Tax Deductions for Business Vehicles
What to consider when purchasing a business vehicle
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 have an effect on tax deductions for business vehicles.
When it comes to purchasing a business vehicle, there are a couple major factors to consider: such as the vehicle’s weight and whether you are purchasing new or used. While the decision to purchase a new or used vehicle is a more universal consideration, considering the vehicle’s weight for tax purposes probably is not.
If you are wondering what the vehicle’s weight has to do with claiming a tax deduction, you are not alone. This article will examine the often overlooked rules associated with deducting so-called “heavy” SUV’s and trucks, as well as one major advantage to purchasing a new vehicle instead of a used one.
Car Deductions 101
To start, some background on why tax considerations would matter for a business vehicle. Generally, when a vehicle is purchased, the cost of the vehicle is not allowed to be deducted in full during the year of purchase. Instead, the cost must be deducted, or “depreciated,” over a number of years (generally five). This is where a vehicle’s weight and condition (new or used) come into play. The vehicle weight, specifically the “GVWR,” or Gross Vehicle Weight Rating, has a huge effect on the amount that can be deducted for tax purposes in the first year of business use. Similarly, the choice to purchase new or used will affect whether an additional deduction will be allowed in the first year.
There are two deductions that are at the center of this article. Those deductions are the “Section 179” deduction, and the “bonus depreciation” deduction. The Section 179 deduction allows qualified taxpayers to deduct part or all of the cost of certain vehicles in the first year of business use. Bonus depreciation allows for an “additional” deduction of up to 50% of the cost of the vehicle in the first year if not fully deducted under Section 179. Since there is a large amount of overlap in these two deductions, the focus of the vehicle factors is to highlight some often overlooked considerations as a whole, instead of separating each deduction. The following are some key points to consider before purchasing.
Gross Vehicle Weight Rating
Likely the most overlooked factor in purchasing is the vehicle weight, or GVWR, as discussed earlier. Generally, an SUV, truck, or van with a GVWR of more than 6,000 pounds will be allowed a significantly higher first-year deduction (in many cases, $20,000+ additional deduction in the first year). Consider purchasing a vehicle with a GVWR greater than 6,000 pounds if feasible.
New vs. Used
Purchasing a new vehicle will generally result in being able to deduct a larger percentage of the vehicle cost in the first year, specifically if the vehicle has a GVWR of more than 6,000 pounds. This is due to the fact that only new vehicles, not used, are eligible for bonus depreciation. To clarify, in the long term, the deduction will generally be the same for a new or used vehicle costing the same. The advantage of buying new is that it will generally allow the cost to be deducted quicker. Consider purchasing a new vehicle instead of used to maximize first-year deductions.
Vans and Trucks
If purchasing a pick-up truck or van, consider choosing a pick-up with a bed at least six feet long or a van that can seat more than nine people behind the driver’s seat. Either of these factors will generally allow for maximization of first-year deduction, and sometimes full deduction of the vehicle cost in the first year.
The above considerations present various factors that will be advantageous for many taxpayers to consider when purchasing a vehicle. The recommendations are general in nature and do not universally apply to every taxpayer. We recommend consulting with your tax advisor when purchasing a vehicle so that your specific situation can be properly assessed.
If you would like to learn more about these considerations or would like to discuss your particular situation, feel to reach out to me at firstname.lastname@example.org or at 408.286.7780.