Let’s begin with a fun and rewarding fact. Did you know that there are provisions in the U.S. tax code that help you get paid for spending? If you think getting paid to spend sounds too good to be true, brace up for a moment of exciting enlightenment as we take you through the generous world of Section 179 deductions.
What is a Section 179 Deduction
This section of the tax code stipulates that business owners can deduct the entire cost of eligible equipment that was purchased during a tax year for business purposes. What this means is that if you buy a bus for business operations, you can deduct the purchase amount from your gross income in the tax year you made the purchase. In practical terms, Section 179 provides you with an incentive to invest in your business.
If you were wondering if people took advantage of this tax code in ways that didn’t necessarily align with reinvesting in business, the answer is yes. In fact, Section 179 was dubbed the “SUV Tax Loophole” in the past because business owners used it to write off the purchase of qualifying vehicles.
The “SUV Tax Loophole” era prompted the IRS to roll out an updated and far more limited Section 179, which made the tax code more difficult to “exploit.” But does this mean no more expense-free vehicle purchase party for you? Not really. Yes, Section 179 is currently more limited than ever, but it is still possible to claim tax write-offs under this tax code, provided you purchase a vehicle that is included in the updated list.
Section 179 Deduction Vehicle List for 2023
First off, what vehicles are eligible for Section 179 deduction in 2023? The list of vehicles can be quite extensive but, generally speaking, they can be categorized as follows:
Heavy SUVs and Trucks: Think of these as the big, muscular types of the automotive world. We’re talking about rides with a Gross Vehicle Weight Rating (GVWR) that tips the scale at over 6,000 pounds! Excellent examples include Chevrolet Silverado 2500/3500, Ford F-250/F-350, and GMC Sierra 2500/3500.
Cargo Vans: These are your ultimate “get stuff done” machines. They’re engineered for one main job: moving goods from A to B. If you’ve got a lot to haul, the Ford Transit Connect, Dodge Grand Caravan, or Toyota Sienna could be your new best friends.
Passenger Vans: These are the party buses of the van world. They’ve got room for nine or more folks seated behind the driver, making them ideal for big families, teams, or just a squad of friends. Notable contenders? The Mercedes-Benz Sprinter Passenger Van, Chevrolet Express Passenger Van, and GMC Savana Passenger Van.
How Section 179 Works for Vehicles
So far, we have established that Section 179 allows businesses to deduct the purchase price of qualifying vehicles in the year they are purchased and placed into service, but how does it work? Below is an overview of the essential points you need to know:
Purchase and Use
You must buy the vehicle and start using it within the tax year you’re claiming the deduction.
Business Use Requirement
At least 50% of the vehicle’s use must be for business purposes.
The IRS often sets limits on the total amount that can be deducted, particularly for SUVs. In most cases, there’s a cap of $28,900 as of 2023.
The deduction is claimed using IRS Form 4562, which needs to be filed along with your regular income tax return.
Note: To truly leverage the Section 179 tax code to your benefit, you need a tax expert by your side. A seasoned tax consultant is your go-to for unlocking its full potential, ensuring every move is compliant and effective.
Deduction vs. Depreciation
A deduction is the amount you are legally allowed to subtract from your income before you calculate or fulfill your tax obligations for a given year.
Imagine your business earned $500,000 this year. Awesome! Now, tax time rolls around and the rate is 30%. Uh-oh, that’s $150,000 to the taxman. But wait! You invested $50,000 in new equipment. This investment could be considered a deduction. If that is the case, your taxable income drops to $450,000 and your tax bill shrinks to $135,000. Voila! Deductions like this help lower your taxable income, ensuring you only pay taxes on the money that’s truly spare after your crucial expenses.
Depreciation is an accounting method that describes spreading out the cost of something you buy for your business, like a computer or a car, over the time you’ll be using it. So instead of saying you spent all the money at once, you can say you’re spending a little bit each year you use it. Depreciation tells you how much value an asset has lost over time.
As a business owner and taxpayer, it is useful to have a solid grasp of deduction and depreciation, as both are instruments that can significantly impact your tax obligations.
Tax Depreciation: Getting Specific
It’s also crucial to understand the difference between regular depreciation and tax depreciation.
Tax depreciation is like a “money-back” offer from the IRS to make up for the fact that an item (think vehicles) you bought for your business loses value over time. It’s a depreciation expense that the U.S. tax code permits you to claim while filing your taxes.
Just like your favorite jeans fade a bit each time you wash them, the value of any business item you purchase fades a bit each year, and this fading value is spread out over many years on your tax return. Think of tax depreciation as a slow drip, where your asset’s value is dripping away slowly over time, and the tax guys give you a bit of a break for this drip. This way, you’re not feeling the pinch all at once, and you also get to save some money on your taxes over the years.
Is Tax Depreciation Considered Taxable Income?
One question that often comes up with tax depreciation is whether it counts as taxable income. The simple answer is no. Tax depreciation is a mechanism that reduces your taxable income rather than adding to it.
How Tax Depreciation Benefits You
Essentially, Section 179 and tax depreciation provide you with an opportunity to reduce or potentially eliminate the financial burden of purchasing an item like a vehicle to run your business.
- The Section 179 deduction authorizes a full cost write-off for qualifying business equipment during the acquisition year.
- Predominantly, eligible vehicles are categorized as heavy SUVs/trucks, cargo, and passenger vans, which must meet specific weight criteria.
- You have to purchase and use the qualifying vehicle within the same tax year, with a mandate of 50% usage for business purposes.
- Tax Depreciation serves as a shield, mitigating asset value reduction over time, thereby minimizing taxable income.
- Consult a tax expert to maximize benefits and ensure compliance with Section 179.
Wondering where to find a qualified tax strategist who understands how to legally use the U.S. tax code to help you claim tax benefits? Look no further than Tax Goddess. We have helped our clients claim more than $1 BILLION in tax savings, and we are confident we can help you, too.
Book a FREE 30-minute Zoom session with us today, and let’s get you on the path to tax freedom!