Monetary Wisdom: How to save money with the Section 179 tax deduction for business owners - March 2023
By Roman A. Basi and Ian C. Perry
When planning on purchasing or financing items such as vehicles or office equipment for your business, you may be eligible for a great tax benefit. Section 179 of the U.S. Internal Revenue Code is an immediate expense deduction that business owners can take for purchases of depreciable business equipment instead of capitalizing and depreciating the asset over a period of time. To do this, you need to meet the requirements of Section 179. The expense deduction is limited to items such as cars, office equipment, business machinery and computers. But before you jump the gun and finance a new supercar, there are a few rules you need to be aware of.
First, every vehicle is not eligible for Section 179 treatment. Vans, pickups and heavy SUVs used for business for more than 50% of the time and exceeding 6,000 pounds gross vehicle weight are eligible. Obviously, vehicles that are used solely for business purposes with no potential for personal use also qualify. An example of this would be a box delivery truck with no passenger seating or a classic cargo van.
The 2023 price limit for Section 179 allows for up to $1.16 million in eligible equipment to be deducted, with the “total equipment purchased” by a business being $2.8 million. If the equipment exceeds that amount, the deduction calls for a reduced deduction on a dollar-for-dollar basis. Many business owners are often shocked to learn they do not have to purchase a vehicle outright to qualify-the tax deduction also applies to vehicles that are being financed. It also surprises taxpayers to learn that the vehicle does not have to be brand new. As long as the vehicle is new to your business and meets all the other requirements, it is eligible for Section 179.
Business owners need to make sure not to confuse Section 179 with bonus depreciation, which is meant to be taken after the Section 179 deduction. It is typically used by large businesses that spend more than the spending limits for Section 179 during the year. Another great thing about bonus depreciation is that businesses with a net loss in a given tax year qualify to carry forward the bonus-depreciation excess amount to a future year. New and used heavy SUVs, pickups and vans acquired and put to business use in 2023 are eligible for 80% first-year bonus depreciation. The only requirement is that the vehicle have more than 50% business use. However, if the vehicle is less than 100% usage, you need to prorate the deduction.
If you happened to purchase the vehicle in a prior year and want to claim the Section 179 deduction, unfortunately, that is not permissible. To qualify for the deduction in any given tax year, the equipment must be acquired and placed into service between January 1 and December 31 of that year. But on the bright side, Section 179 can be used every year. It was made to be a permanent part of U.S. tax code.
This last step is very crucial for business owners to note: Section 179 is not automatically applied. To receive the benefit of the deduction, the taxpayer must elect Section 179 treatment on their tax return. Form 4562 must disclose the acquisition in the year the vehicle is obtained in order to take the deduction.
If business owners are purchasing or financing new vehicles for their company and are not knowledgeable about taking the Section 179 deduction, as well as bonus depreciation, they are simply paying extra taxes for the company. These tax benefits could save tens of thousands of dollars for their business.
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