The section 179 deduction and bonus depreciation provide additional deductions to income in year a vehicle is placed in service thereby reducing a company's tax liability. The deductions decrease the depreciable basis of the vehicle for future year depreciation calculations.
When to Claim the Section 179 Deduction
The section 179 deduction is only available in the tax year the vehicle is purchased and placed in service for business use, and the vehicle must be used over 50% of the time for business purposes. A vehicle used less than 50% of the time for business that is changed to more than 50% for business cannot claim a section 179 deduction due to the change in use.
If the taxpayer failed to claim the deduction in the year of purchase and vehicle was eligible for the deduction, they will need to amend the tax return for the year of purchase plus all subsequent years.
Bonus Depreciation
A taxpayer may claim both the section 179 deduction and bonus depreciation. The value of both the section 179 deduction and bonus depreciation is reduced for certain classes of vehicles due to IRS depreciation deduction limitations. Bonus depreciation must be taken in the year the vehicle is originally placed in service by the taxpayer. Caveats:
- Bonus depreciation is not subject to an annual dollar limit, nor is it limited to annual business profit.
- Bonus depreciation may be used to increase vehicle first-year depreciation by $8,000.
- Property does not need to meet the "over 50% business use:" requirement. But percentage of business use dictates the maximum value of bonus depreciation that can be claimed.
- Property must be eligible for MACRS depreciation with a recovery period of 20 years or less.
- Property must be purchased from someone who is unrelated to taxpayer.
IMPORTANT: Vehicles purchased using "floor financing", the type of financing used by most car dealerships, is NOT eligible for Bonus Deprecation.
Reminder: In a given year, taking bonus depreciation on one asset requires the company to take bonus depreciation on all assets that fall into that respective asset class.
Note: Taxpayer may claim section 179 deduction, bonus depreciation, and MACRS depreciation on the same property. However, IRS dictates that the taxpayer first claim the section 179 deduction, followed by bonus depreciation, then depreciation (if needed.)
Bonus Depreciation Phaseout
The Tax Cuts & Jobs Act of 2017 increased bonus depreciation to 100% for assets placed in service from September 17, 2017 through December 31, 2022. Starting in 2023, bonus depreciation is gradually phased out as follows:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027: 0%
Recapture Considerations
When depreciable property is disposed of, the section 179 deduction and bonus depreciation are recaptured and taxed as ordinary income since the initial deduction was used to reduce ordinary income.
Additionally, if a vehicle's business use drops below 50%, any special depreciation taken on the business return must be recaptured and reported as ordinary income.
Treatment of a section 179 property owned by a pass-through entity is not reported on the entity return, on a Form 4797, or Schedule K. Rather, the book gain or loss is an adjustment on Schedule M-1:
- S corp - The calculated gain or loss is reported to the shareholder on Schedule K-1 (Form 1120-S) in box 17 with code K designated “dispositions of property with section 179 deductions.”
- Partnership - The same information will be reported on Schedule K-1 (Form 1065) box 20 code L.
A supplemental statement supplying the following information needs to be included with the Schedule K-1:
- Description of the disposed property
- Date acquired and placed in service
- Date of sale or disposition
- Owner’s distributive share of sale price
- Distributive share cost and selling expense
- Distributive share of depreciation
- Distributive share of Section 179 expense
- If the disposition is due to a casualty or theft, report the information necessary for the shareholder to complete Form 4684.
- Installment sale information, if applicable
The recapture of excess depreciation can be avoided if the business elects to depreciate using the straight-line method over 5 years and also chooses to not claim section 179 or bonus depreciation
Maximum Deduction Limits for Vehicles
Certain vehicles are not subject to the section 280F depreciation limits:
- Autos with unloaded gross vehicle weight (GVW) of more than 6,000 lbs.
- Trucks and vans with loaded GVW more than 6,000 lbs.
- Qualified nonpersonal-use vehicles.
Even if business use exceeds 50%, the taxpayer may elect to depreciate using the 5-year rule for straight-line depreciation.
| Vehicle Category | Deduction | T A X Y E A R | ||||||
| 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | ||
| Light: up to 6000 lbs GVWR - Car / Crossover SUV |
Sec 179 | 3,160 | 10,000 | 10,100 | 10,100 | 10,200 | 11,200 | 12,200 |
| Bonus Dep | 8,000 | 8,000 | 8,000 | 8,000 | 8,000 | 8,000 | 8,000 | |
| Total | 11,160 | 18,000 | 18,100 | 18,100 | 18,200 | 19,200 | 20,200 | |
| Truck / Van: up to 6000 lbs GVWR |
Sec 179 | 3,560 | 10,000 | 10,100 | 10,100 | 10,200 | 11,200 | 11,200 |
| Bonus Dep | 8,000 | 8,000 | 8,000 | 8,000 | 8,000 | 8,000 | 8,000 | |
| Total | 11,560 | 18,000 | 18,100 | 18,100 | 18,200 | 19,200 | 20,200 | |
| SUV / Vehicle: 6001-14000 lbs GVWR |
Sec 179 | 25,000 | 25,000 | 25,500 | 25,900 | 26,200 | 27,000 | 28,900 |
| Bonus Dep | no limit | no limit | no limit | no limit | no limit | no limit | no limit | |
| SUV / Vehicle: more than 14000 lbs GVWR |
Sec 179 | no limit | no limit | no limit | no limit | no limit | no limit | no limit |
| Bonus Dep | no limit | no limit | no limit | no limit | no limit | no limit | no limit | |
These limits apply to the sum of any special depreciation allowance, MACRS depreciation, and section 179 expense claimed. Overall limit on section 179 expensing also applies.
Note: This article provides an overview of the section 179 deduction. It is not intended as tax advice.
Additional Information: