Mongeon's Auto Next Gen Auto Sales LLC

Business Tax Deductions

This article is written to primarily take advantage of the Section 179 tax deduction as I believe this deduction is going to be used in most cases. We will also overview other methods and how the deduction process works but in reality the key elements are:

1. Determine if the vehicle qualifies for Section 179 deduction
2. Determine the percent of business use to determine the amount of the deduction
3. You or your accountant fill out the proper tax forms and submit with your annual return

Big Picture

Revenue (top line) is adjusted by expenses to get net income (bottom line). This net income generally is your taxable income. Some business assets will lose their value overtime from wear and tear, giving them special tax treatment. Depreciation is used to account for this reduction in value and is reflected as an expense for your business. We account for this not only because this expense becomes a deduction to taxable income and therefore your income tax but it is also necessary to keep your balance sheet accurate. Also, keep in mind that even though a vehicle may completely depreciate from an accounting standpoint between one and five years it should remain valuable to you much longer.

Methods of Deducting

There are three main methods of depreciating a business vehicle purchase on IRS form 4562 (Depreciation and Amortization):

1. Expense the Property Under Section 179
• Allows you to deduct purchase expenses on qualified vehicles all in one year and if the full deduction is not usable it can be carried over to the next year. The deduction amount is proportional to business use percentage. The deduction can be used all in one year even if the vehicle has been financed.
2. Special depreciation
• Can be useful if the purchased vehicle does not qualify for Section 179. Allows you to deduct a larger percentage than regular depreciation for the first year the vehicle is placed into service. In later years the remaining depreciation will be figured under regular depreciation.
3. Regular depreciation over 5 years using Modified Accelerated Cost Recovery System (MACRS)
• Ideally you are better off using the above options to their fullest extent as a specific dollar amount of tax savings now is more valuable, accounting for inflation, than in years to come. Maybe if you know you will be reporting substantially more income in years to come this could make sense but it would take quite a bit of certainty to justify delaying your tax savings. MACRS allows you to use the 200% declining balance method until switching to straight line depreciation in later years.

***Important note: If you are depreciating your vehicle using one or more of the above methods (besides only straight line) you cannot use the IRS per-mile rate. See IRS Topic No 510 for more restrictions. Instead use the Actual Expense method and keep track of gas, oil, repairs, tires, insurance, registration fees and licenses to report amount (proportional to business use) under car and truck expenses on Profit or Loss from Business (IRS 1040 Schedule C) for single member LLCs.

What Vehicles Qualify for Section 179

Vehicles clearly designated as “work” and have no potential for personal use qualify for a full Section 179 deduction. Examples include:

• Classic cargo vans featuring a fully-enclosed driver’s compartment/cargo area, with no seating behind the driver’s seat
• Vehicles like shuttle vans that can seat more than nine passengers behind the driver’s seat
• “Singular use” business vehicles like dump trucks, bucket trucks, contractor trucks, etc

Trucks and SUVs exceeding 6,000 lbs. GVWR (Gross Vehicle Weight Rating) qualify for a partial deduction if the business use surpasses 50%. However, deduction limits vary, depending on the vehicle type. For vehicles weighing between 6,000 lbs. and 14,000 lbs. and with a minimum of 50% business use, the following generally qualify:

• Pickup trucks with a full-size (8’) cargo bed - No deduction limit
• Heavy SUVs – maximum deduction limit of $30,500 for 2024

How to Estimate Your Section 179 Tax Savings for Single Member LLC - Example

Roger runs a small business based in Rhode Island that specializes in mobile heavy equipment repair. He currently has two service trucks and is buying a third to expand his operation. His business structure is a single member LLC. The truck will cost $30,000 and qualifies for the section 179 deduction. This truck is specialized for his trade and will be used 100% for business allowing him to use 100% of the $30,000 deduction.

Vehicle Purchase Expense × Business Usage Percent = Deduction
$30,000 × 100% = $30,000

Roger was able to:

Workflow for deducting a Section 179 Business Vehicle Purchase for a Single Member LLC (all depreciation methods)

A vehicle purchase deduction will always start with IRS form 4562 no matter what the business structure is. In the case of a single member LLC the values generated in form 4562 will flow through to your personal 1040 tax return as seen in the diagram below. On the 2023 version of form 4562 you will record the vehicle as listed property in section 5 line 26. Don’t forget to record your car and truck expenses using the actual expense method as mentioned earlier on schedule C. In Rhode Island there is nothing that needs to be done on your state return because the deduction is accounted for in your AGI that is pulled from the federal return into the RI return.

Disclaimer

This article is written for customers that will be using their purchased vehicle for business purposes. It has not been written by an accountant and therefore should not be used as tax advice for your particular situation. It has been written by someone curious about how vehicle deductions work because laying out the process and options would prevent customers from overpaying in taxes. We suggest doing your own background research to become knowledgeable enough on the subject to correctly deduct a vehicle purchase and/or have your accountant do it for you.

Helpful sources:

• https://www.section179.org/
• IRS form 4562 and Instructions
• IRS form 1040 schedule C and Instructions
• IRS Publication 946
• IRS Tax Topic No. 510