Like all parts of the tax code, Section 179 does not have a snappy name. It does have a snappy purpose, however. The federal government wants to encourage business owners to spend money on equipment. Therefore part of the tax code, or Section 179, helps business owners make purchases and deduct the entire cost of the purchase immediately.
This is a subsidy for business owners. Section 179 allows business owners to use pre-tax money to purchase items they use in their business activities.
Why should you care about Section 179? If you own your business, whether that’s as a private practice physician or as a plumber, understanding the tax code is always in your favor. Nobody will care more about your bottom line than you.
In this article, we walk through the requirements to use Section 179 and limitations on its use. We also talk about the use of bonus depreciation in business vehicle purchases.
An example of Section 179 deduction
Wile E. Coyote runs a pest control business. In 2022, he plans to expand his business. He wants to purchase additional nets, explosives, and a pickup truck in which to carry it all. He hopes thereby to expand into neighboring areas.
How much equipment can Wile E. Coyote purchase? How much of the cost basis qualifies for a deduction?
IRS has a very, very long article describing the limits and use of Section 179.
However, to be succinct, IRS allows the following types of expenses to use the Section 179 dedction.
- The property must serve a business use greater than 50% of the time. Only the proportion of time the property is used for business is eligible for deduction. Business use records (such as mileage) should be kept.
- Deduction can apply to tangible property such as machinery or equipment purchased for use in a trade or business. Eligible property includes qualified real property such as improvements to roofs, HVAC, fire alarm system, security systems in non-residential real property. Also includes appliances such as refrigerators, stoves, certain property used to furnish lodging (furniture), livestock such as horses [2], structures used to store gasoline and other fungible commodities
Limits to Section 179 deduction
In 2022, the maximum Section 179 deduction is $1,080,000.[2] This is called the dollar limit.
The dollar limit can be reduced if the cost of equipment exceeds $2,620,000. The dollar limit is reduced by the amount above this threshold.
For example, if equipment cost $2,820,000, then the dollar limit of Section 179 deduction becomes $1,080,000 – $200,000 = $880,000.
After meeting this dollar limit, another limitation or cap is placed on the annual Section 179 deduction. That’s the business income limit. That is, if you meaningfully participate in the trade or business activity, as Wile E. Coyote does in his pest control business, then the Section 179 deduction is capped at your annual income from the business.
So, if your business is new or you are making purchases in excess of annual income, there will be expense you cannot deduct in year 1. This deduction can be carried over to the next year.
How do I use Section 179 to deduct the cost of my car or vehicle?
Certain items such as cars are regulated by IRS in order to cover the gap previously known as the Hummer Loophole. IRS divides the types of vehicles into three categories for this deduction. Like other equipment or machinery for this deduction, the vehicles should be put into use in the same tax year to qualify for the deduction.
- Cars weighing less than 6,000 lbs (most cars), the maximum Section 179 deduction is $18,200.
- For SUVs and heavy trucks, weighing between 6,000 – 14,000 lbs, the maximum Section 179 deduction on sports utility vehicles is $26,200.[2]
- For Other vehicles defined by either (1) seating at least 9 people behind the driver (like a bus); (2) equipped with cargo area at least six feet in length (can be closed or open) or (3) has enclosure closing driver’s seat and no seating behind driver; these other vehicles may qualify for the full section 179 deduction at $1,050,000.[2]
Example cars that qualify for section 179 deduction in 2022
I’ll provide a sampling of some 2022 vehicles and their current gross vehicle weight rating (GVWR), which is the calculation used by IRS for this rule. This is the loaded weight of the vehicle. Curb weight is the unloaded weight and will be lighter.
Cars and other vehicles weighing less than 6,000 lbs
Most vehicles will fit in this category.
- 2022 Tesla Model Y: 5302 – 5712 lbs
- 2022 Tesla Model S: 5596 lbs
- 2022 Tesla Model 3: 4541 – 5072 lbs
- 2021 BMW i3: 3858 – 3951 lbs
SUVs and other vehicles weighing more than 6,000 lbs
These will be smaller trucks and SUVs.
- 2022 Tesla Model X: 6250 lbs
- 2023 BMW Model X5: 6162 – 6569 lbs
- 2022 BMW iX xDrive50: 6437 lbs
- 2023 Ford F150: 6010 – 7150 lbs
- 2023 Chevrolet Silverado 6700 – 7100 lbs
Other vehicles which can take full section 179 deduction
These will be vans or buses seating > 9 people.
- Chevrolet Express (seats 12-15)
- GMC Savana (seats 12-15)
- Mercedes-Benz Springer (seats 12-15)
- Ford Transit (seats 12-15)
- Extended cab pick up trucks including Ford F150 and Chevrolet Silverado
Can I deduct the remaining cost of vehicle beyond section 179 deduction?
Yes.
IRS explicitly allows further deductions after Section 179, calling these special depreciation allowances. Only qualified property is permitted to use the special depreciation allowance.
For property placed into service in 2022, The Tax Cuts and Jobs Act of 2017 had a provision in Section 168(k) which allowed business owners to take 100% bonus depreciation in the first year on certain qualified property.[3]
Bonus depreciation allows business owners to take 100% deduction in 2022
For those taxpayers who are seeking to maximize deductions and even achieve a net operating loss (paper loss!), bonus deprecation can be used.
IRS outlines that there is a limit to the depreciation for vehicles, even the bonus depreciation. For the first year, the maximum 100% bonus depreciation limit for small vehicles is $18,000; for year 2, the maximum is $16,000.[4]
Let’s go back to the example of how to take the section 179 and bonus depreciation
Wile E. Coyote chooses to purchase a Ford F150 for his business for $42,200. His other equipment purchases sum $20,000. His net income for 2022 was $100,000.
We know that his vehicle is considered a heavy SUV; as such, according to Section 179, he can expense $26,200 of this cost in the first year. Therefore he will remain with $16,000 of car expense that he can deduct. If he chooses, he can take 100% bonus depreciation against the remaining cost.
On top of all that, he can use section 179 to deduct the remaining $20,000 in equipment.
His total deduction is $62,200, which substantially reduces his net income of $100,000 to $37,800.
What if Wile E had purchased a lighter vehicle? The tax benefits are not as immediate. He can take a section 179 deduction of $18,200 (instead of $26,200). He can also take bonus depreciation. IRS will allow a maximum $18,000 deduction when using 100% bonus depreciation for smaller passenger vehicles in the first year.
The car can continue to be depreciated in future years.
A Note On Depreciation Recapture: What If You Sell The Car?
So far we’ve talked about writing off the cost of the car in the first year.
According to IRS, automobiles have a working life of five years.
If you sell your car after year six, there’s no need to worry about depreciation recapture. That’s because in the eyes of IRS, the car has no further useful life after five years.
However if you sell the car before its useful life has ended, you must calculate the depreciation recapture, or amount of depreciation deduction that must be repaid. Depreciation recapture also applies if your business use of the property drops below 50%.
As always, I am writing from my personal experience and reading for entertainment purposes. I am not a tax professional, lawyer, or accountant. I strongly recommend discussion with your tax professional before making any financial decisions.
References
[1] https://www.irs.gov/newsroom/depreciation-expense-helps-business-owners-keep-more-money
[2] https://www.irs.gov/pub/irs-pdf/p946.pdf
[3] https://www.irs.gov/newsroom/additional-first-year-depreciation-deduction-bonus-faq
[4]https://www.irs.gov/newsroom/new-rules-and-limitations-for-depreciation-and-expensing-under-the-tax-cuts-and-jobs-act
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