 179 deduction may also be eligible for other tax-saving mechanisms, including bonus depreciation.
Moving Forward With Section 179 Deductions
For many small business owners, the myriad of issues and challenges associated with successfully operating their enterprise makes it difficult to find time to master more mundane issues such as tax code guidelines. The complexity of the deduction process often leads business owners to avoid taking the time to fully delve into this topic. Because of this, many individuals never secure all of the deductions they have earned.
With that in mind, it may be in your best interest to seek out a financial adviser or tax specialist if you anticipate having the opportunity to take advantage of Section 179 tax deductions. This decision can help you prepare more efficient and accurate tax returns for years to come.
Not only will a tax expert be able to help you pinpoint specific deductions you may have overlooked or missed, but they will also be able to review the documentation you currently have on file in order to ensure that you could successfully pass an audit. Although Section 179 regulations are not overly complex, these rules are strictly enforced. Failure to properly adhere to these rules could result in annoying technicalities and logistical hurdles for business owners during tax season.
- IRS issues guidance on Section 179 expenses and Section 168(g) depreciation under Tax Cuts and Jobs Act | Internal Revenue Service
- IRS: IRS Issues Guidance on Section 179 Expenses and Section 168(g) Depreciation Under Tax Cuts and Jobs Act
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- Section 179: Section 179 Frequently Asked Questions
Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.