We receive more questions about Section 179 deductions than any other tax issue. There is no doubt that this tax rule depends on many qualifying factors and can be quite complicated to implement as a tax strategy. For that reason, MileageBooks.com is offering the following explanation on how Section 179 affects the depreciation of a business vehicle.

The purpose of a Section 179 deduction is to provide the option of quickly depreciating business assets. Normally, large purchases such as vehicles, computers and other “hard� business assets must be depreciated over a minimum of five years. This is a disadvantage for businesses that do not retain those assets for the entire depreciation period (or assigned “Useful Life�) due to wear and tear, obsolescence or other factors. Section 179, otherwise referred to as “First-Year Expensing�, addresses this inequity.

Automobiles used for business purposes qualify for Section 179 deductions. For purposes of the points considered below, vehicles and automobiles refer to passenger vehicles.

It’s A First-Year Decision

Section 179 can only be employed in the first year that a qualifying asset is placed in operation. Once standard depreciation methods have been used for an asset, Section 179 can’t be declared in subsequent operational years. There are also maximum income levels for using the Section 179 deduction method (when income exceeds $200,000.00 during the tax year, restrictions begin and are eliminated altogether at $220,000.00).

For most passenger automobiles, the total depreciation deduction (including the section 179 deduction) that can be claimed is limited. For example, automobiles placed in service during 2001, including the section 179 deduction, could be depreciated more than $3,060. The maximum depreciation deduction for automobiles placed in service in 2001 was $4,900 for 2002 and will be $2,950 for 2003. The maximum depreciation deduction for each year after 2003 will be $1,775.

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