Your Maximum Vehicle Deduction Could Be 100 Percent If You Hurry
Your maximum vehicle deduction could save you big bucks on next year’s taxes. Using Section 179, you can expense up to 100 percent of cost of a vehicle if placed in service (not just purchased) before December 31, 2022 up to a certain dollar amount. Using Bonus Depreciation, you can also deduct 100 percent of your purchase price with no dollar limit (with some different restrictions) But starting in 2023, the maximum you can depreciate under Bonus Depreciation decreases by 20 percent a year (reaching 0 in 2027).
Three Types of Section 179 Eligible Vehicles
There are three types of vehicles eligible to take the Section 179 deduction:
- Cars (with an unloaded gross vehicle weight of less than 6,000 lbs.) – maximum deduction is $18,200 in 2022.
- SUVs (the unloaded gross vehicle weight must be more than 6,000 lbs.) – maximum deduction is $26,200 in 2022.
- “Other” vehicles – eligible for the overall maximum deduction of $1.08 million in 2022. These include:
- A pick-up truck with the following specifications: Equipped with a cargo area (either open or enclosed by a cap) of at least 6 feet in interior length that is not readily accessible from the passenger compartment. No rear seating.
- Cargo vans and passenger vans that carry nine or more people.
- Special-purpose vehicles such as an ambulance or hearse.
Maximum Vehicle Deduction Rules and Restrictions
Your business use of the vehicle must be greater than 50 percent. And that business-use percentage affects the amount of your deduction. To calculate your deduction: take the business use percentage x total cost = maximum deductible amount.
The business must be profitable in order to use Section 179
If you take the Section 179 deduction (or Bonus Depreciation), you cannot deduct the standard mileage rate in subsequent years. That’s because the standard mileage rate includes depreciation (which you’ve already taken).
Other Things to Note
- You can finance a vehicle or pay cash. If you finance, the interest expense is also deductible.
- The vehicle can be new or used.
- If you depreciate a vehicle 100 percent, any sales amount or trade-in allowance you receive when you dispose of it is fully taxable as a capital gain.
Bonus Depreciation Instead?
- You may want to opt for Bonus Depreciation if you can take a greater deduction than under Section 179. Bonus Depreciation can also let you deduct 100 percent of your purchase price, but has its own set of rules.
- On the plus side:
- There is no annual maximum amount.
- The cost of the equipment/vehicle can be more than the business’s net income.
- On the negative side:
- You must use Bonus Depreciation for every asset you purchase that has the same depreciation period/asset class.
- On the plus side:
Maximum Vehicle Deduction – Act Now!
If you buy now, you won’t get a set of steak knives thrown in. But you may be able to get your maximum vehicle deduction if you put your new vehicle in service before the end of the year.
Here’s a partial list of SUVs and trucks that may qualify for the Section 179 deduction.
This article explains the difference between using Section 179 to expense a purchase and Bonus Depreciation to accelerate depreciation.
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