When your business makes a large purchase, you traditionally expect to capitalize and depreciate it. To capitalize a purchase, you recognize the cost as an asset on your business's balance sheet. As you depreciate your asset over its useful life, you slowly recognize the expense on your income statement.
From a tax perspective, capitalizing and depreciating an asset limits the amount you can deduct for your new purchase in any one year. Fortunately, there are ways to deduct more—if not all—of your vehicle purchase in the year you place it in service. Section 179 and bonus depreciation are two methods that allow you a bigger upfront tax break for buying a car.
Tax law has included section 179 and bonus depreciation for a while, but both were both modified considerably by the Tax Cuts and Jobs Act (TCJA), which Congress signed into law in December 2017. Before diving into the specifics of how it relates to your vehicle purchase, here's an overview of section 179 and bonus depreciation.
Section 179 allows for more flexibility if you plan to pick and choose which purchases you'd like to deduct immediately. You have to take bonus depreciation on all assets within the same class. Bonus depreciation allows you to expense a larger dollar amount of purchases, and, unlike Section 179, you can take it even if the deduction exceeds your business's taxable income. If taken together, you must apply Section 179 first.
Before the TCJA, tax law capped Section 179 deductions at $500,000 with a phase-out threshold beginning at $2 million. The TCJA increased the limit to $1 million and the phase-out point to $2.5 million. Since the increase, the IRS has adjusted the new limit and threshold annually for inflation. In an attempt to discourage businesses from purchasing luxury vehicles, the IRS set lower limits for vehicles. Here are the usual rules.
Limitation and phase-out threshold
For tax year 2021, the Section 179 deduction limit is $1,050,000. This will increase to $1,080,000 in 2022. This limit is the maximum deduction allowed for Section 179 property.
The phase-out threshold—which limits the allowable deduction based on the cost of the Section 179 property being placed into service—begins at $2,620,000 in 2021. This will increase to $2,700,000 in 2022. The phase-out threshold decreases the maximum allowable deduction dollar-for-dollar until the allowable deduction becomes zero. For the 2021 tax year, the allowable deduction becomes zero at $3,670,000.
Prior to the TCJA, the IRS limited bonus depreciation to 50% of an asset's cost. Since the tax law changed, bonus depreciation is now allowable up to 100% of an asset's cost for tax years 2018 to 2022. It is scheduled to decrease by 20% per year beginning in 2023 and expire fully after tax year 2026.
Be aware, tax law is constantly changing. Any or all of these new provisions could be modified, removed, or extended by future tax legislation.
Deducting your business vehicle purchase
Current tax law sets lower limits for vehicle purchases to discourage businesses from purchasing luxury vehicles. The Section 179 deduction applies to four-wheeled passenger cars, SUVs, trucks, and vans used for business at least 50% of the time.
Be aware, you can only deduct the percentage of the vehicle that is business-related. If used part-time for commuting or other personal purposes, the IRS proportionately reduces your allowable deduction.
Small vehicles vs. heavy vehicles
As of 2021, small vehicles—those weighing under 6,000 pounds of gross vehicle weight—have the following annual depreciation limits under section 179:
- Year 1: $10,200
- Year 2: $16,400
- Year 3: $9,800
- Each year thereafter: $5,860
With bonus depreciation, the first-year limit increases to $18,200, and all future years remain the same.
As of 2021, Section 179 limits heavy vehicles—weighing between 6,000 and 14,000 pounds of gross vehicle weight—to $26,200 in their first year in service. There is no bonus depreciation limit, so they are eligible for the 100% bonus depreciation until the end of 2022.
Important business vehicle rules
Here are other special rules relating to section 179 and bonus depreciation deductions for your business vehicle.
- The vehicle can be new or "new to you," but you must place it in service before Dec. 31 of the year you are claiming the deduction.
- The title to the vehicle should be in the business's name, not the business owner's.
- If a vehicle is registered to the owner of an SMLLC and is used more than 80% for business purposes, then they may be entitled to a vehicle expense deduction on Schedule C of their personal income tax return.
- You can purchase, lease, or finance your vehicle. If utilized effectively, leasing or financing your vehicle can provide a significant tax benefit.
These types of vehicles are exempt from the deduction limits.
- Vehicles used to transport people or property for hire—taxis, shuttle buses, etc.
- Vehicles that, by their nature, are used primarily for work—passenger vans with more than nine seats behind the driver, vans with shelving or open cargo areas behind the driver, etc.
- Vehicles leased or held by your business if you are regularly engaged in the business of leasing vehicles
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