The Internal Revenue Services enacted a particular statute under the Internal Revenue Code to induce investment and adoption of the latest technology among small businesses. This is the much-used Section 179.
In this article, we focus particularly on the vehicle expenses deduction-related provisions under Section 179.
Section 179 was enacted to offer businesses, especially smaller ones, certain extra tax breaks on the equipment and machinery they buy for their business. The rationale behind this step was to encourage smaller businesses to invest in the latest technology.
Normally, businesses claim depreciation for a piece of machinery or equipment over several years of the said equipment's life.
Section 179 allows businesses to claim the full purchase amount for a new piece of equipment in a single year, contingent on the fact that it is bought and put to use on the business in the same year.
To understand depreciation better, let's take the example of Amir, who runs a hair salon in Portland, Oregon. He bought a computer for the front desk of his shop for $1,000, which is a necessary business expense to keep track of customer appointments.
Within normal accounting standards, Amir will spread out the cost of the computer over a period of 10 years (assuming that the computer would last him 10 years). The $100 deduction that Amir would claim each year is called depreciation.
But with Section 179 in place, Amir can straightaway claim a business expense of $1,000 in the first year itself and save $900. These saved $900 can be used for further investment.
The limit on Section 179 deductions for the year 2021 has been set at $1,050,000, while the total equipment purchase limit is $2,620,000.
The rampant misuse of the $100,000 tax break for SUVs that the IRS introduced in 2003 led to Section 179 being earning the monikers "SUV Tax Loophole" and the "Hummer Deduction". Although it was later rectified, its effects have spilled over into the present.
Therefore, vehicles are generally not considered to be eligible for Section 179 deductions, but certain exceptions are present. Here is a breakdown of vehicle tax deductions under Section 179:
Heavy vehicles are eligible for a 100% bonus tax deduction in the first year, combined with a Section 179 of up to $25,900 if used more than 50% of the time for business purposes.
If, however, the vehicle is used for business purposes less than 50% of the time, then the depreciation is spread over a six-year period, based on business-use percentage. As an example, consider that a firm has bought a $75,000 SUV.
This SUV is primarily for business use, but nothing can prohibit the owner from using it for personal obligations. In the first year, the SUV is used for business only 75% of the time. As a result, the business owner can only deduct $56,250 in that year (75% of $75,000).
Heavy vehicles are classified as 'heavy' according to their weight. For Section 179 deductions, this weight threshold is 6000 or above.
One can take a look at the Gross Vehicle Weight Rating (GVWR) by glancing across the inside edge of the driver's seat door, where the door hinges and frame meet. Typical examples of heavy vehicles are:
- Jeep Grand Cherokee
- Buick Enclave
- Honda 4WD
- Tesla Model X
These are lighter vehicles that you could use for business tax deduction purposes. Tax deduction for these vehicles is limited to $11,160 per year, that too only if these vehicles are employed for business purposes more than 50% of the time.
Vehicles Having Full Depreciation
Hearses, ambulances, and vehicles of the sort that cannot be used for personal purposes at all are eligible for full depreciation. Other vehicles under this category include:
- Shuttle Buses
- Modified Vans
- Vehicles used in heavy construction, like forklifts
- Over-the-road semi/tractor vehicle
- Vans having nine or more passenger seats
- Vehicles with no passenger space behind the driver's seat, like pick up trucks
Calculations for vehicle deduction under Section 179 are usually carried out in two ways:
You can keep track of your vehicle-related expenses over the financial year and use them as a measure of the time your car has been used for business. This includes fuel and vehicle maintenance charges like oil changes, tire rotation, among many others.
Although seemingly simple, following this approach might prove to be tedious in the long run. It's easy to lose business receipts and important documents in a rush. Expense tracking apps, however, can save you from the trouble of keeping an analog file.
This is a much easier approach given the fact that vehicle tracking has been made a lot easier with the advent of global positioning systems (GPS).
It is highly unlikely that cars purchased in this era are not fitted with GPS systems. But even if they are not, you can track the number of miles with the help of the odometer, which is a standard in all cars.
You can then multiply the final number with the IRS set standard mileage rate to reach the figure, which can be deducted under Section 179. The standard mileage rate for the year 2021 has been pegged at 56 cents to a mile.
So, let's say that your vehicle runs 10,000 miles under business use by the end of the year. With the standard mileage rate, your car tax deductible for that year would amount to a total of $5,600.
You can claim a vehicle tax deduction for travel expense by filing IRS Form 4562. This form is filled out by all firms claiming depreciation and amortization deductions for their businesses. Section 179 deductions are also claimed through this form.
Form 4562 is a comprehensive form with a lot of sections. Part V is the section pertinent to claiming full depreciation on vehicles and other listed property as per Section 179. It includes the following three sections:
Section A asks for basic information about the listed property. This includes:
- Property Type
- Date Placed in Service
- Portion of Business Usage
- Cost Basis
- Basis of Depreciation
- Recovery Period
- Method or convention for depreciation
- Depreciation deduction
- Any Section 179 deductions
Questions 24a and 24b are of utmost importance since they ask you to notify whether the deduction claimed is supported by evidence, and if so, whether the evidence is written or not.
Section B contains specific questions on vehicle usage. This section is meant for sole proprietors, partners, or other "more than 5%" owners in the business. Information related to personal and business-related miles has to be written down correctly in this section.
Section C is only pertinent to employers who provide vehicles to their employees. These are objective questions where one can only answer either "yes" or "no".
Vehicles, if used for business purposes and fitting particular criteria, are eligible for deduction under Section 179 of the IRS.
But bear in mind that you should use these vehicles for business purposes for more than 50% of the total time, else they fail to qualify for the deduction. Information on Section 179 deduction on vehicles is to be provided in IRS Form 4562.
Navigating taxes, bookkeeping, and other financial aspects of your business can be challenging if you are primarily in the creative field. At Fincent, we believe that you were born for creating, not to manage books.
While you focus on your business, leave the bookkeeping to us to save time and money. Schedule a call today.