Small business owners – especially during the COVID-19 era – need to save money whenever they can. The IRS recognizes this reality and offers a variety of tax incentives to help businesses both grow and save money. If you bought or leased a vehicle for your small business this year, you may qualify for the Section 179 tax deduction. This part of the tax code allows owners to deduct all or part of a qualifying vehicle’s acquisition costs the year it’s placed in service. As such, we’ll use this article to outline the best Section 179 vehicles for 2021.
Specifically, we’ll cover the following topics:
- What is Section 179?
- Section 179 for Vehicles
- What Vehicles Qualify for Section 179?
- Best Luxury Vehicles for Section 179
- Best Section 179 Trucks
- Other Section 179 Vehicles
- Questions about Section 179 Vehicles?
What is Section 179?
Normally, when you buy a major piece of equipment for your business (e.g. a vehicle), you can’t expense 100% of the cost in that first year. Rather, you capitalize the purchase and expense a portion of this cost over several years in a process called depreciation.
But, with the Section 179 deduction, You can elect to recover all or part of the cost of a car that is qualifying section 179 property, up to a limit, by deducting it in the year you place the property in service. This first-year deduction can save you a ton of money at tax time. But, as this IRS statement makes clear, limits exist, and you can’t automatically deduct all costs when you purchase a vehicle for your business.
To avoid abuse, the IRS has stated: The maximum section 179 expense deduction for sport utility vehicles placed in service in tax years beginning in 2021 is $26,200. This ceiling helps avoid the “Hummer writeoff,” that is, businesses using Section 179 to expense the costs of excessively expensive SUVs.
To incentivize large purchases, the IRS also offers businesses the Special Depreciation Allowance – or Bonus Depreciation. This can be used in conjunction with Section 179, and it allows businesses to deduct up to 100% of qualifying purchases in the first year. Once again, though, limits apply to many vehicles. Of note, the first-year limit on depreciation, Special Depreciation Allowance, and Section 179 deduction for vehicles acquired after September 27, 2017, and placed in service during 2020 remains $18,100. (NOTE: This number increases to $18,200 for 2021).
In addition to the aforementioned SUV waiver to this $18,200 limit, the IRS also completely exempts the following Section 179 vehicles from a maximum deduction:
- Designed to seat more than nine passengers behind the driver’s seat;
- Equipped with a cargo area (either open or enclosed by a cap) of at least 6 feet in interior length that is not readily accessible from the passenger compartment; or
- That has an integral enclosure fully enclosing the driver compartment and load-carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield
If your vehicle falls into one of these three categories, it can qualify for the entire Section 179 deduction amount ($1,050,000 in 2021).
Section 179 for Vehicles
To qualify for the Section 179 deduction, you must use a vehicle for business purposes (as opposed to personal use) more than 50% of the time. If used for 50% or less, you will not qualify for any Section 179 deduction.
If you use a vehicle for more than 50% but less than 100% business purposes, you’ll need to calculate the allowable deduction. The IRS states that: If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. The result is the cost of the property that can qualify for the Section 179 deduction.
Typically, owners calculate business use based on mileage. For example, say you bought a car for your business and drove 10,000 miles the first year. If 6,000 of those were for business use, that translates to 60% – qualifying it as a Section 179 vehicle. And, if you purchased the car for $20,000, $12,000 (60% x $20,000) would qualify for the Section 179 deduction.
What Vehicles Qualify for Section 179?
The IRS broadly divides Section 179 vehicles into three categories: cars and luxury vehicles, SUVs, and “other” vehicles:
- Cars ($18,200 deduction limit): For depreciation purposes, a car is any four-wheeled vehicle (including a truck or van) made primarily for use on public streets, roads, and highways. Its unloaded gross vehicle weight must not be more than 6,000 pounds.
- SUVs ($26,200 deduction limit): Any four-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways […] and that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight.
- “Other” vehicles (standard Section 179 limit of $1,050,000): These vehicles include the three exceptions outlined in the above section (i.e. certain large passenger vans, pick-up trucks, and cargo vans).
GVWR vs. Curb Weight
When the IRS refers to vehicle weights, it uses the gross vehicle weight rating, or GVWR. This equals maximum safe weight of your vehicle. Conversely, curb weight equals the unloaded – or empty weight – of the vehicle.
For example, say a vehicle has a 4,000 pound curb weight. If safety regulators determine that this vehicle can safely carry an additional 2,000 pounds in fuel, passengers, accessories, and cargo, it would have a 6,000 pound GVWR. You can find this information on a vehicle’s driver-side door panel, and this number dictates many Section 179 classifications.
Best Luxury Vehicles for Section 179
Section 179 luxury cars must have a GVWR of 6,000 pounds or less, while luxury SUVs fall between 6,000 and 14,000 pounds. As stated, an $18,200 maximum first-year Section 179, Bonus Depreciation, and regular depreciation limit applies for cars, while a $26,200 limit exists for SUVs.
2021 Mercedes G-Class
This high-end, luxury SUV comes equipped with a 416 horsepower, V8 engine. It has a $154,520 MSRP and 6,945 pound GVWR, qualifying business owners for the SUV Section 179 deduction of $26,200.
2021 Tesla Model X
This luxury, crossover SUV comes equipped with a 1,020 peak horsepower, electric engine. Its MSRP starts at $79,990, and it has a 6,800 pound GVWR. Qualifying business owners can take a section 179 deduction under the SUV Section of $26,200.
2021 Range Rover P525
This high-end, luxury SUV comes equipped with a 518 horsepower, V8 engine. It has a $105,950 MSRP and 6,967 pound GVWR, and qualifying business owners can deduct $26,200 under Section 179
Best Section 179 Trucks
As outlined above, a Section 179 pick-up truck must meet the following specifications: Equipped with a cargo area (either open or enclosed by a cap) of at least 6 feet in interior length that is not readily accessible from the passenger compartment. If it meets these criteria, a truck qualifies for the entire Section 179 deduction of $1,050,000.
2021 Chevy Silverado 3500 Duramax Diesel
This heavy-duty pick-up truck comes equipped with a 445 horsepower, V8 engine capable of towing up to 36,000 pounds. Its MSRP starts at $40,700 and its extended bed qualifies business owners for a Section 179 deduction of the total purchase price.
Other Section 179 Vehicles
The “other” category of Section 179 vehicles mainly includes 1) passenger vans that can hold more than nine passengers, and 2) cargo vans. If one of these vehicles meets the above IRS criteria, it will qualify for the full Section 179 deduction, allowing business owners to deduct the entire purchase cost in the first year.
2021 Ford Transit
This large passenger van has seating capacity for 15 people and has an MSRP of $41,945. Due to its passenger-carrying capacity, the Transit qualifies for the full Section 179 deduction. That is, assuming 100% business use, business owners can deduct the entire purchase price in the first year of service.
Questions about Section 179 Vehicles?
Do you have additional questions about Section 179 vehicles? Our tax experts can help! At Shared Economy Tax, we understand how complicated these issues can be for small business owners. That’s why we want to help. Contact us to set up a tax planning strategy session today!