How does the Section 179 vehicle deduction work?
Occasionally we receive inquiries from clients who've heard they can purchase a vehicle for work and write off the full cost, or at least up to $25,000. They're commonly referring to the Section 179 vehicle deduction provision in tax law.
The 179 deduction is often misunderstood and misused. Many tout it as a way to get a free SUV (or huge deduction), but unfortunately it's not that simple! There are many key requirements and restrictions to get larger deductions for these business vehicles, which I’ve included below (and asterisked the main ones which usually disqualify folks or significantly limit the benefits)…
- Must be acquired for business use
- Must be titled in name of business
- Must be “new to you” and put in biz use the first year
- You cannot deduct more than your biz net income for the year, so you must have corresponding net income to offset
- If not, the deduction can carry over to future years
- ** Must be used > 50% for business (every year for 5-6 years…cannot sell, give it away, convert, etc.)
- **Otherwise deducted over 6-year period based on biz use
- ….and have depreciation recapture of prorated amount (most businesses don’t have business vehicle use that truly exceeds 50% of overall use, which then essentially eliminates the net deduction benefit)
- **Depreciation deduction reduced by any personal use percentage
- **IRS very hard on this, since it’s common for small businesses/rental property owners looking to dump lifestyle/personal expenses into the business to reduce income taxes…so detailed records are vital
- Must have owned business for two years
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