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Depreciation and Writing Off the Purchase of a Business Vehicle Under Section 179

land roverThe purchase of a business vehicle is a capital expenditure rather than an expense. This means that it would normally be recorded on your financial statements as a fixed asset. Instead of deducting the whole cost of the purchase in the year of purchase, you would deduct a portion of the cost of the vehicle from your income each year over the useful life of the vehicle. The accounting term for this process is “depreciation.”

The common-sense meaning of “useful life” is the amount of time an asset will serve you. For example, if you expect to drive a car for 5 years, its useful life would be five years. If you were using straight-line depreciation, you would deduct 1/5 of the cost of the car each year for 5 years.

Congress has assigned “class lives” to various classes of assets for purposes of calculating the tax deduction for depreciation. For passenger cars, the class life is 3 years; for light general purpose trucks 4 years, and for heavy general purpose trucks 6 years.

In addition to having periods for depreciation that do not necessarily match the actual useful life, you can use accelerated depreciation for tax purposes, that is to say you deduct more of the cost in the early years and less later on. This is advantageous from a tax-saving point of view.

An even better advantage would be to write off the whole cost of the purchase in year one. This is what section 179 allows you to do, with some limitations.

You cannot use the section 179 deduction for a passenger car or light general purpose truck. Instead, these vehicles must be depreciated over their class lives.

For example, if your business pays $30,000 for a passenger car to be used by the business, the depreciation schedule would look like this:

Year 1 $10,000
Year 2 $ 13,335
Year 3 $ 4,443
Year 4 $ 2,223

Certain vehicles get better tax treatment. The section 179 deduction up to $25,000 can be taken for heavy general purpose trucks.

The definition of heavy general purpose truck used to include SUV’s in previous years, but it no longer does. The vehicles that qualify include the following:

— Heavy vehicles (gross vehicle weight rating above 6000 pounds) with a cargo area at least six feet in interior length not easily accessible from the passenger area. This definition is meant to exclude SUV’s. It also excludes some extended cab, short-bed pickups, but would apply to a standard or long-bed pickup.

— Vehicles that can seat more than eight passengers behind the driver’s seat (for example, airport shuttle vans).

— Vehicles with a fully-enclosed driver’s compartment / cargo area; no seating behind the driver’s seat; and no body section protruding more than 30 inches ahead of the leading edge of the windshield (classic cargo van)

Here’s how the write-off for a $30,000 heavy pickup truck would look:

Year 1: $25,000.00
Year 2: $ 2,223.00
Year 3: $ 740.50
Year 4: $ 370.50

Note that special-purpose vehicles will fall into different categories. For example, tractors and other special purpose farm vehicles can be fully written off up to the annual limits for section 179. Likewise dump trucks, flatbed trucks, and forklifts.

Posted in Uncategorized on 12/09/2015 08:59 pm