The end of a year brings an opportunity to save big on stocking stuffers, holiday mark-downs and business essentials. If you are considering a vehicle purchase for your business, signing on the dotted line before December 31 could get you on the road to significant tax benefits in the New Year.
According to the IRS 2021 Section 179 tax deductions, the full or partial price of eligible new or used commercial vehicle purchases, leases or refinances can be written off of this year’s taxes. To qualify, your vehicle must be in use for your business by midnight on December 31.
Qualifying vehicles include passenger cars, heavy SUVs, vans and trucks used at least 50% of the time for commercial purposes. For example, a florist business may be able to deduct the purchase price of a delivery van used to transport flowers to clients.1
Smaller commercial vehicles, often used to support small businesses, including cars, crossovers and utility trucks, are required to have a gross vehicle weight rating (GVWR) under 6,000 pounds are limited to no more than a $10,100 deduction in their first year and $18,100 with bonus depreciation under Section 179. Qualifying heavy commercial vehicles weighing between 6,000 and 14,000 pounds have a deduction limit of $25,000. However, the deduction amount is proportionate to the vehicle usage. So, if a vehicle is only used 50% of the time for a small business, its deduction limit is divided in half.1
Current deduction limits on capital equipment purchases are over $1 million, while the cap for equipment purchases has increased to $2.5 million, per the Tax Cuts and Jobs Act bill. The bill also allows businesses to depreciate 100% of eligible equipment bought or leased from September 27, 2017, through 2022.2
Aside from Section 179 deductions, business owners can also write off vehicle costs on their taxes through the mileage method or actual expenses method. Businesses may currently deduct 56 cents on the mile for their vehicle,3 while actual expenses include fuel, repairs, maintenance, insurance, tires and depreciation costs.4
Although the actual expenses method may seem more profitable, it often requires tedious bookkeeping, depreciation calculations and limited mileage. For those intending to drive frequently and keep their vehicle for over three or four years, the mileage method may prove more beneficial long-term.4
Capital equipment purchases are a costly investment. Analyze various tax deduction options before you buy to get the best price and keep more money in your pockets during tax time.
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It is important to note, vehicle qualifications are deemed by the IRS and subject to change. Also, your Section 179 deductions for the year may not exceed your net taxable income. For a new or used vehicle to qualify for tax deductions, it must be put into business use before December 31 of the calendar year in which it was purchased. This will often require proof of business service.
This information is for educational purposes only. APGFCU recommends speaking to a tax professional before making any purchases.
1https://www.balboacapital.com/section-179-vehicles/
2https://www.crestcapital.com/tax_deduction_calculator
3https://www.nerdwallet.com/article/taxes/irs-standard-mileage-rate
4https://www.entrepreneur.com/article/284089