Have you been inundated with car dealership ads in the past couple of weeks all promising you a big tax break along with your new vehicle purchase? I have! My favorite was the one from Land Rover, who also included a packet of tea from those fine folks who provided the tea for the Boston Tea Party. So I thought I would take a couple of minutes and just go over how the vehicle purchase deduction works.
The deduction falls under the Section 179 (of the IRS Code) depreciation guidelines, which applies to “qualified personal property” that is bought and placed into active service in the year you take the deduction. In other words, you can take this deduction for any property or equipment you buy this year on your 2007 tax return). Qualified personal property means, roughly, any type of assets that aren’t fixed in place and are used in the active conduct of a trade or business, including vehicles.
It works by allowing you to essentially trade a multi-year depreciation deduction in exchange for an immediate write-off, as long as whatever you’re buying fits under the depreciation cap. That cap is currently $112,000, but starting next year cost of living adjustments will take it up to $125,000 or more.
So how does it apply to cars? In one of two ways:
Option 1: The $25,000 “SUV” deduction. If you buy a vehicle that weighs between 6,000-14,000 lbs, you can write off up to $25,000 of the purchase price under Section 179. The “SUV” label is kind of self-explanatory — what other passenger vehicles out there weigh 6,000 lbs?
Option 2: The “Business Vehicle” deduction. Originally Section 179 was supposed to help people write off the cost of delivery and other hard-working vehicles. In fact, if your vehicle weighs more than 14,000 lbs you can apply the entire $112,000 deduction to your purchase. If your vehicle weighs more than 6,000 lbs but less than 14,000 lbs, you can also take the full deduction amount if it meets one of the following conditions:
- Your vehicle is designed with a seating capacity of 10 people or more, not including the driver
- Your vehicle has no seating other than the driver, a fully enclosed storage area and a short front end (i.e., a UPS van)
- Your vehicle is a pick-up truck with a bed at least six feet long (Yes, pick-up lovers, this means what it says – buy a “long bed” and take the entire cost as a Section 179 deduction, as long as your vehicle weighs 6,000 lbs or more)
Now here’s a fun fact – if you look for a good deal between now and the end of the year you don’t have to pay the full purchase price to get the deduction. You just have to make the sale. And remember, if you’re buying the vehicle through a C Corporation, you’ve got until your business’s year-end, which may or may not be December 31st.
If you’d like to learn more about the Section 179 deduction and depreciation in general, check out the 2-part Special Report series on Depreciation, Top 10 Strategies to Make the Most of Depreciation and Depreciation Loopholes for Smart Real Estate Investors