In the era when the pandemic is looming large, what the populace needs is a way to save money however they can. With that being said, the IRS has recognized the undergoing economic condition and came up with a variety of tax incentives.
They aim to help businesses grow and save money. If you have bought or lesser a vehicle for your small enterprise during the pandemic, then good news. As we believe that you may positively qualify for the Section 179 tax deduction.
You must be thinking that this part of the tax code does. It allows the owners to deduct all or at least a part of the qualifying vehicle’s acquisition costs for the year it has been placed in service.
Let’s Cover The Basics Behind Section 179:
Normally, when you buy a major piece of equipment for your firm, you can’t expense the whole amount in the first year.
However, you can capitalize on the purchase. In that way, you can expense a portion of this cost over several years in a process. This process is known to us as depreciation.
However, the section 179 deduction allows you to elect to recover all or a part of the cost of the car. There is a catch, you can recover the part that qualifies for section 179 property.
That also up to a limit. It will reduce it in the year you choose to place the property in service. The first-year deduction can assist you in saving a ton of money during tax time.
However, as this IRS statement makes clear that the limitations exist. So, as a result, you cannot deduct all costs when you purchase the vehicle for your work.
The Rules Of Bonus Depreciation
The usage of section 179 lies solely in the essence of the rules. To use the large purchase, the IRS has given the customers an offer of the Special Depreciation Allowance or Bonus Depreciation.
One can use in breaks with section 179. Moreover, it will allow the user to deduct up to 100% of the purchase in the first year. Although the purchase must qualify the rules.
However, one must keep in mind that there are limitations to each vehicle. In addition to that, keep in mind that the first-year limit on such matters for vehicles placed in service in 2020 is $18,100.
Although the number has increased to $18,200 for 2021. Apart from the SUV waiver to this $18,200 limit, the IRS has also outside themselves. They have also exempted the following Section 179 vehicles from a maximum deduction:
- If the vehicle has more than nine passengers behind the driver’s seat.
- The vehicle should come with a cargo area of at least 6 feet in interior length. Moreover, if it is not accessible from the passenger compartment.
- If it has an integral enclosure that encloses the driver compartment and load-carrying device. In addition, if it does not have any seating rearward of the driver’s seat. Moreover, if it has no body section more than 30 inches ahead of the edge of the windshield.
If your vehicle fulfills any one of these three categories, then you have good news. The vehicle will surely qualify for the entire Section 179 deduction amount.
Know The Section 179 For Vehicles
To fully put section 179 at use, you need to know whether your vehicle qualifies for the section 179 deduction or not. You must use a vehicle for business purposes more than 50% of the time.
However, if you have used it less than the said time, you will certainly not qualify for any Section 179 deduction.
If you end up using the vehicle more than 50% of the time but less than 100%, then you must count the allowable deduction.
According to the IRS, if you have used the property more than 50%, then you may multiply the cost of the property by the percentage of business use.
The result that you may get is the cost of the property that has qualified for the Section 179 deduction.
Furthermore, the owners tend to calculate the business based on distance. Many prefer mileage.
Let us give you an example:
Suppose, you have bought a car for your business. Now imagine that you have driven it for 10,000 miles the first year. If 6,000 miles were driven for business purposes, then it means you have driven the vehicle 60%.
Hence, the vehicle qualifies as a Section 179 vehicle. Now coming to the deduction. If you have purchased the car for $20,000, then you must obtain 60% of it. As a result, you will get $12,000 for the Section 179 deduction.
Qualifications For Section 179 Deductions
To ensure that your vehicle qualifies for the 179 deductions, you must bring it into service during the year in which you have applied for the 179 deductions. If you place the car in service, then it means the business asset is ready.
Moreover, it translates to being ready for specific use in a business. One may even put it for the production of income. In addition, here are some factors of the vehicle that you must assure.
- The vehicle must be over 6000 pounds. Here is a list of vehicles over 6000 pounds that also qualifies if you manage to fulfill any criteria mentioned in the above paragraph.
- It must be eligible property. Moreover, it includes vehicles, furniture, machinery, and fixtures. Know that land and lease property do not qualify.
- The company must buy the asset for business purposes only.
One of the major aspects is the usage of the vehicle. It should be bought for serving the corporate purpose alone.
However, keep in mind that you can only take a section 179 deduction for vehicles used more than 50% of the time for business purposes. Also, know that the deduction is in limitations as well. Hence, one cannot take it for personal use.
A section 179 deduction is one special variation of tax deduction. It allows business owners to reduce expenses. One can choose to take this deduction on the cost of certain types of business property.
Many choose to do it for vehicles. One may find the method to be tough. But if one goes through the basics behind the tax, one will know what to do.