Heavy Vehicles and Tax Deductions

The tax code provides distinct advantages for businesses that use heavy vehicles weighing over 6,000 pounds. These benefits can significantly reduce the tax burden for business owners who invest in such vehicles. This provision is designed to encourage businesses to invest in themselves and is particularly beneficial for small and medium-sized enterprises. Understanding these tax advantages and how to properly utilize them is essential for maximizing savings.

Section 179 Deduction

One of the primary tax benefits for heavy business vehicles is the Section 179 deduction. Under Section 179 of the IRS tax code, businesses can immediately expense the cost of qualifying equipment, including heavy vehicles, rather than depreciating it over several years. For the 2024 tax year, the maximum deduction limit is $1,220,000, with a phase-out threshold of $3.050,000.

The Section 179 deduction is limited to:

• The amount of taxable income from an active trade or business

• $30,500 for SUVs (to close the "Hummer Loophole" of years past) and other vehicles rated at more than 6,000 pounds but not more than 14,000 pounds

However, the $30,500 limit doesn't apply if your vehicle meets anyone of the following:

• Designed for more than nine passengers behind the driver’s seat

• Equipped with a cargo area of at least six feet in interior length that’s not readily accessible from the passenger compartment

• A vehicle that:

  • Has an integral enclosure fully enclosing the driver compartment and load-carrying device

  • Doesn’t have seating rearward of the driver’s seat

  • Has no body section protruding more than 30 inches ahead of the leading edge of the windshield

To qualify, the vehicle must be used more than 50% for business purposes. If a vehicle is used less than 100% for business, the deduction is prorated based on the percentage of business use. For instance, if a vehicle is used 70% for business, only 70% of the purchase price is eligible for the Section 179 deduction.

Bonus Depreciation

In addition to the Section 179 deduction, businesses can benefit from bonus depreciation. This provision allows for a 100% first-year deduction of the purchase price of new and used heavy business vehicles. Unlike Section 179, bonus depreciation can be claimed even if the total cost exceeds the Section 179 limits.

For 2023, businesses can take advantage of 80% bonus depreciation.

In 2024, the bonus depreciation rate will drop to 60%, falling by 20% per year thereafter until it is completely phased out in 2027 (assuming Congress doesn’t take action to extend it)

Bonus depreciation is particularly advantageous for businesses that purchase multiple heavy vehicles or other qualifying equipment, as there is no annual limit on the amount that can be deducted. However, the vehicle must be placed in service before the end of the tax year to qualify for the deduction.

Combining Bonus Depreciation and Section 179

Businesses can leverage both bonus depreciation and Section 179 in the same tax year to maximize their tax savings. Here’s how they can work together:

1. First, apply Section 179. IRS rules require most businesses to apply Section 179 first. Use Section 179 first to write off the full purchase price of eligible assets up to the limit.

2. Next, claim bonus depreciation: After reaching the Section 179 limit, apply bonus depreciation to the remaining cost of eligible assets.

While companies cannot create a tax loss with Section 179 initial year expensing, bonus depreciation has no such limitations. Therefore, it’s possible to reduce your company’s taxable income to zero using Section 179 and then use bonus depreciation on any depreciable assets to create a tax loss that can be carried forward to a future tax year.

This strategy allows businesses to maximize their deductions in the first year, providing significant tax relief and improving cash flow.

Depreciation Limits and Luxury Auto Limitations

Heavy vehicles are exempt from the luxury auto depreciation limits that apply to passenger vehicles. These limits significantly restrict the amount of depreciation that can be claimed on passenger vehicles, but vehicles over 6,000 pounds are not subject to these caps. This allows businesses to take full advantage of the depreciation deductions for these heavier vehicles.

Usage Requirements and Documentation

To ensure compliance and maximize deductions, proper documentation and usage tracking are crucial. Businesses must keep detailed records of the vehicle's purchase price, date of service, and business use percentage. Mileage logs and receipts for related expenses help substantiate the business use and qualify for deductions.

Consulting a Tax Professional

Given the complexity of the tax code and the significant potential savings, consulting with a tax professional is highly recommended. They can provide guidance on qualifying vehicles, ensure compliance with IRS regulations, and help structure purchases to maximize tax benefits.

Conclusion

The tax code offers substantial benefits for businesses utilizing heavy vehicles over 6,000 pounds. Through the Section 179 deduction, bonus depreciation, and exemption from luxury auto depreciation limits, businesses can achieve significant tax savings. Proper documentation and professional guidance are essential to fully leverage these advantages and ensure compliance with IRS regulations. By understanding and utilizing these tax provisions, business owners can make more informed decisions about their vehicle investments, ultimately enhancing their financial position.