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Tax season is quickly approaching, which means it’s time for your business to start thinking about deductions and tax write-offs for business purchases you’ve made this year. These, of course, potentially include any new trucks or vehicles you bought or added to your fleet in 2023.
One such deduction you may be able to take advantage of is Section 179 of the U.S. Internal Revenue Code (“Section 179”). This tax benefit is an immediate expense deduction that allows businesses and owner-operators to write off the entire value of qualifying, major business purchases (including vehicles and trailers) to decrease their taxable income for the tax year in which the item was acquired and put into service.
This article is intended to cover everything you need to know to better understand what Section 179 is and how to use it to decrease your business’s taxable income, including how much you can deduct, what vehicles qualify and how to file for the deduction. However, you should always consult an accountant or tax professional for specific advice and filing strategies for Section 179 and other possible tax deductions for your business.
How Section 179 Can Be Beneficial for Your Business
Section 179 was originally intended to offer tax relief for small businesses; however, larger businesses may also benefit from this deduction. The main benefit Section 179 provides is allowing businesses and self-employed individuals to immediately deduct the full purchase price of qualifying equipment, machinery or software from their taxable income rather than spreading the cost out over several years.
Typically, when your business makes a large purchase, such as a new truck, you would be required to capitalize and depreciate the cost of the truck over a fixed period of time as smaller yearly deductions. With Section 179, it is possible that the entire cost of the truck can be deducted from your gross income in a single year, which could affect your marginal tax rate and lead to substantial tax savings.
Section 179 was designed to help businesses grow and invest in themselves, and in turn the U.S. economy, by allowing them to use the tax savings to purchase equipment they need right now, instead of waiting. This could mean you’re able to add a new truck to your fleet this year rather than waiting to purchase it one to two years down the road.
2023 Section 179 Deduction Limit
As with most tax deductions, there is a limit to how much you can deduct from your taxable income using Section 179. This amount changes from year to year to adjust for inflation, but for 2023 the maximum Section 179 deduction is $1,160,000, an $80,000 increase from 2022.
You can combine multiple qualifying expenses to reach this total, but you can’t deduct more than the yearly limit. Section 179 also stipulates that your deduction cannot exceed your qualifying taxable net income. If your deduction is greater than your taxable income, you can carry the remaining balance of your Section 179 deduction forward to future tax years.
Please note that the full Section 179 deduction can only be taken for equipment or vehicles that are used for business purposes 100% of the time. However, as long as the item is used at least 50% of the time for business purposes, a partial, prorated Section 179 deduction can still be taken. Simply multiply the cost of the item by the percentage of business use above 50% to determine the amount eligible to be deducted using Section 179.
For vehicle purchases, there are also limits to how much can be deducted using Section 179 based on the type of vehicle. We’ve covered this in more detail below.
2023 Section 179 Spending Cap
Because Section 179 was intended for smaller businesses with fewer expenses, there is a spending cap in place that dictates the amount you can deduct using Section 179 in a given tax year based on the total amount your business has spent on equipment or vehicle purchases. For 2023, the Section 179 spending cap for purchases made from January 1 through December 31 is $2,890,000.
If your business spends $2,890,000 or less on qualifying equipment in 2023, you are eligible for the full Section 179 deduction amount. The deduction limit is then reduced for every dollar your business spends on qualifying equipment beyond the $2,890,000 cap. If equipment expenditures reach $4,050,000, the Section 179 deduction is completely phased out, meaning your business no longer qualifies for the deduction.
Qualifying Vehicles for Section 179 in 2023
On a basic level, vehicles can qualify for a Section 179 deduction if they were purchased, financed or leased and placed into service before the end of the tax year for which the deduction is being claimed. The Internal Revenue Service (IRS) defines “placed into service” as the moment the vehicle is ready and available for use. If the vehicle was purchased during the calendar year but not put into service before midnight on December 31, the vehicle is not eligible to be claimed as a Section 179 deduction.
The vehicle can either be new or used (it just has to be “new to you”), but it must be acquired via an “arms-length” transaction. Inherited or gifted vehicles do not qualify for Section 179, and neither do vehicles purchased from a direct relative. The vehicle must also be titled in your company’s name, not the company owner’s name.
