Business Taxpayers – The Truth About Deducting Automobiles And Other Business Equipment

I received a mailing from an American automobile company regarding the Section 179 deduction. The letter expressed some urgency to purchase a vehicle before the end of the year to get a large Section 179 deduction. While this is true, the letter left me with the impression that I needed to take action before December 31, 2016, or the deduction would be lost. What they stated was true. However, it is what was left unstated that concerns me.

For the uninitiated, Section 179 allows a business taxpayer to expense in the current year costs of certain equipment purchased during the year rather than taking depreciation over the life of the asset. Currently businesses purchasing less than $2,000,000 in such assets may expense up to $500,000 of Section 179 deduction on their return. This amount was enacted in January 2016 and is permanent until Congress changes it. Thus, the deduction remains at $500,000 and is indexed for inflation for future years. The deduction must be taken in the year in which the asset is placed into service.

In the letter, the company stated that, in order to get the deduction in 2016, the asset needed to be placed into service during 2016. While this is true, it is also true that an asset purchased in 2017 may also be deducted in a similar manner in 2017. This is what Ford did not state. They implied that action must be taken by December 31, 2016 to get the deduction at all. What is true is that the asset must be placed in service by December 31, 2016, in order to deduct it on your 2016 tax return. The only urgency is to purchase the asset now in order to deduct it this year, as with any business expense.

Normally, the full cost of the asset may be deducted under Sec. 179, but due to the luxury automobile limits, the cost of certain motor vehicles may not be fully deducted. There are four categories of vehicles for this portion of the law.

  • Trucks and cargo vans rated over 6,000 pounds GVWR (gross vehicle weight rating). You may deduct up to the full purchase price of this category of vehicle.
  • SUVs and passenger vans rated over 6,000 pounds GVWR. You may deduct up to $25,000 of the cost of this type of vehicle. In addition, you may deduct bonus depreciation of 50% of the remaining cost and then regular depreciation on any remaining balance.
  • Trucks and vans rated under 6,000 pounds GVWR. You may deduct up to $11,560 of the cost of this class of vehicle. In addition normal depreciation may be taken on the remaining balance.
  • Passenger automobiles rated under 6,000 pounds GVWR. The limit here is $11,160 plus normal depreciation on the remaining balance.

Section 179 is a great tax deduction for small businesses. Hopefully, the “permanent” level of $500,000 plus inflation increases will remain in place for years to come. For right now, that is the limit for the foreseeable future. This has only been a quick overview. You should consult a CPA, Enrolled Agent, or other tax professional about the details of Section 179.

Have questions? Contact Tax Expert John Stancil.

Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.

Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.

He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.

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