How Section 179 Deductions Work
A section 179 deduction is a special kind of tax deduction that businesses can take to reduce expenses. You can elect to take this deduction on the cost of certain types of business property, including business vehicles, instead of (or in addition to) recovering the cost by depreciating the property (spreading out the cost over several years).
Qualifications for Section 179 Deductions
To qualify for a section 179 deduction for a business vehicle, it must be bought and put into service during the year in which you are applying for the section 179 deduction. Being placed in service means that a business asset is ready and available for specific use in a business or for the production of income. A few categories of employees, including Armed Forces reservists, qualifying performing artists, state or local government officials, or employees with impairment-related work expenses may still be able to take this deduction. In addition:
The vehicle must be eligible property, including machinery, furniture, and fixtures. Land and leased property are not eligible.Your company must buy the vehicle for business purposes.
The most important qualification for section 179 deduction purposes is business use. You can only take a section 179 deduction for vehicles used more than 50% of the time for business purposes. The deduction is limited to the amount of use and can’t be taken on personal use.
Section 179 Deductions and Depreciation
Section 179 deductions work like depreciation. The purpose of depreciation is to spread the expense (and tax deductions) of owning a business asset such as a car or truck over the life of that asset. Normally, depreciation is deducted as an expense to the business over the life of the equipment or vehicle. However, a section 179 deduction allows you to take more of the expense of the purchase in the first year.
Limits on Section 179 Deductions
There are two limits on the amount you can elect to deduction under section 179.
Dollar Limits
The total amount you can take as section 179 deductions for most property (including vehicles) placed in service in a specific year can’t be more than $1,080,000. In other words, all section 179 deductions for all business property for a year can’t be greater than $1,080,000 for the tax year. The dollar amount is adjusted each year for inflation. There is also a “phase-out” limit of $2,700,000. In addition to the general dollar limits, the maximum section 179 expense deduction for sport utility vehicles placed in service in tax years beginning in 2022 is $27,000.
Business Income Limit
After you apply the dollar limit, the total cost you can deduct each year—including section 179 deductions—is limited to the taxable income from your business during that year. In other words, you can’t use a section 179 deduction to cause your business to have a loss. If you can’t take all or part of a section 179 deduction in one year, you can carry it over to the next year. The calculation for this limit is complicated and it’s different for each business. See the instructions for IRS Publication 946 for more details.
How To Take the Deduction
You or your tax preparer will need to complete IRS Form 4562 Depreciation and Amortization. Follow the instructions for Part I.
Key Requirements and Restrictions
The vehicle must be new or “new to you,” meaning that you can buy a used vehicle if it is first used during the year you take the deduction. The vehicle may not be used for transporting people or property for hire. You can’t deduct more than the cost of the vehicle as a business expense. You must put the vehicle “into service” (use it in your business) by December 31 of the tax year. If you don’t use it, you can’t get the deduction, so make sure you can prove the vehicle was used in your business by the end of December, in case of a tax audit. You cannot deduct more than your business net income for the year.
