The IRS has issued a specific regulation under the Internal Revenue Code to attract small business investment and adoption of the latest technology. This is Article 179 in common use. In this article, we pay particular attention to the provisions under Article 179 related to the deduction of vehicle expenses.
What is Section 179? How does it work?
Section 179 was enacted to provide businesses, especially small businesses, with certain additional tax deductions for their purchases of equipment and machinery. The rationale behind this step is to encourage small businesses to invest in the latest technology. Typically, businesses require a piece of machinery or equipment to be depreciated over the useful life of said equipment.
- Section 179 allows a business to claim the full purchase amount of new equipment within a year, depending on the fact that the equipment was purchased and used in the business in the same year.
- To better understand depreciation, let’s take the example of Amir who runs a hair salon in Portland, Oregon. He paid $1,000 for a computer for the front desk of his store, a necessary business expense to track customer appointments.
- Under normal accounting principles, Amir would spread the cost of the computer over 10 years (assuming the computer will last 10 years). The $100 deduction that Amir claims each year is called depreciation.
- But with Section 179, Amir can directly claim the $1,000 in business expenses and save $900 in the first year. These savings of $900 can be used for further investment.
Vehicles Article 179
Rampant abuse of the $100,000 SUV tax deduction introduced by the IRS in 2003 has led to Section 179 earning the nicknames “SUV tax loophole” and “Hummer deduction.” Although it was later corrected, its effects have spilled over into the present. Therefore, vehicles are generally not considered eligible for the Section 179 deduction, although certain exceptions exist. The following is a breakdown of vehicle tax relief under Section 179:
Heavy vehicles are eligible for an additional tax credit of 100% in the first year, plus a Section 179 tax credit of up to $25,900 if used for business purposes more than 50% of the time. However, if the vehicle is used for business purposes less than 50% of the time, the depreciation is spread over a six-year period based on the percentage of business use. For example, let’s say a company buys a $75,000 SUV. This SUV is primarily intended for commercial use, but nothing prevents the owner from using it for personal obligations. In the first year, the SUV was used only 75% of the time for business. As a result, the business owner can only deduct $56,250 (75% of $75,000) for the year. Large vehicles are classified as “large” based on their Tesla Model X Gross Vehicle Weight. For section 179 deductions, this weight threshold is greater than or equal to 6000. You can check the Gross Vehicle Weight Rating (GVWR) by looking at the inside edge of the driver’s seat door (where the door hinge and the frame meet). Typical examples of heavy vehicles are:
- Jeep Grand Cherokee
- Buick enclave
- Honda 4WD
- Tesla Model X
- Garden type passenger car
These are light vehicles that you can use for sales tax deduction purposes. The tax deduction for these vehicles is limited to $11,160 per year if the vehicles are used for business purposes more than 50% of the time.
Fully depreciated vehicle
Hearses, ambulances and vehicles that are completely unusable for personal use are eligible for full depreciation. Other vehicles under this category include:
- Shuttle bus
- Modified truck
- Vehicles used in heavy construction, such as forklifts
- Off-road semi-trailer/tractor
- Vans with nine or more passenger seats
- Vehicles with no passenger space behind the driver’s seat, such as pickup trucks
Calculation of tax write-offs for motor vehicles under section 179
Calculating vehicle deductions under Section 179 for Tesla Model X is generally done in two ways:
- Expense Tracking
You can track vehicle-related expenses during the fiscal year and use them as a measure of how long your car is used for business. This includes fuel and vehicle maintenance costs such as oil changes, tire changes, etc. While deceptively simple, following this approach can be tedious in the long run. It’s easy to lose business receipts and important documents in a hurry. However, an expense tracking app can save you the trouble of saving mock files.
- Track Mileage
This is an easier method because vehicle tracking has become easier with the advent of the Global Positioning System (GPS). It is unlikely that a car purchased in this day and age is not equipped with a GPS system. But even if not, you can track mileage with the help of an odometer, which is standard on all cars.