Deducting the Full Value of Your Vehicle
Yes, it is possible to deduct the full value of a brand new car on your tax return. Deducting your vehicle is one of the great tax breaks available to small business owners. However, the rules can be complex, and there is a lot of incorrect information on the internet about this deduction.
We created this guide to provide you with all of the rules and information you will need to understand this deduction.
How is this possible?
Thanks to the TCJA of 2017, business owners have the opportunity to combine Section 179 and bonus depreciation to write off the full value of a brand new car. However, this rule is currently only temporary, and the final opportunity to take advantage of this tax break is 2023.
What is Section 179?
Section 179 allows businesses to fully expense up to $1.08M of equipment purchases in the year the equipment is acquired and placed into service. This is in contrast to the old rules of having to depreciate the equipment over a 5 to 10-year period.
However, there are two limitations in Section 179. The first limitation is that passenger vehicles that weigh less than 6,000 pounds are not eligible. The second limitation is that passenger vehicles over 6,000 pounds are limited to a $26,200 deduction in 2022. But luckily, there is also something called bonus depreciation.
What is Bonus Depreciation?
Bonus depreciation allows vehicles that qualify for Section 179 to depreciate 100% of the car’s remaining value in the year the car was placed in service. This only applies to 2022. In 2023, you will only be able to depreciate 80% of the car’s remaining value in the year it was placed into service.
Rules You Will Have to Follow
Not everyone will be able to take this deduction, and you will have to follow some rules to remain eligible and pass an IRS audit.
- Vehicle has to weigh more than 6,000 pounds
- Vehicle needs to be used at least half of the time for business-related purposes
- Section 179 deduction cannot exceed net taxable income for the year
- Vehicles must be acquired and put into business use in the same calendar year before December 31
- Vehicle title and loan has to be in the name of the business
- Does not need to be a brand new car, only new to you
- You do not have to pay the full cash value in the first year
Example
Let’s say your business purchases and places a Tesla Model X into service in 2022. The Tesla Model X costs $85,000 and has a gross vehicle weight rating of 6,250 pounds.
The chart below shows how much you will be able to deduct on your tax return, assuming you use it either 100% or 60% of the time for business purposes.
60% Business
Section 179 Deduction
Bonus Depreciation
Total Deduction
$15,720
$35,280
$51,000
100% Business
Section 179 Deduction
Bonus Depreciation
Total Deduction
$26,200
$58,800
$85,000
Things to Keep in Mind
- In the event of an audit, you will still need to track your personal and business mileage to prove the vehicle was used more than 50% of the time in your business.
- When you sell your car, you will pay a higher capital gains tax since the tax-value of the car will be zero.
- You will have to use the actual expense method to account for the car on your tax return.
Conclusion
This deduction can be an amazing way to reduce your tax liability this year dramatically. However, the rules can get complex, so speaking with a CPA before making any major purchase decisions is important.
At Windstone Financial, we have experience helping small business owners minimize their taxes. Click the button below to speak to a CPA about the Section 179 deduction.
