If you are a small business owner who needs to buy a new vehicle for your business, you may be wondering how to save money on taxes. One way to do that is to take advantage of the Section 179 deduction, which can allow you to deduct the full purchase price of qualifying equipment and vehicles in the year you buy them.
What is the Section 179 deduction?
The Section 179 deduction is a tax incentive that allows businesses to deduct up to $1.16 million of the cost of eligible property in 2023, instead of depreciating it over several years. The deduction applies to both new and used property, as long as it is placed in service in the same year. The property must be used for business purposes more than 50% of the time.
One of the benefits of these tax incentives is that they can apply to vehicles, including SUVs, trucks, and vans, that are used for business purposes. However, there are some limitations and rules that you need to be aware of before you claim these deductions.
What qualifies for Section 179?
Work vehicles qualify for the Section 179 deduction as long as they were purchased from an unrelated party, placed in service in the year you’re claiming a deduction, and used more than 50% of the time for business. The maximum section 179 deduction for a sport utility vehicle is $28,900 for 2023, but you can deduct more than that if it has a gross vehicle weight rating (GVWR) of more than 6,000 pounds or a truck bed of at least 6 ft.
If you use the vehicle for both business and personal purposes, you can only deduct the cost that corresponds to the percentage of business use. If the asset is owned by the company the personal use needs to be calculated and added back to the employee’s W2. Check out IRS publication 15-B Employer’s Tax Guide to Fringe Benefits for more information.
Is Section 179 right for your business?
While claiming a large SUV tax deduction in the year you buy the vehicle may sound great, there are a few risks to consider:
Business Taxable Income Limit
You cannot claim section 179 depreciation to create a loss.
Cash Flow
Companies that finance vehicles and write the entire value off in the first year with section 179 depreciation can run into cash flow issues. Non-deductible principal payments continue to reduce cash in subsequent years, which results in higher business net income and more tax owed without the benefit of depreciation expense to offset.
Depreciation Recapture
Depreciation expense reduces ordinary income. However, when the business use falls below 50% or the asset is sold, that accumulated depreciation is recaptured as ordinary income again. This unexpected income catches many small business owners by surprise.
Working with Haworth & Company, Ltd.
Claiming the Section 179 deduction for your business vehicle can be a great way to save money on taxes, but it comes with risks as well. Haworth & Company has been helping small business owners in the Twin Cities and Rochester, MN understand and utilize the different depreciation methods for over 30 years, as well as serving as their bookkeepers, tax preparers, and payroll specialists. Contact us today to find out how we can help you take advantage of depreciation and other tax incentives for your business.
