How to Maximize the Section 179 Tax Deduction For Your Trucking Business
We all want to reduce our taxes as much as possible before April 15 arrives. Many truckers and trucking companies are unaware of the Section 179 federal tax deduction. It allows you to write off the entire cost of a capital asset when you buy it. That includes heavy equipment, office furniture and even semi truck & trailer sales.
What Qualifies for the Section 179 Deduction?
You must have an eligible asset in order to qualify. Eligible assets are tangible items like physical property, furniture, office equipment and computer software.
If your asset is intangible, you can't claim a deduction. Copyrights and patents are two examples of intangible assets that do not qualify for the Section 179 deduction.
Buildings and land do not qualify. However, building-related equipment like HVAC systems, fire suppression systems and security alarm systems are all eligible.
Under Section 179, you must start using the asset in your business to qualify for the deduction. If you purchase new office furniture in December of 2022 but don't start using it until 2023, it won't be eligible for the deduction until 2023.
Items to be deducted must have been recently purchased. Leased items do not count. The item must be used in your business at least 50% of the time. Personal items that are sometimes used for business are ineligible
Qualifying items cannot be acquired from family members or from businesses, charitable organizations or trusts you have a relationship with.
Why the Section 179 Tax Deduction Is So Important
If you are a trucker with a small or mid-size business, the Section 179 tax deduction can save you a meaningful amount of money. You can deduct some or all of the total cost of heavy equipment that you purchase or finance and put into use prior to December 31, 2022.
Section 179 can help you plan for future capital expenditures as well. The deduction makes it easy and profitable for small and medium-size trucking companies to acquire and install capital equipment.
The Tax Cuts and Jobs Act (TCJA) of 2017 made significant changes in Section 179 as well as in bonus depreciation. Those changes will apply throughout 2022. When used together, a business owner can deduct up to 100% of the full purchase price of any capital expenditure.
Prior to 2017, Section 179 allowed a maximum deduction of $500,000 with a phase-out starting at $2 million. The Tax Cuts and Jobs Act increased that deduction limit to $1 million with a phase-out threshold of $2.5 million. Small and medium-size companies that spend under $3.5 million annually for business equipment will benefit most.
What About Bonus Depreciation
Bonus depreciation up to 100% is available for all qualified purchases made between September 27, 2017 and January 1, 2023. Bonus depreciation then begins to drop in 2023.
Business taxpayers can deduct bonus depreciation for the cost of qualifying equipment that exceeds the usual depreciation allowances. The objective of bonus depreciation is to increase capital purchases by businesses of all sizes.
Prior to the TCJA, bonus depreciation applied only to new equipment. Now, the IRS allows for depreciation on used equipment as well. The only requirement is that the equipment must be "first use" at the point of purchase.
A common concern among trucking companies is whether it's better to claim bonus depreciation or to take the Section 179 deduction.
Section 179 offers greater flexibility than bonus depreciation. However, it also limits the amount you can claim. Bonus depreciation has no cap, so you can claim as much as you like. However, bonus depreciation can also mean "wasting" depreciation that you might otherwise use in the future.
Can the Deductions Be Used Together?
Although both deductions help truck sales companies to reduce their purchasing costs, the ultimate savings can be realized by using Section 179 first and bonus depreciation after that.
Bonus depreciation now covers both new and used equipment, so the benefits of Section 179 alone would only apply under certain conditions.
With the bonus depreciation limit of 100 percent through 2022, businesses can benefit financially when they make last-minute purchases. Prior to the passage of the TCJA, the bonus depreciation limit fluctuated every year.
The new rules have expanded to include not only physical equipment but also software. Companies can now benefit from Section 179 whether they buy heavy equipment or not.
Section 179 allows a business to write off the entire cost of an asset as an expense instead of an asset. Business owners get tax savings up front, reduce their income for the tax year and lower the cost of purchases.
To qualify, all you have to do is buy a commercial vehicle or other heavy equipment during the current tax year and put it to work before the end of the year.
2022 Section 179 Deduction Limits
The 2021 Section 179 deduction limit was $1,050,000 for qualifying new or used commercial vehicles and equipment. The 2022 limit on vehicle and equipment purchases increased to $2.5 million. With the higher limit, you can claim up to 100% of your heavy equipment expenditures.
Claiming the Deduction
To claim the Section 179 deduction, you'll need Part I of Form 4562. You'll be instructed to include a description of the property. You'll also need to include on line six the cost of the equipment and the amount of Section 179 you will be claiming for that asset.