For some small businesses, a company car isn't a perk -- it's a necessity.
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The IRS makes provisions for vehicle costs to be deducted as a legitimate business expense. Yet many business owners are ignorant about the tax handling of vehicle expenses and end up either paying too much tax or sending a red flag to IRS auditors.
According to the IRS, the purchase price, sales tax and improvement costs of a car or truck are classified as a capital expense. Capital expenses also include equipment purchases and are typically deductible as a depreciation expense on the business' tax return.
However, Section 179 of the IRS code allows for special handling of certain capital expenses (including the acquisition cost of a business car or truck). Under Section 179, it's possible for some capital expenses to be completely deducted in the year of acquisition.
Although Section 179 can be a legitimate way to deduct buying a car as a business expense, limits and restrictions sometimes apply. Here's what you need to know if you plan on using Section 179 to deduct the cost of a vehicle purchase:
- Section 179 lets you deduct the full amount of a purchased, leased or financed vehicle in the year of acquisition. Instead of depreciating the purchase over several years, you can deduct the full amount from your gross income in a single tax year.
- The IRS clearly limits Section 179 vehicle deductions to the year the vehicle was placed in service – regardless of whether it was placed in service for personal or business use. If you convert a personal vehicle to a business vehicle in a subsequent tax year you can depreciate it, but you can't claim a Section 179 deduction.
- To qualify as a Section 179 vehicle, your car or truck must be used for more than 50% business purposes. If you use it for more than 50% but less than 100% business use, your Section 179 deduction will be prorated.
- Businesses that lease or purchase less than $800,000 in business equipment qualify for Section 179 deductions. But the amount of your deduction is subject to limitations that change on a yearly basis. In 2010 the Section 179 deduction is limited to a total of $250,000.
- To ensure full compliance with Section 179 rules, we recommend consulting with your tax preparer before you set your sights on a Section 179 vehicle expense deduction.