Tax Advantage in Your New Pickup Truck: Understanding Section 179 Depreciation in Lexington
*Note: This article is not intended to be used as tax advice. Consult your tax professional to determine your vehicle depreciation and tax benefits.
With the end of the tax year quickly approaching, most business owners in Lexington are now getting more clarity into final 2018 profitability numbers as well as their expected income tax liability. This is also typically the time of year when businesses consider capital expenditure needs for the upcoming year. Businesses that own or lease vehicles for business purposes should consider the tax advantages of making end of year upgrades to their fleet and commercial vehicles. This article is meant to help you, the business owner, understand the advantages or disadvantages of an end-of-the-year vehicle purchase.
Understanding the Advantage: Section 179
In the hopes of incentivizing small business investment, Congress has passed legislation that allows small businesses to immediately deduct 100% of the cost of capital expenditures from their taxes, subject to certain limitations. Typically, capital expenditures, such as the purchase of a new truck, must be capitalized and then depreciated over the useful life of the asset. For a truck, this can be anywhere from 5-11 years. Therefore the advantage to the business owner is limited and pushed out over time. Using the Section 179 deduction, 100% of the cost of the asset (truck) can be deducted in the year that it is purchased and placed into service.
Calculate Your Savings
To accurately calculate your expected savings on a vehicle purchase using the Section 179 deduction, you must know your income tax liability. In short, the higher your tax liability, the greater your tax savings using this deduction.
In the example below, let’s assume you are looking to purchase a new 2018 Ram 2500 for your construction business. The total cost of this vehicle is $45,000 and your expected 2018 Federal Tax Rate is 35%. Using the Section 179 deduction, you are eligible to deduct 100% of the cost of your truck ($45,000) from your taxable income which equates to a tax savings of $15,750. This brings the true cost of your truck down from the original $45,000 price tag to just $29,250!
To receive this tax benefit for the 2018 tax year, it is important to act quickly. One of the limitations for the Section 179 deduction is that the asset (truck) must be acquired and placed into service during the tax year that you plan to take the deduction. Therefore, you must buy the truck and put it into service in 2018 to take advantage of the deduction during the 2018 tax year! This is why it is important to understand your tax liability now rather than waiting until your accountant gets back to you in April!
Another limitation for this deduction is that it is capped at $1,000,000 for 2018. While this may seem astronomical for some small business owners, this is the total for all capital expenditures which could include real estate or other heavy (expensive) machinery. So if your business has already made some big purchases in 2018, you may no longer qualify for this deduction.
I hope this article was informative and helped you to better understand the Section 179 income tax deduction. The deduction has been very beneficial to small business owners in helping them to hold on to more of their cash while investing in their business. At Glenn’s Freedom Chrysler Dodge Jeep RAM, we have a knowledgeable sales staff and great selection of New and Used Trucks and Commercial Vehicles that can help you get the right truck for your business’s needs. We also shop various financial institutions to help you get the lowest possible interest rate on your vehicle. Stop by our dealership at 1560 E New Circle Rd, Lexington, Kentucky 40509 or give us a call today at (859) 795-3197!