Background On Section 179
Section 179 allows you to depreciate certain assets fully in the first year that you purchase them. These deductions must be for business related assets such as vehicles, equipment, and software. Section 179 cannot help you create a loss so you must have the required net income to allow for the deduction. If you purchase a piece of qualifying equipment, you may be able to deduct the full purchase price from the taxable income of the business. It’s an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves.
Summary of deductions
To understand how section 179 works it is important to know what a deduction is and what it does. A deduction is an expense that can be subtracted from a business’ taxable income. This creates a reduction in the amount of income that is subject to taxation.
How Section 179 Applies to vehicles
Section 179 is a very common tool used among our clients when they are purchasing vehicles for business purposes. Section 179 allows them to deduct the entire cost of the vehicle in the first year instead of over the typical 5 year period of traditional tax depreciation. For section 179 to apply, the vehicle must meet certain requirements. In order for this to work the vehicle must be used for business at least 50% of the time. This also means that you only get a deduction on what percentage is used for business. If it is used personally more 50% or more than no deductions are allowed. For example, if the vehicle costs $100,000 and is used for business 75% of the time, then you can only deduct 75% of the cost ($100,000). Therefore, you could deduct $75,000.
What Vehicles Qualify?
Section 179 is available for SUVs, crossovers, certain pickup trucks, as well as many other business vehicles. When it comes to SUV’s and crossovers, they must meet a certain weight. SUV’s and crossovers with a gross vehicle weight rating above 6,000 lbs. but no more than 14,000 lbs. qualify. When it comes to pickup trucks the requirements are a little different. For other heavy “non-SUV” vehicles and trucks with a cargo area at least six feet in interior length (this area must not be easily accessible from the passenger area). This means that many pickups with full sized cargo beds qualify for a full deduction.
Depreciation Recapture
One important thing to keep in mind is depreciation recapture. When you sell or trade in the vehicle, you will end up paying tax on the value you receive for the vehicle. This is also the case with the other assets in which you take accelerated depreciation such as machinery and equipment. An example of this would be if you bought a truck for $85,000 and used it for 3 years and decided to sell it. Since it was fully depreciated in the first year then any amount you sell the vehicle for will be a taxable gain.
| Year 1 | Cost of Vehicle | $85,000 |
| Section 179 or bonus depreciation taken in which resulted in a tax deduction | ($85,000) | |
| Cost basis at the end of the year | – | |
| Year 3 | Sold Vehicle | $55,000 |
| Less cost basis | – | |
| Taxable Gain | $55,000 |
If you have any questions or want help saving on taxes then reach out or give us a call today.
