Section 179 Deduction

You can take the section 179 deduction for part or all of the business portion of the cost of a vehicle, instead of taking depreciation over the years. This deduction can be taken only in the first year the vehicle is placed in service. You cannot claim a section 179 deduction for a vehicle you started using for personal purposes one year and then starting using for business purposes in a later year.

50% Business Use Test

In order to qualify for the section 179 deduction, you must use the vehicle more than 50% for business. You then take your business percentage and multiply it by the cost of the vehicle to determine the amount eligible for the section 179 deduction.

Limits

There are three limits that apply on the section 179 deduction:

1. There is an overall limit on the amount you can claim as a section 179 deduction for the year. This is a fixed dollar amount that may change periodically. This amount can be found in the instructions and publications the IRS updates each year. And, the total section 179 deduction after limitations cannot be more than your taxable income from the active conduct of a trade or business – the section 179 deduction cannot generate a loss.
2. Sport utility and certain other vehicles are subject to a fixed dollar limit on the amount of the vehicle’s cost that can be taken into account in calculating the section 179 deduction.
3. The total amount of your section 179 deduction and your depreciation deduction for a qualified vehicle you place in service during the year is limited to a certain fixed dollar amount.

Effect on Basis

The section 179 deduction reduces your basis in the vehicle for purposes of calculating depreciation and for calculating an eventual gain or loss on the sale or disposal of the vehicle. Also, if you meet the 50% business use test the first year, and in a subsequent year your business use drops below 50%, you may have to recapture, or include in your income, any excess depreciation in that subsequent year.

How To Claim the Section 179 Deduction

You must claim the section 179 deduction in the year you purchase the vehicle and start using it for business or work. If you are an employee, you need to file Form 2106, Employee Business Expenses. If you are self-employed you would use Form 4562, Depreciation and Amortization, to claim the deduction.