Here’s a write-off that many small business owners neglect: a van or truck.
“Heavy” SUVs, pickups, and vans used over 50% for business are eligible for the first-year Section 179 depreciation write-off in the year they are first put to business use. In addition, new heavy vehicles are eligible for first-year bonus depreciation.
In many cases, these favorable depreciation rules allow you to write off the entire business-use portion of a heavy vehicle’s cost in year one. And you may get some nice state tax income deductions too. Here’s what you need to know to cash in.
Heavy vehicle tax break basics
The super-generous first-year depreciation deduction rules I’m about to explain only apply to vehicles used over 50% for business.
The business-portion of the cost of a vehicle is first reduced by the allowable Section 179 deduction. For heavy vehicles that are classified as SUVs under the tax rules, the Section 179 deduction is limited to $25,000. Other heavy vehicles, such as long-bed pickups and vans, are unaffected by the $25,000 limit.
Importantly, pickups with cargo beds that are at least six feet in interior length are not classified as SUVs (pickups with shorter beds are treated as SUVs).
Next comes the allowable first-year bonus depreciation deduction, but this break is only available for new vehicles.
Finally, the business portion of the remaining cost (if any) is depreciated under the “regular” depreciation rules, usually at a 20% rate in Year One.
Before the end of the year, you buy a new $45,000 heavy SUV and use it 100% in your sole proprietorship business. Your first-year depreciation deduction is $37,000: $25,000 Section 179 deduction + $10,000 first-year bonus depreciation deduction [50% x ($45,000 - $25,000)] + $2,000 “regular” depreciation deduction [20% x ($45,000 - $25,000 - $10,000)].
The $37,000 in write-offs will reduce your federal income tax bill and your self-employment tax bill too. You may get a healthy state income tax deduction too, although some states have refused to go along with the super-generous depreciation rules enacted by the federal government.
In contrast, if you buy a new $45,000 sedan and use it 100% for business, your first-year depreciation write-off will be only $11,160. For a new $45,000 light truck or light van, your first-year write-off would be only $11,560.
Same basic story but you buy a heavy pickup with a long bed for $45,000. For federal income tax purposes, you can deduct the entire cost on this year’s return under the Section 179 deduction privilege. The pickup can be either new or used.
Nice! In contrast, if you buy a used $45,000 sedan, your first-year depreciation write-off will be only $3,160. For a used $45,000 light truck or light van, your first-year write-off would be only $3,560.
Picking out a suitably heavy machine
The Section 179 deduction and bonus deprecation deals are only available for an SUV, pickup, or van with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds that is purchased (not leased).
It’s easy to find attractive vehicles with GVWRs above the magic 6,000 pound threshold. Examples include the Audi A7, BMW X5 and X6, Buick Enclave, CadillacGM, +1.66% scalade, Chevy Tahoe, Dodge Durango, Jeep FCAU, +0.37% Grand Cherokee, Nissan 7201, -3.09% Titan, Toyota TM, +1.59% Tundra, Ram pickups, and most other full-size pickups. You can usually find the GVWR on a label on the inside edge of the driver’s side door.
More good news: The IRS has confirmed that heavy SUVs qualify for the aforementioned depreciation tax breaks whether they are built on a truck chassis or an auto chassis. So heavy crossovers qualify if they are used over 50% for business. Source: IRS Chief Counsel Advice (CCA) 201138048.
Now for the caveats
Needless to say, the favorable depreciation rules for heavy vehicles come with limits. Here are the ones that are most likely to apply.
First, your Section 179 deduction cannot exceed your aggregate net business taxable income (calculated before the Section 179 write-off). However, if you operate as a sole proprietorship, or as a single-member LLC treated as a sole proprietorship for tax purposes, you can count any wages that you earn as an employee as additional business income. If you are married and file jointly, you can also count your spouse’s earnings from employment as well as any self-employment income that he or she may earn. These loopholes reduce the odds that you’ll be hurt by the net business income limitation.
If you operate as a partnership, multi-member LLC, or corporation, special rules apply. So consult your tax adviser about how to take full advantage of the depreciation breaks for heavy business vehicles in your situation.
In the five tax years following the year that you put your heavy vehicle into service, the business-use percentage must continue to exceed 50%. Otherwise, you run afoul of “recapture” rules that will force you to add back some of your previous depreciation write-offs into your taxable income. So to fully cash in on the aforementioned depreciation breaks, you must be committed to using the vehicle mainly for business for at least six years.
The bottom line
As things now stand, the heavy vehicle depreciation breaks I’ve outlined here are “permanent” features of our beloved Internal Revenue Code. But nothing is really permanent when it comes to taxes. Depending on how this year’s elections turn out, much less favorable rules could apply in future years. So you might want to get your heavy vehicle purchase done before year-end.