IRS offers big tax deduction on qualifying trucks
Small businesses are looking at big opportunities in the coming year. Nearly 75 percent of small business owners surveyed by the National Small Business Association are confident in their businesses--the highest percentage recorded in the last four years. With access to capital for small companies rising steadily over the past four years, now is a great time to invest in growing the business by purchasing a new vehicle.
The icing on this cake is that spending money on capital equipment like trucks or office equipment is less than what the sticker price indicates, thanks to a little-known tax deduction increase in Section 179 of the Internal Revenue Code. In December 2015, the Congress passed legislation directing the Internal Revenue Service (IRS) to permit businesses to deduct capital expenses up to a whopping $500,000 for the year in which the expenditures were made.
Instead of the typical expensing for the depreciation in the value of a purchased business asset over time, companies can write off the entire amount now--no waiting required. While this is not necessarily news-- Section 179 was enacted in 1958--the previous annual tax deduction limit was $25,000. There's a very big difference between $25,000 and $500,000.
Here's a scenario of how the tax deduction would apply: Let's say Sally's Plumbing Repair Co. buys a new truck to cart her tools and other equipment to customers' homes and offices. Sally uses the truck for business purposes more than 50 percent of the time. It cost her $35,000 to buy the vehicle. At year-end, she can deduct the entire $35,000 from the company's taxable income. Depending on her company's tax bracket, she has just shaved off quite a bit of money from the vehicle's cost at year-end, effectively purchasing the truck for a heck of a lot less than its retail cost.1
"The Section 179 deduction is definitely one of the top tax savings strategies we use with our business clients, especially those that are still growing or must continually invest in new equipment to keep pace with competitors," says Jaime Ward, a partner in the Missoula, Montana-based accounting firm Boyle Deveny & Meyer, which serves a clientele of predominantly small businesses.
Good News for Small Businesses
As always with the IRS, there are nuances to consider. For instance, the truck that Sally bought must meet certain criteria before it can qualify for Section 179 treatment. "The IRS wants to make sure you're buying a truck that is rated to specifically carry materials and supplies back and forth for business reasons," says Ken Esch, partner in accounting firm PwC's Private Company Service practice.
This wasn't always the case, he adds. "Previously, businesses would write off (the purchase of) a large sport utility vehicle (SUV), which is why Section 179 was referred to as the 'Hummer Tax Loophole,'" Esch says. "No longer is this allowed, although there is a separate $25,000 limitation in Section 179 (b)(5) provided for SUVs that are used to carrying passengers. The IRS wants to be sure a business like a contractor isn't deducting the cost of a vehicle used for the person's own pleasure."
This important consideration understood, Section 179 has so much to offer small businesses, chief among them, that $500,000 maximum annual limit. In effect, a fast-growing company can purchase more than a dozen trucks in a single year and write off all of them, adding up to a pretty substantial sum of money saved. "You're literally getting the deduction for the entire depreciation of a fixed asset in a single year, rather than taking a little bit at a time over the term of the asset's useful life," says Ward. "There's little question that this can result in significant tax savings in the year of purchase."
Any long-term tangible personal property that is used by a company in the course of business qualifies for the tax deduction, although vehicles are one of the most common deductions. Another expensing bonanza is that Section 179 can be utilized for up to $2 million in business investments per tax year (indexed for inflation). The deduction is phased out dollar-for-dollar when investments exceed that threshold. Sally's Plumbing Repair can buy a couple of trucks this year, another one next year, and two more the year after. "A growing small business could buy a sizable number of trucks easily over several years and get what adds up to a pretty sizable deduction," Esch says.
There's no rush to take advantage of Section 179. As of last year, the $500,000 annual limit is now written in stone, due to a favorable provision in the Protecting Americans from Tax Hikes Act of 2015 that makes the tax deduction limit permanent. "If this legislation had not been enacted, the amount would have reverted back to $25,000," says Phil Cohen, associate professor of taxation at Pace University's Lubin School of Business.
Even used vehicles qualify for Section 179 treatment, as do vehicles that are financed, Ward notes. "The one thing to bear in mind is that companies cannot use Section 179 to create a net operating loss," she warns."Small businesses that are not operating at a profit should definitely consult with their tax advisers before investing in fixed assets just to take advantage of the deduction."
Good advice always, as a tax adviser will expound on the many benefits of the deduction, in addition to the potential drawbacks. "The bottom line here is that Uncle Sam is willing to subsidize a small company's capital expenses in a big way," says Cohen, who previously was vice president and general tax counsel at consumer goods manufacturer, Unilever. "This is aimed at the small guys, not big companies."
Broadcasting the Message
As would be expected, manufacturers of trucks and other vehicles used for business reasons are highlighting Section 179 in their promotional campaigns. "Obviously, if a small company is cash-strapped and needs a new truck or several trucks to grow the business or just maintain it, this is a great way to trim costs," says Kyle Zidek, assistant commercial manager for Chevrolet. "It doesn't matter what business you're in--electrical,plumbing,construction, landscaping,or even in the agricultural space--this is an incredibly helpful tax incentive."
Zidek is quick to point out that Section 179 should be only one factor in the decision to purchase a vehicle, albeit a very important one. "We help our customers find a truck or other vehicle that specifically suits their business needs--things like quality, reliability,durability, price, and overall cost of ownership," he explains. "Section 179 just makes it that much more affordable."
Chevrolet has a comprehensive line of vehicles that qualify for Section 179 tax treatment. "For nearly 100 years, Chevy has given small business owners the tools they need to help get the job done," Zidek says. "Our complete line of commercial vehicles, including Silverado 1500, Silverado HD, and Colorado can help businesses run more efficiently."
Affirming Zidek's comments is the fact that Vincentric recently named Chevrolet Silverado the best value commercial pickup truck in America.2
The large tax deduction afforded by Section 179 has come at just the right time, when small business prospects are full speed ahead.
1 Each individual's tax situation is unique; therefore, please consult your tax professional to confirm vehicle depreciation deduction and tax benefits. For more details visit IRS.gov.
2 Based on Vincentric 2016 Fleet Awards analysis in the full-size pickup segments.