Bart sat in the diner, in his favorite booth, stirring his coffee. He was waiting for a fellow small business owner with whom he occasionally shared a breakfast of fresh blueberry muffins and real butter. Betty wasn’t a competitor but they serviced the same industry. So after a chance meeting at a Chamber of Commerce roundtable, they’d agreed to come together once a month to share ideas and vent the occasional frustration, if need be. Despite the challenges, they both enjoyed being small business owners.
Bart was early for their meeting. He found himself watching for Betty’s car, a three year-old sedan he remembered to be ice blue. There was a light rain beating the diner window and he lost track of the diner’s parking lot after a time.
“Good morning, Bart.”
“Betty! I didn’t see you drive up.”
“That’s because I have a new SUV.”
“Oh, you do? What did you get?”
“A Cadillac Escalade.”
“Wow. Business must be good.”
“It is, but my accountant advised me to make this purchase as a year-end tax deduction.”
“I’ve always heard of this but never looked into it. I’m having a pretty good year myself so perhaps this is something I should consider?”
“For my situation, my accountant called it a no-brainer but if I were you, I’d ask yours before doing anything.”
“I think I will,” said Bart, as he poured Betty some coffee. “It must be fresh in your mind. What can you tell me about the rules?”
“It’s something called Section 179 of the tax code. It used to be called the Hummer Tax Loophole because at one time, you could write-off the entire cost of a large vehicle. Then the government got wise.”
“They usually do.”
“Anyway, the deduction limits are still there, just not the size of a Hummer.”
“I think I heard that any vehicle acquired must be used for business at least 50% of the time. Is that right?”
“Yes. That’s the first test.”
“So how much can you deduct?”
“That’s the real question, isn’t it?”
“Let’s see if I recall the numbers… again, it’s best to ask your accountant but for a passenger vehicle, the number is just over $11,000. It’s $11,060, I think.”
“And they allow more for other vehicles?”
“Yes. The IRS will allow up to a $25,000 on other types.”
“Basically, any vehicle that is designed and built for mostly business purposes. Taxis, cargo vans, certain pick-up trucks…”
“Exactly. Here are the goods. Vehicles with a gross vehicle weight between 6,000 and 14,000 lbs. also fall into the higher category. So buying the Escalade allowed me the higher deduction.”
“Not to mention showing the world your business is successful. Can I lease or purchase to obtain the deduction?”
“My calendar is full of deadlines right now. I have to do this by when?”
“You can do it any time, of course, but to qualify for a current tax year deduction, you must take delivery of your new car or truck by the close of business on December 31.”
“I don’t have much time, then. Didn’t we meet a Scott from the Cadillac dealership at the last roundtable?”
“Scott Trombley . He’s my man.”
“So what’s the catch?”
“My accountant said there isn’t one. It’s all part of the government’s efforts to encourage economic activity.”
“Well, that part of its strategy must be working. So what do you think of this real butter? Heavenly, isn’t it?”
December is typically a busy month for the automotive sales professional. Not only are vehicles outstanding gifts, sometimes presented as a once-in-a-lifetime thrill in the driveway for Hanukah or on Christmas morning, but can also serve as an excellent year-end tax deduction vehicle (no pun intended) for many business owners. This article briefly summarizes what the tax code says regarding this deduction. However, if you are seriously considering this, it makes good sense to consult with your accountant or go to IRS.gov to ensure the deduction will apply to your situation.
The applicable tax code section for vehicle deduction is Section 179. Several years ago, the Section 179 deduction was often referred to as the “Hummer Tax Loophole,” because then, it allowed businesses to buy large SUVs and write them off entirely.
The government eventually recognized this as too much of a good thing, so while the deduction limits are now more modest, Section 179 can still be a significant tax advantage for your business.
The first requirement for the intended vehicle is that it must be used for business purposes more than 50% of the time. Passenger vehicles have a total depreciation deduction limitation of $11,060.
For many business owners, this figure is significant. Additionally, other vehicles can qualify for a higher figure if, due to their inherent features, they are not likely to be used more than a minimal amount for personal purposes.
Here are examples of those:
• Ambulance or hearse used specifically in your business;
• Transport vans, taxis, and other vehicles used to specifically transport people or property for hire;
• Qualified non-personal use vehicles specifically modified for business (i.e. van without seating behind driver, permanent shelving installed, and exterior painted with company’s name).
• Heavy “non-SUV” vehicles with a cargo area at least six feet in interior length (this area must not be easily accessible from the passenger area.) To give an example, many pickups with full-sized cargo beds will qualify (although some “extended cab” pickups may have beds that are too small to qualify).
• Vehicles with: (1) a fully-enclosed driver’s compartment / cargo area, (2) no seating at all behind the driver’s seat, and (3) no body section protruding more than 30 inches ahead of the leading edge of the windshield. In other words, a classic cargo van.
Certain vehicles (with a gross vehicle weight rating above 6,000 lbs. but no more than 14,000 lbs.) qualify for expensing up to $25,000 if the vehicle is financed and placed in service prior to December 31 a nd meet other conditions (again, speak t o your accountant).
So thanks to Section 179, December is that time of the year not only for joy but for positioning your small business properly for its tax liability. Happy Holidays!