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 Lifeâ€) due to wear and tear, obsolescence or other factors. Section 179, otherwise referred to as “First-Year Expensingâ€, 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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If the business/investment use of the automobile is less than 100%, the maximum deduction amount must be reduced proportionately. For example, if a taxpayer purchased a car for $4,500 in 2001 and used it 60% for business, the cost of the car that qualified for the section 179 deduction was $2,700 ($4,500 X 60%). However, the section 179 deduction was limited to $1,836 ($3,060 ? 60%).
The percentage of business use is determined by tracking the miles driven over the course of the year. The Vehicle Mileage & Maintenance Record Book (here comes the shameless plug) which can be purchased at www.MileageBooks.com, is an excellent tool for tracking mileage.
Limitations
Beginning in 2003, the maximum allowable deduction under Section 179 will be $25,000.00 and will remain at that level in subsequent years until and unless the rule is updated. The amount has been increased by $500.00 each year since 2001. The deduction can’t exceed income reported in the tax year. A vehicle deduction can be included toward the maximum amount.
Electing the section 179 deduction is not always advantageous. The election may reduce or eliminate eligibility to claim the earned income credit, reduce coverage under the social security system, and prevent fully using all available exemptions and deductions.
There are many other factors affecting the election of Section 179 deductions, and not all of them can be considered without an examination of a tax payer’s individual tax circumstances. There are limits on income levels, corporate structure and asset characteristics. Other qualifying factors include the location of a business (HUB Zones and the New York Liberty Zone impact qualification).
As always, MileageBooks.com recommends that you consult with a tax professional, accountant or attorney when planning tax strategies. Other useful information pertaining to the business use of vehicles is available on our web site. A valuable “Car Buyers Guide†that can help you save thousands of dollars on the purchase of a new or used vehicle is also available for download at the site.
The Vehicle Mileage & Maintenance Record Book is designed for busy professionals like you who are tired of cheap tax information recording tools that fall apart and don't provide adequate room on forms for writing. Order one of our auto mileage logs today and start making this essential task simple and quick. Each book comes with a MONEY BACK GUARANTEE! Click here to order by using our online shopping cart, downloadable order form, or through Amazon.com.