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12/6/2017

Understanding Section 179 and Vehicle Deductions

As the end of the year draws closer, small business owners may be interested in learning about the Section 179 tax deduction and its financial benefits. One of the most popular uses of the Section 179 deduction is for vehicles. If your business bought or leased vehicles this year, you may qualify for the deduction, which can be thought of as accelerated depreciation. Instead of waiting several years to slowly deduct the expense of a major item like an SUV or expensive equipment, the Section 179 deduction allows you to depreciate most of it during the year you purchased it. While there are limitations on the types of vehicles that meet the Section 179 guidelines, its worth considering, particularly for those who leased or financed their business’ vehicles.

The limits on taking the Section 179 tax deduction vary from year to year. For 2017, the deduction limit for both Section 179 and bonus depreciation is $11,160 for smaller vehicles and $25,000 for SUVs. The vehicles can be new or used, and must be financed and placed in service (meaning used by the business) before December 31. To qualify for Section 179, a vehicle must be used at least 50 percent of the time for business, and you can only deduct the percentage of the cost equal to the percentage of business use.  For example, if the vehicle is used 75 percent of the time for business and 25 percent of the time for personal use, only 75 percent of the cost can be deducted.

Some other key requirements to be aware of include that companies have a minimum of two years’ time-in-business and that both the company and the owners have good credit. Vehicles should be titled in the company name, rather than the company owner’s name. Deductions can’t exceed your business net income for the year. It’s worth noting that the total for all Section 179 deductions in 2017 is $510,000 per year, for property worth up to $2,030,000.

Section 179 has been referred to as the “SUV tax loophole,” or “Hummer deduction,” due to its ability to deduct these kinds of vehicles easily, though increased restrictions have limited the size of these deductions in recent years. Currently, SUVs and larger vehicles must have a gross vehicle weight rating above 6,000 pounds but no more than 14,000 pounds to qualify. They must be 4-wheeled vehicles primarily intended for carrying passengers.

The previously described deduction limits do not apply to the following types of vehicles:

  • Designed to seat nine-plus passengers behind the driver's seat
  • Equipped with a cargo area of at least six feet in interior length that is not easily accessible from the passenger area
  • Has a fully-enclosed driver’s compartment; does not have seating behind the driver's seat; ​and has no body section protruding more than 30 inches ahead of the leading edge of the windshield

These non-passenger automobiles are eligible for the full depreciation deduction each year.

If you bought or are planning to buy vehicles this year that you primarily use for business, electing to take the Section 179 tax deduction could be a smart way to make the most of your purchases. Different types of businesses are subject to special rules, exclusions, and limits, so it’s important to discuss the Section 179 deduction with your tax professional. Learn more about how Section 179 can help your business save on taxes this year in our free guide.

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