‘Tis the season of giving, and several area automobile dealerships, in conjunction with the U.S. government, are giving small-business owners a tax break as 2016 comes to a close.
According to Jon Gee, certified public accountant and senior tax manager for Dixon Hughes Goodman LLP, there are two tax breaks that are in play with vehicle purchases – Section 179 expensing and bonus depreciation
Section 179 expensing targets small businesses with less than $2 million in total asset acquisitions during the year.
“The intent is to entice the small-business owner to invest in its business by allowing it to potentially deduct a large portion of the vehicle’s cost upfront as a tax deduction,” Gee said. “In some instances, the company can immediately deduct a large portion, if not all, of the cost of the vehicle.”
“Heavy” SUVs, pickups and vans used for the business more than 50 percent of the time are eligible for the first-year Section 179 write-off in the year they are first put to business use.
Bonus depreciation is available for the remaining cost that was not deducted as a Section 179 expense. This is beneficial for property that might not qualify for Section 179 expense. This is 50 percent of the cost of new property.
“There are limits for this depreciation, though, for vehicles that are not heavy trucks or heavy vans,” Gee said.
“These two tax breaks are available year round, but there tends to be more emphasis at the end of the year as companies are looking for opportunities to invest in their business and receive tax savings.”
While this IRS break has been around for some time, since 2008 the maximum benefit for Section 179 expensing has increased from $125,000 to $500,000 in a single year, thanks to congressional stimulants. This has resulted in a very busy December for many auto dealerships, including the Durant Auto Group in Weatherford.
“Between the 15th of December and the 2nd of January is one of our busiest times. It wasn’t that way until they made that change,” owner Jerry Durant said. “Instead of taking off for the holidays, this has made it a time when it’s imperative car dealers be open and the sales crew working.”
Buyers can combine the tax break with additional holiday discounts.
“Prices are always better in December as manufacturers and dealers are not only working to have a strong close for the end of the year, but are also looking to sell down inventories before going into the first quarter, which are traditionally some of the slower months,” said Chad Chase, vice president of Autobahn Motor Group.
“Add this to the fact that manufacturers will have an onslaught of support ranging from factory to dealer rebates, owner loyalty incentives, low APR financing, and special leaser programs, which in some cases include tax credits.”
Chase said December unit sales are sometimes double that of an average month. He said Autobahn plans to sell more than 100 qualifying SUVs this year with sales of about $7 million.
“It’s our busiest month of the year thanks to the tax code, but also for business people looking to spend their year-end bonus on a new vehicle,” Chase said.
Section 179 has several factors that determine the vehicles’ ability to be deducted. “Heavy” vehicles such as long-bed pickups and vans can be deducted 100 percent in the year they are acquired. “Heavy” is defined as a vehicle with a gross vehicle weight rating above 6,000 pounds that is purchased (not leased).
For a “heavy” vehicle that is classified as an SUV under the tax rules, the limit is $25,000 in the year of acquisition. The remaining cost can have bonus depreciation applied to it as long as the SUV is new.
The vehicles need to be used for business purposes more than 50 percent of the time. Section 179 expense is not available for light trucks, light vans and sedans.
Finally the company needs to have positive income and not a net loss for the year. The deduction is not allowed if the company has an overall loss before the deduction.
Bonus depreciation is allowed for any company that acquires new property, whether it has positive income or a net loss. Total depreciation is limited for light trucks, light vans and sedans to $11,560 in the first year.
Durant said buying a fleet or utility vehicle during this time just makes sense.
“Most business owners will check with their accountant and determine what are the best things they can do to not pay Uncle Sam any more money,” Durant said. “And buying a new car is a great way to do that.”