7 minute read
Section 179 is a tax strategy that often gets overlooked, especially with bonus depreciation at 100%. But Section 179 is a fantastic strategy to use for long-term tax planning, particularly when you purchase or lease luxury vehicles.
Section 179 helps businesses afford the cost of big asset purchases. With Section 179, businesses can deduct the full cost of capital expenditures immediately rather than recovering those costs over the life of the assets with depreciation.
Capitalizing and depreciating assets isn’t necessarily a bad thing, and for some, choosing to spread the expense deduction over multiple years can be a good strategy. But for many businesses, Section 179 is essential for them to be able to afford new assets, and for others, Section 179 helps them fine tune their taxable income.
Section 179 and 100% bonus depreciation are similar: they both help businesses fully deduct asset costs in the year of purchase. But there are a few important differences.
In 2022, the maximum Section 179 expense deduction is $1.08M, and if you purchase $2.7M of assets in a year, this max deduction will start to phase out. In contrast, there is no deduction limitation or spending cap for bonus depreciation.
Section 179 can only reduce your taxable income down to zero. Bonus depreciation can exceed your taxable income; the excess will generate a net operating loss (NOL) that you can use to reduce taxable income in future years.
You can apply Section 179 depreciation to individual assets. In contrast, you must take bonus depreciation uniformly across asset classes. For example, if you want to apply bonus depreciation to your vehicles, you must also apply bonus depreciation to all other assets with 5-year MACRS tax lives.
Over the past two decades, bonus depreciation has expired and has been brought back many times, making it a difficult tool to use for long-term tax planning. Section 179 will always be an option to you. 100% bonus depreciation is only available through 2022; in 2023 it begins to phase out and will be gone completely by 2027.
If you purchase a vehicle to use in your business, you can potentially use Section 179 to deduct the full cost of that vehicle in the first year. But there are three limitations you need to think about:
You can only use Section 179 on assets that you use at least half of the time for business purposes. If the business use percentage is more than 50% but less than 100%, your Section 179 deduction will be ratably reduced to reflect that business use percentage.
In 2022, the first-year Section 179 deduction for small passenger automobiles — those that weigh under 6,000 pounds — is limited to $11,200. However, if the vehicle qualifies for bonus depreciation, this is increased to $19,200 – even if using 179.
Heavy vehicles — those weighing more than 6,000 pounds — are eligible for a larger deduction. In 2022, the first-year Section 179 deduction for vehicles weighing between 6,000 and 14,000 pounds is limited to $27,000, and the deduction for vehicles weighing more than that is unlimited.
Yes, you can.
You can take Section 179 in the year you place an asset in service, whether it’s new or used. The asset must simply be new to you. This is different from using bonus depreciation – you can only take bonus depreciation on vehicles when they are new.
Yes, you can.
You can take a Section 179 deduction in the year you begin financing your vehicle as long as (1) your business use percentage is at least 50%, and (2) you place the vehicle in service that year.
Using Section 179 on vehicles that you finance can be a smart fiscal strategy. Doing so effectively allows you to deduct the cost of an asset that you haven’t yet paid for. This can help reduce current year taxes, boost your cash reserves, and improve your cash flow.
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Yes, you can.
Like with financed vehicles, there are tax benefits of leasing a car for business purposes. Applying Section 179 to leased vehicles allows you to deduct the full cost of the purchase (up to the annual limits) before you’ve fully paid for the vehicle.
There is one caveat on leased vehicles, though: to qualify for Section 179, the lease must be a capital lease. A capital lease is an agreement where ownership rights of the car will transfer at the end of the lease term, or where you are intended to be the sole lessee during the vehicle’s useful life. Common capital leases are:
Yes, you can, but Section 179 will be applied first. When bonus depreciation is at 100%, this isn’t as useful of a strategy, but when bonus depreciation is less than 100%, combining the two recovery methods can be a great way to finesse your taxable income. You can use Section 179 to fully recover the cost of individual assets, and then you can apply bonus depreciation to the remaining assets.
Section 179 isn’t a one-size-fits-all strategy, but it can be employed in many circumstances. In particular, businesses that lease heavy luxury vehicles will benefit. A few luxury vehicles that qualify for the enhanced $27,000 first-year deduction under Section 179 are the Mercedes G Wagon, the BMW X6, the Cadillac Escalade and the Lexus GX460, although there are many more Section 179 vehicles to choose from.
Talk to your tax advisor before making a purchase to make sure your vehicle qualifies for the enhanced deduction.
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