How Section 179 Can Save You Money on Your New or Used Car
Section 179 is a special additional
depreciation deduction you can
take in the year you purchase a new or used car. The election is made on an item-by-item basis for
qualifying property and it must be made in the year the property is first placed in service. The
expense deduction is available only if an auto is used more than 50% for business in the year that
it is purchased and used in the business. You will need to document your mileage in a log to show
your tax accountant proof of business use. If you are ever audited, the
IRS will
need to see at least 3 months of log records to validate your deduction. Commuting to a job is not
deductible, unless it is your own business.
Know the Limitations on Section 179 Before Buying a Car
Any
Section 179 claim will reduce the basis of the auto for purposes of claiming
the special
depreciation allowance and for purposes of computing regular MACRS
depreciation. The total of these expenses may not exceed the statutory limitations,
depending on when the new or used car was placed in service.
The limits are as follows (Year 2003-based on 100% business use):
- Passenger Autos
- If claiming 50% special depreciation, $10,710
- If claiming 30% special depreciation, $7,660
- If no special depreciation claimed, $3,060
- Trucks and Vans
- Add $300 to every category
- Electric Vehicles
- If claiming 50% special depreciation, $32,030
- If claiming 30% special depreciation, $22,880
- If no special depreciation claimed, $9,080
Vehicles Over 6,000 lbs in Weight
The following vehicles are just an example of vehicles over 6,000 lbs in weight that qualify for a
special
depreciation deduction : Chevy Suburban 1500, Chevy Tahoe, Ford Expedition,
Ford F-150 Reg Cab, GMC Yukon, Toyota Land Cruiser, Toyota Sequoia SR5, Chevy Silverado 1500,
BMW X5 SUV, MB ML 430 SUV. If the vehicle is used 50% or more in a business, you can write off up to
100% of the purchase price up to $102,000 in the first year of ownership if you buy and not lease
the vehicle. The recapture period ends after three years. These rules fall under the Tax Growth and
Resolutions Act of 2003.
Understand the Qualifying Terms Before Buying a Car
To qualify for the 50% special
depreciation allowance, a vehicle must be acquired
after May 5, 2003 and placed in service before January 1, 2005. The vehicle must also be new.
The 30% special
depreciation allowance does continue to be available for vehicles
acquired and placed in service prior to May 6, 2003.
Be Aware of Section 179 Dangers and Pitfalls Before You Buy a Car
However, the tax benefit derived from a
Section 179 election must be recaptured,
if business use of the auto falls to 50% or less during the regular five year recovery period.
This is generally regarded as ordinary income, but on a Schedule C or Schedule F (Farm income) it
will also be subject to Social Security tax of 15.3%.
Section 179 Carryovers Can Save You Money When Buying a Car
There is, however, a carryover provision with any property cost that is not deductible in a tax year
due to the taxable income limits. This is added to the cost of qualifying property placed in
service in that tax year. As always, the tax laws in relation to automobile use are always
changing, so it is always best to consult your tax adviser when purchasing or leasing a vehicle for
business use. When it comes to tax savings, additional advantages of
Section 179
are the following:
- It may increase itemized deductions because of the AGI limits on various deductions
- It may increase the earned income credit for taxpayers who file a Schedule C
- It may help a taxpayer to qualify for an IRA deduction by reducing AGI
Learn more about Section 179 and SUVs in a special report on
Edmunds.com.
