How It Works
You can immediately write off up to $25,000 of the cost of a new or used heavy SUV, pickup or van thanks to the Section 179 deduction privilege. The vehicle must be placed in service by the end of your business tax year beginning in 2015 and used over 50% for business purposes.
After taking advantage of any first-year tax breaks, you can follow the “regular” tax depreciation rules to write off whatever is left of the business portion of the heavy vehicle’s cost over six years, starting with 2015.
Of course, there are restrictions and rules in order to cash in on this favorable tax treatment. You must buy a “heavy” vehicle, which means the manufacturer’s gross vehicle weight rating (GVWR) should be above 6,000 pounds. First-year depreciation deductions for lighter SUVs, light trucks, light vans, and passenger cars are much smaller. You can usually find a vehicle’s GVWR specification on a label on the inside edge of the driver’s side door where the hinges meet the frame.
Expanded Section 179 and Bonus Depreciation Possibilities
If Congress decides to restore the expanded Sec. 179 or 50% first-year bonus depreciation deductions for 2015, then you may be able to write off even more. Last year, the Sec. 179 limit was $500,000 for qualifying assets, including heavy long-bed pickups and vans with no seating behind the driver’s seat and no body section protruding more than 30 inches ahead of the leading edge of the windshield.
Buying New: SUV vs. Sedan
Let’s say your Maine business uses the calendar year for tax purposes. You buy a new $65,000 heavy SUV and use it 100% for business between now and December 31. On your 2015 business tax return, you can write off $25,000 of the cost thanks to the Section 179 deduction. In addition, if Congress restores the 50% bonus depreciation deduction, you will be able to write off another $20,000 (half the remaining cost of $40,000 after subtracting the Sec. 179 deduction).
Assuming that Congress restores the 50% bonus depreciation, you can follow the regular depreciation rules to depreciate the remaining cost of $20,000. This is the amount of the original purchase price that would be left after subtracting the Sec. 179 deduction and the 50% bonus depreciation deduction. Regular depreciation typically would result in an additional $4,000 deduction (20% times $20,000). So your first-year depreciation write-off equals $49,000 ($25,000 plus $20,000 plus $4,000). That’s 75.4% of the vehicle’s original cost!
In contrast, suppose you spend the same $65,000 on a new sedan that you use 100% for business between now and year end. Because the sedan is covered by the so-called luxury auto depreciation limits, your 2015 depreciation write-off will be only $3,160. However, if Congress restores the first-year bonus depreciation tax break, you will be able to deduct $11,160.
Buying Used: SUV vs. Passenger Car
Your business uses the calendar year for tax purposes. You buy a used $40,000 heavy SUV and use it 100% for business before January 1. On your 2015 business tax return or form, you can write off $25,000 thanks to the Sec. 179 deduction privilege.
You can also follow the regular depreciation rules to write off the remaining cost of $15,000. Regular depreciation would typically result in an additional $3,000 deduction (20% times $15,000). So your first-year depreciation deductions add up to $28,000 ($25,000 plus $3,000).
In contrast, if you spend the same $40,000 on a used passenger car, your maximum 2015 depreciation write-off will be only $3,160.
Important Note: Pay attention to the business taxable income limitation. Sec. 179 can’t be claimed if it will create (or increase) an overall business tax loss. If your Maine business is already expected to have a tax loss for the year (or close to it), purchasing a heavy vehicle at year end may not reduce your 2015 tax bill.
If you’re in the market to purchase a new vehicle for business purposes, contact your tax adviser to determine whether it makes sense to buy a “heavy” SUV, pickup or van, as there isn’t a one-size-fits-all tax plan. Your tax adviser will account for your company’s financial position and goals in light of the latest tax rules. Contact Filler & Associates for more details.