Under normal tax depreciation, it takes five years to write off the cost of a vehicle. To provide relief to small businesses, Congress enacted Section 179, which allows a larger initial tax deduction for vehicle expenses. Depending on its characteristics, a 6,000-pound vehicle may qualify for a $500,000 or a $25,000 Section 179 write-off.
In general, business owners can use Section 179 to write off equipment purchases up to $500,000. Businesses can claim the Section 179 write-off on new and used property. After $2 million in purchases, the deduction phases out dollar for dollar. For example, a business can claim $500,000 in Section 179 depreciation on a $2 million vehicle. However, it can only claim $400,000 in Section 179 depreciation on a $2.1 million vehicle.
Exceptions and Exclusions
As a general rule, a 6,000-pound vehicle does not qualify for the full Section 179 deduction. The Internal Revenue Code only allows taxpayers a $25,000 deduction for heavy sport utility vehicles between 6,000 and 14,001 pounds. However, exceptions exist for a wide variety of 6,000-pound vehicles. Vehicles designed to seat more than nine passengers, such as shuttles, are excluded from this rule. Vehicles with a cargo area that's not readily accessible -- say, pickups with full-sized cargo beds, are also excluded. If the vehicle has no seating behind the driver's seat or fully encloses the driver, as many delivery vans do, the vehicle is also excluded. Excluded vehicles qualify for the full $500,000 Section 179 deduction.
Bonus First Year Depreciation
On top of the immediate Section 179 deduction, vehicles purchased new also qualify for a 50 percent bonus first-year depreciation; vehicles purchased used don't qualify. The 50 percent bonus depreciation is calculated as 50 percent of the remaining value of the equipment after the Section 179 write-off is taken. For example, say that a business purchases a new $700,000 van. The Section 179 depreciation is $500,000 and the bonus depreciation is 50 percent of the remainder, or $100,000.
Modified Accelerated Cost Recovery System
Businesses can continue to depreciate any leftover vehicle value using the modified accelerated cost recovery system, or MACRS. A variety of depreciation methods are available, but most businesses choose MACRS because it gives the largest tax deduction right away. Virtually all vehicles qualify as five-year property in MACRS. Under the five-year calculation, business owners can depreciate 20 percent of the remaining value in the first year, 32 percent in the second, 19 percent in the third, 11 percent in the fourth and 11 percent in the fifth.
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