The IRS breaks down the list of vehicles that qualify for a Section 179 deduction into three categories: Light, Heavy and Other. The deduction limit differs for each group and may change annually to account for inflation. Also, remember that the deduction limit for each category is also subject to be prorated based on the percentage of time the vehicle is used for business purposes if not used for business 100% of the time.
- Light Vehicles – Any vehicles with a gross vehicle weight rating (GVWR) under 6,000 lbs. These include many passenger cars, crossover SUVs and small utility trucks.
- 2023 Deduction Limit for Light Vehicles: $12,200
- Heavy Vehicles – Any vehicles with a GVWR of at least 6,000 lbs. but no more than 14,000 lbs. These include many full-size SUVs, commercial vans and pickup trucks.
- 2023 Deduction Limit for Heavy Vehicles: $28,900
- Other Vehicles – Any vehicles with a GVWR over 14,000 lbs. OR vehicles modified for work-centric, nonpersonal use. These include tractor trailers, cab and chassis, shuttle/passenger vans with at least nine passenger seats, buses, cargo vans and “singular use” business vehicles such as ambulances or work trucks.
- 2023 Deduction Limit for Other Vehicles: Not subject to extra limitations. You may deduct 100% of the cost of vehicles falling into this category.
2023 Bonus Depreciation
In addition to the Section 179 deduction, equipment or vehicles you purchase and put into service during the tax year may also qualify for bonus depreciation, which can further reduce your tax liability. Both Section 179 and bonus depreciation offer similar benefits but have key differences:
- Bonus depreciation allows you to immediately deduct a percentage of the cost of qualifying equipment or vehicles acquired during the calendar year, whereas Section 179 allows you to deduct a set dollar amount. For 2023, the bonus depreciation allowance is 80% of the value of qualifying purchases. Unless current laws change, this percentage allowance will decrease by 20% each year until 2027 (e.g., 60% in 2024, 40% in 2025, etc.).
- Unlike Section 179, which has a set deduction limit as well as an annual spending cap for qualifying business expenditures, there is not a limit or spending cap on bonus depreciation deductions. This means that larger businesses that don’t qualify for Section 179 based on their expenditures can still deduct a percentage of the value of purchased items in their first year of use.
- Bonus depreciation can also be used even if your business is not profitable or has a net loss for the year. Section 179 deductions, on the other hand, cannot exceed your taxable business income (but can be carried forward to future years).
It is possible to claim both Section 179 and bonus depreciation deductions in the same tax year, but Section 179 deductions are typically taken first followed by bonus depreciation, if applicable or necessary.
Calculating Your Section 179 Vehicle Deduction
If you have purchased, financed or leased business equipment or vehicles and placed them into service in 2023, or are considering making a purchase and putting such vehicle into service by the end of the year, it may be beneficial to take the time now to calculate how much you could potentially save on your 2023 taxes by claiming a Section 179 deduction.
As an example, let’s say your business purchases a used truck for $90,000 and puts it into service in 2023. By claiming the full cost of the truck as a Section 179 deduction, you could save $31,500 on your taxes (assuming a tax bracket of 35%) and lower the true cost of the truck to $58,500. That $31,500 could then be used by your business to invest in other needed equipment this year.
We recommend this Section 179 calculator from Section179.org, which is updated to reflect the current 2023 limits and includes bonus depreciation.
How to Claim Your Section 179 Deduction
Once you’re ready to file your 2023 taxes, your first step will be understanding your business’s taxable income to understand the upper limits of what you’re eligible to deduct using Section 179. You’ll then need to gather financial records for each purchase you wish to claim, including the date of purchase, the date you began using the property and the cost.
You’ll then need to fill out IRS Form 4562 and list all of the purchases you’re claiming for your Section 179 deduction. You’ll also want to include any Section 179 deductions you’re planning to carry forward from previous years.
Please remember to always consult an accountant or tax professional for specific advice and filing strategies for Section 179 and other possible tax deductions for your business.
Purchase a Vehicle from Rush Truck Centers and Save on Your 2023 Taxes
As the nation’s largest commercial vehicle dealer network, Rush Truck Centers has a vast inventory of both new and used trucks in stock and ready to be placed into service in 2023. Our dedicated truck sales specialists can help find a truck or commercial vehicle that meets your needs and provides beneficial tax savings for your business.
Search our inventory or contact us today to inquire about a vehicle.
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