When purchasing a vehicle for your business, it's essential to look for those that will give your business an economic benefit and a tax credit at the end of the year.
There are many ways you can enjoy tax credits as a small business owner. Section 179 of the IRS Tax form provides you with an ethical way of paying less tax. In the provision of this section, IRS allows business owners to deduct the vehicle's price up to 100% if eligible.
The IRS has a federal tax code that allows the business owner a deduction tax credit from any vehicle used for a business operation to deduct up to $25,000 of a vehicle's price. The vehicle eligible for tax saving should not weigh less than 6,000 pounds, as per the gross vehicle weight rating (GVWR), and not more than 14,000 pounds. The vehicle in question should be used to qualify for the section 179 Tax Deduction for business purposes. The tax deduction encourages entrepreneurs to invest in their businesses by buying new vehicles to help their economic development.
The IRS Draft Tax Form states:
"Section 179 deduction dollar limits. For tax years beginning in 2021, the maximum section 179 expense deduction is $1,050,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,620,000. Also, the maximum section 179 expense deduction for sport utility vehicles (SUVs) placed in service in tax years beginning in 2021 is $26,200. The recovery period for certain race horses. The 3-year recovery period for race horses 2 years old or younger will not apply to horses placed in service after December 31, 2021. Accelerated depreciation for qualified Indian reservation property. The accelerated depreciation of property on an Indian reservation property will not apply to property placed in service after December 31, 2021."
Make sure to read the full section in-depth.
Section 179 doesn't reduce the income of a business. It only helps the business owner to reduce the tax burden by deducting the cost of purchasing the vehicle from the tax liability in the form of a tax credit.
This IRS section permits organizations to deduct the full expense of capital assets immediately instead of depreciating them over their valuable life. For your asset to qualify for section 179 it must meet the following criteria:
Another condition is the asset must be used wholly for your business for over half of the first year. For example pickup trucks for personal purposes aren't qualified for any deduction under Section 179. These vehicles aren't for personal use, and there aren't any special rules to change that.
To qualify for the internal revenue code section 179 tax benefits, the standard expects you to begin using the asset in your business to take the allowance. Please note that you are not qualifying for the deduction in the year you purchase the asset but the year you have a business use for the vehicle. Make sure to talk with a tax advisor when you are purchasing a vehicle to take advantage of these new tax depreciation laws.
To claim the deduction, you need to fill out a request form 4562. You'll need to give the asset's details, its full purchase price, date of purchase, date of use, and how much you're claiming for that asset.
To take advantage of Section 179 tax deduction, check whether your vehicle meets the required weight rules. You need to check the producer's gross vehicle weight rating (GVWR), which should be more than 6,000 lbs.
You can confirm the GVWR of a specific vehicle by checking the manufacturer’s label that is normally inside of the driver door, where the side door pivots to meet the vehicle's casing.
Below is a list of vehicles that qualify for a 6000 lb tax credit:
As a small business owner, qualifying for the tax credit on your vehicle doesn't mean you have to buy the business vehicle outright.
A financed vehicle can also qualify your business for the tax credit if your business has been in operation for more than two years with a good credit score.
Vehicles must be put to use within the calendar year of purchase to qualify for the tax credit. Doesn't matter if they are heavy SUVs, work vehicles, passenger vehicles, cargo vans, light trucks, or even passenger automobiles they still need to be used within the first year to be a qualifying vehicle.
Both old and new vehicles are eligible for a tax credit if they satisfy the provision of IRS guidelines regarding tax credit.
This article is for informational purposes only, make sure to talk to your tax professional for all the tax advice and tax rules for use in small businesses.