The ability to expense assets on an accelerated basis through Bonus Depreciation and the Section 179 deduction has made purchasing equipment an attractive alternative for businesses over the past several years.
But as 2013 came to an end, so too did the ability to use the Bonus Depreciation expensing option. Additionally, the Section 179 expensing limits decreased to levels not seen in more than a decade, and Congress doesn’t appear interested in making changes any time soon, if at all.
As a result, the Section 179 expensing deduction for 2014 is limited to an annual maximum of $25,000. More significantly, the Section 179 deduction limit is reduced dollar-for-dollar once the amount of qualifying property placed in service during the year exceeds $200,000.
Accordingly, the 179 deduction is completely eliminated once the property purchased during the year exceeds $225,000.
Running the Numbers
For example, assume that a company places three trucks — each with a GVWR exceeding 6,000 pounds and costing $25,000 apiece — into service in 2014 for a total cost of $75,000.
If this is the only qualifying property purchased during the year, then a $25,000 Section 179 deduction would be allowed on the tax return for 2014. (The same math holds true for a single vehicle such as a $60,000 delivery truck.)
If the company purchases equipment totaling $210,000 during 2014, then the maximum Section 179 deduction would only be $15,000 ($210,000 - $200,000 = $10,000 reduction; $25,000 limit – $10,000 reduction = $15,000 allowable Section 179 deduction).
Keep in mind that once the amount of qualifying equipment purchased exceeds $225,000, the Section 179 deduction is eliminated.
The Lease Option
With these expensing limits in place, leasing becomes a more attractive option for acquiring business property. The business can simply expense the monthly payments to the extent the vehicles are used for business, much like expensing office lease payments.
Understand that the Section 179 deduction cannot be used to create a tax loss for a business. Any loss not utilized in the current year may be carried over to the next year, but it may be used only when there is a profit.
Deducting lease payments does not have a similar limitation. The amount of payments may be expensed in full regardless of the profitability on the tax return — subject to the amount of business use discussed previously.
Financing your business equipment requires careful planning and the advice of your professional tax adviser. But with a potentially lower initial cash outlay and an unrestricted ability to deduct lease payments, leasing may become the more favorable choice.
Which Vehicles Qualify?
Many vehicles that by their nature are not likely to be used for personal purposes qualify for full Section 179 deduction, including the following types of vehicles:
- Heavy “non-SUV” vehicles with a cargo area at least 6 feet in interior length. This area must not be easily accessible from the passenger area (i.e., pickups with full-sized cargo beds, though some "extended cab" pickups may have beds that are too small to qualify).
- Taxis, transport vans and other vehicles used to specifically transport people or property for hire, including vehicles that can seat nine-plus passengers behind the driver's seat (i.e., hotel or airport shuttle vans).
- Vehicles specifically modified for business with permanent shelving installed and exterior painted with company’s name.
- Vehicles with a fully-enclosed driver's compartment and cargo area, no seating at all behind the driver's seat and no body section protruding more than 30 inches ahead of the leading edge of the windshield (i.e., a typical cargo van).
- Ambulance or hearse used specifically for business.
For passenger vehicles, trucks and vans that are used more than 50% in a qualified business use, the total deduction for depreciation including both the Section 179 expense deduction as well as Bonus Depreciation is limited to $11,060 for cars and $11,360 for trucks and vans.
The limits for 2014 have yet to be announced, but are expected to remain the same or vary only slightly. Be sure to check your state’s rules, as specific Section 179 limits may be applied on a state-by-state basis.
SUVs or crossover vehicles with a GVWR greater than 6,000 pounds (but not more than 14,000 pounds), qualify for expensing up to $25,000 if the vehicle is financed and placed in service prior to Dec. 31 and meet other conditions.
Rodney J. Couts is an enrolled agent with a tax practice in Carlsbad, Calif. Formerly the executive director of the National Vehicle Leasing Association, he has written extensively on the subject of leasing.