Tax season has begun and is almost over before you know it. If your business owns vehicles like sport utility vehicles, trucks and vans used in the conduct of your business, you can deduct the costs of buying these vehicles or them depreciating over time from your income tax bill. More deductions equal more savings on taxes, freeing up funds for your business.
Section 179 Deduction
Under Section 179, you can deduct all or part of the costs in acquiring the vehicle in the year it is placed in service. To qualify for a Section 179 deduction, your vehicle must be (i) an eligible property (tangible personal property), (ii) acquired for business purpose, and (iii) acquired by purchase through loans, leases or cash.
If the vehicle is used for both business and personal purposes, you can claim a Section 179 deduction only if you use it more than 50% for business in the year it is placed in service. If you use the vehicle more than 50% for business, you can multiply its cost by the business use percentage. The total amount you can elect for a Section 179 deduction is subject to a) dollar limit and b) business income limit.
For one, you can’t claim a Section 179 deduction for more than $25,000 of the cost of any heavy SUV and certain other vehicles, according to the IRS. This includes any four-wheeled vehicle primarily used to carry passengers on public thoroughfares, not subjected to passenger automobile limits, and having a gross vehicle weight not exceeding 14,000 pounds.
The $25,000 limit however does not apply to vehicles whose design permits it to seat more than 9 people, have a cargo area with a six-feet interior length, and equipped with an integral enclosure.
Regular Depreciation Deduction
You can also opt to recover the “cost or other basis” of your vehicle over a certain period through depreciation and deduct such from your taxes.
A recent IRS guidance discloses the depreciation limits for the calendar year 2017:
- For passenger automobiles that are not vans and trucks, the depreciation limit for the first tax year, including bonus depreciation, is $11,160. If the bonus depreciation does not apply, the limit is $3,160.
- For vans and trucks with bonus depreciation, the depreciation limit is $11,560. Without bonus depreciation, the limit is $3,560.
This bonus depreciation or special depreciation allowance is applicable to the first year a new vehicle is placed in service. It represents a first-year deduction of 50%.
Taking into account your Section 179 deduction, regular depreciation deduction, and bonus depreciation, the combined amount should not exceed $11,160 for cars, and $11,560 for vans and trucks. The resulting amount is multiplied by your business percentage use noted above.
Consult with a tax professional regarding the implications of the above provisions on your taxes.