Hi Wayne: What can you tell me about Section 179? I own a small business and have heard that I can obtain a substantial tax benefit by purchasing a new vehicle. I was told that to obtain the most benefit I should purchase a vehicle with at least 6000 lb. Gross Vehicle Weight. How much benefit could I expect and do I have to maintain ownership for any specific length of time? If I purchase late in the year can I still utilize the deduction? Is there anything I should be aware of that could bite me if I’m not careful?
Darrell Rude
http://www.4truck-accessories.com
Hi Darrell:
You are doing well to research the tax consequences of a major purchase BEFORE actually making the purchase. And you heard right — there are tax benefits to using Section 179 when buying business assets such as vehicles and other equipment like computers.
You’ve asked several excellent questions — but because depreciation is such a complicated area of tax law, I’m only going to give you general answers. There so many rules and exceptions to the rules, you’ll need to do some further research on your own (using the resources listed below) or consult with a tax professional to get all the info you’re looking for.
Before addressing your specific questions, never forget the old Wall Street proverb: “Don’t let the tax tail wag the investment dog.” Translation: don’t go out and spend lots of money on an expensive vehicle just because you get a deduction. Remember there’s a big difference between a tax deduction and a tax credit. Spending 30 or 40 grand on a vehicle does not mean you get tax savings of 30 or 40 grand. You get a deduction for 30 or 40 grand (over several years, assuming you use the vehicle 100% for business), and the actual tax savings will be considerably less than the money spent.
So one of your questions I cannot answer: “how much benefit could I expect.” The answer to that question depends on your tax rate. I can tell you how to calculate the tax benefit: deduction amount X tax rate = tax savings. Again, this tax benefit will be realized over several years, because with the Section 179 deduction limits on vehicles (see below), it’s possible that you won’t deduct the full cost of the vehicle in one year.
Section 179 allows the purchase of most fixed assets to be fully deducted in the year of purchase, rather than written off via depreciation over several years. There are limits to the Section 179 deduction — for example, the maximum you can deduct via Section 179 in 2002 was $24,000; in 2003 it’s $25,000.
So, Section 179 is basically a major exception to the general rule that says a fixed asset must be depreciated over a certain number of years.
But then there are exceptions to the Section 179 exception! There are several rules that limit how much you can deduct via Section 179. For example, you cannot use the Section 179 deduction to increase or create a loss.
As far as using Section 179 to deduct a vehicle purchase — well, there are special rules here, too. So many, in fact, that it’s just not practical to list them all in this Q&A. Vehicles that weigh more than 6,000 pounds are not subject the general Section 179 limits on vehicles, so you heard right — there is the potential to deduct much more on a larger vehicle. The maxium deduction amounts change every year — I would consult IRS Publication 946 or the instructions for Form 4562 to get all the details — and when it comes to depreciation, there’s lots and lots of details. Publication 946 runs 107 pages; the instructions to Form 4562 are 12 pages.
Your questions regarding maintaining ownership and purchasing late in the year also required lengthy explanations. You can start your own research with this 2 resources:
Publication 946: How To Depreciate Property: http://www.irs.gov/pub/irs-pdf/p946.pdf
Form 4562 instructions: http://www.irs.gov/pub/irs-pdf/i4562.pdf
Sincerely,
Wayne
Wayne M. Davies is author of 3 tax-slashing
eBooks for small business owners and the self-employed. For a
free copy of Wayne’s 25-page report, “How To Instantly Double
Your Deductions” visit http://www.YouSaveOnTaxes.com
