There are countless factors that influence a person’s decision to purchase a particular vehicle. Everything from whether to buy a car, truck, or SUV, to smaller factors, such as specific options and color. While tax considerations may not top the list for personal vehicles, certain qualities do influence tax deductions for business vehicles.
Car Deductions 101
Generally, when a vehicle is purchased, its cost is not allowed to be deducted in full during the year of purchase. Instead, the cost must be deducted, or “depreciated,” over a few years (generally five). However, there are several tax strategies for business vehicles that business owners might use to accelerate depreciation.
Some considerations include Section 179, bonus depreciation, Gross Vehicle Weight Rating (GVWR), and others.
Bonus Depreciation vs. Section 179
Section 179 and bonus depreciation are separate deductions that can be taken alone, or together, to help reduce a business’s tax liability.
Section 179 deduction allows qualified taxpayers to deduct part or all of the cost of certain vehicles in the first year of business use. It is most common for Section 179 to be applied first. But if a company has no taxable profit, or the car is over the cost limit, bonus depreciation may be the best option.
Bonus depreciation allows for an additional deduction of up to 100% of the cost of the vehicle in the first year if it is not fully deducted under Section 179. The 2017 Tax Cuts and Jobs Act increased the percentage of what could be deducted in the first year from 50% to 100%. In recent legislation, bonus depreciation began to be phased out after 2022.
For more information on the phase–out, read Bonus Depreciation: 5 Key Points.
Key Factors to Think About When Selecting a Business Vehicle
Gross Vehicle Weight Rating
A vehicle’s weight, surprisingly, is an often-overlooked factor while evaluating a purchase. Business use SUV, truck, or van weighing over 6,000 and under 14,000 pounds can be fully deducted in first year.
Vans and trucks
If purchasing a pickup truck, consider one with a bed at least six feet long. If purchasing a van, consider one that can seat more than nine people behind the driver’s seat. Maximize your first-year deduction with either of these factors. Sometimes you can fully deduct the cost of the vehicle in the first year.
New vs. used
Before the passage of the Tax Cuts and Jobs Act, there were advantages of purchasing a new vehicle instead of a used vehicle. But under the new tax law, the bonus depreciation provisions were amended to allow a deduction for used cars as well as new. Given this change, there is no advantage from a tax standpoint to purchasing a new vehicle versus a used vehicle for 2023.
Taking Advantage of Tax Deductions for Business Vehicle Purchases
When selecting a business vehicle, it’s important to consider all the tax implications. Get advice on deducting your business vehicle cost. Our advisors can help you find the best option for your company. Contact us today for more information about tax deductions and how they could benefit your business.