Understanding Section 179 Tax Deduction

A clause in the US tax code known as Section 179 permits firms to write off the full cost of qualified machinery, cars, and software in the year they are purchased rather than depreciating it over a number of years. This deduction has a big impact on small businesses because it can significantly lower their tax obligations and increase cash flow. See IRS Publication 946 for further details.

Before you read further, please remember, I am not a tax advisor, CPA or anything of the sort. This article is to give you information to speak with your tax advisor so you can have an educated conversation.

To maximize their tax advantages, small business owners must fully understand the Section 179 deduction. To make the most of this beneficial tax benefit, choose a car that is eligible, keep precise records for business use, consult a tax specialist, and stay up to date on the most recent tax rules.

What automobiles can be written off under Section 179 in 2023?

Heavy SUVs*, pickups, and vans (above 6,000 lbs. GVWR, more than 50% business use) are among the vehicles that qualify for the Section 179 tax write-off.

• Clearly marked non-personal “work” vehicles (such as a farm tractor, backhoe, and dump truck).
• Delivery vehicles (box trucks, cargo vans)
• Specialty vehicles with a particular purpose (ambulances, hearses, etc.)

*For the 2023 tax year, the deduction limit for large SUVs is $28,900.

What constitutes using a vehicle for commercial purposes?

According to IRS regulations, there are three types of car use: business, commuting, and personal. Transporting supplies and equipment between working sites, as well as business-related travel away from the usual work location, all qualify as business use and are tax deductible. Even if any “business activity” occurs in the vehicle during these times (such as having an advertisement display on the vehicle, utilizing the drive to listen to business literature, calling clients, or something similar), commuting and personal use are not tax deductible. As a result, if you drive a car home every night, it can never be used exclusively for business purposes (because the commute is not deductible even though everything else is).

How can I determine the percentage of business use?

Divide the total number of miles driven for business by the total number of miles driven (including personal use/commuting) for the year to arrive at the business-use percentage. The vehicle’s purchase price is then multiplied by the proportion of business use to arrive at the deductible under Section 179. You should get assistance from your accountant or a tax expert here.

What kind of records should I keep for Section 179 car deductions?

You should maintain thorough records of how you use your car, including mileage logs, receipts, invoices, and any associated costs. If the IRS audits your tax return, these records will assist you establish your claim for business use. Additionally, it’s crucial to maintain these documents for at least three years following the filing of your tax return. Consult the SBA Tax Guide for further details.

Are both new and old cars eligible for Section 179?

Yes, both new and used automobiles are eligible for a Section 179 deduction provided that the model and GVWR meet the requirements. The phrase “new to you” must be used when referring to a used car.

What is the cutoff date for submitting a Section 179 claim for a vehicle in 2023?

You must buy the vehicle and put it into operation between January 1 and December 31 of the calendar year in order to qualify for a Section 179 deduction.

Can I finance a car and deduct it under Section 179?

You can use the Section 179 deduction when financing a car, yes. You can deduct the entire cost but only pay back a portion of it this year, which might be a wonderful method to increase cash flow.

Can a vehicle be financed in the name of a business?

Yes. Purchasing a car under your company’s name has some advantages, like separating personal and corporate debts and maybe improving the credit standing of the corporation. Nevertheless, the majority of lenders do not do this, and those few that do frequently impose limitations like blanket liens.

What are the Section 179 deductions’ restrictions and ceilings?

The deduction cap for 2023 is $1,160,000, while the overall equipment spending cap is $2,890,000. The particular amount that can be deducted for each vehicle depends on its cost as well as how much of it is used for business purposes (at least 50%). Keep in mind that once your total equipment purchases surpass the spending limit, the Section 179 deduction starts to taper out on a dollar-for-dollar basis.

How does bonus depreciation work and what is it?

Businesses can take an additional first-year depreciation discount on certain vehicles and other qualified property thanks to bonus depreciation. The bonus depreciation rate for 2023 is 80%. Bonus depreciation is restricted for big SUVs and any vehicle under 6,000 lbs GVWR; for more information, visit Additional First Year Depreciation Deduction or ask your accountant or tax professional (please note that Brian Pate is unable to respond to any issues regarding taxes or eligibility).

What are some Section 179-related tax-saving tactics?

As was already noted, instead of buying vehicles outright, think about financing them. This can help with cash flow and still qualify for the Section 179 deduction.

A helpful hint is to finance qualifying automobiles near the end of the year. This keeps a deduction while reducing the number of monthly payments made on the car.

Can I deduct Section 179 expenses for secondhand cars?

Yes, secondhand cars qualify for the Section 179 deduction as long as they are brand-new to you and your company. To qualify, the vehicles must also be used for business more frequently than not.

State-specific Section 179 laws and regulations?

Depending on your state, it’s likely that Section 179 deductions are subject to state-specific laws and regulations (some states, but not all, have their own restrictions for Section 179 deductions). You can check eligibility and requirements by getting in touch with your state’s department of revenue or a tax expert who is aware with the tax regulations in your state.

Example of Calculation of the Section 179 Deduction Example

You spend $60,000 on a brand-new large SUV with a GVWR of 6,500 lbs., which is primarily utilized for work. The cost of the automobile for business purposes is $48,000 (80% of $60,000). Therefore, you are eligible to deduct the full $28,900 permitted as a Section 179 deduction for SUVs. (Note: This is presuming you adhere to Section 179’s expenditure caps on total equipment purchases and that all other requirements are satisfied.

Below is a list of automobiles that are eligible for the Section 179 Tax Deduction. All of these vehicles are over the 6,000 pound Gross Vehicle Weight according to the websites for the company that builds them at the time of this publishing.