Understanding the Section 179 Deduction and Its Impact on Business Vehicle Purchases in 2023

by | Aug 29, 2023

The Section 179 Deduction is an integral part of the IRS tax code, designed to incentivize businesses to invest in themselves by purchasing or leasing qualifying equipment or software. Many misconceptions surround this deduction, but it is neither mysterious nor complex. It simply allows businesses to deduct the full purchase price of qualifying equipment from their gross income within the tax year of purchase. 

In the past, Section 179 was often associated with the 'SUV Tax Loophole' or 'Hummer Deduction', as businesses used this tax code to offset the purchase cost of eligible vehicles. Although the benefits for SUVs have been notably diminished in recent years, the deduction continues to be highly beneficial for small businesses, offering critical tax relief.

The mechanics of Section 179 are simple. Traditionally, businesses would write off the cost of qualifying equipment gradually through depreciation. For example, if a company spent $50,000 on a machine, it could write off $10,000 a year for five years. However, Section 179 allows businesses to write off the entire purchase price of qualifying equipment for the current tax year, which is more appealing for most business owners. This deduction has significantly impacted many businesses and the overall economy, enabling them to purchase necessary equipment immediately, rather than waiting. 

For the 2023 tax year, the entire cost of qualifying equipment can be written off on the tax return, up to $1,160,000. However, there are caps to the total amount that can be written off, and limits to the total amount of the equipment purchased ($2,890,000 in 2023). The deduction begins to phase out on a dollar-for-dollar basis after $2,890,000 is spent by a given business. This makes it a true small and medium-sized business deduction.

All businesses that purchase, finance, and/or lease new or used business equipment during the tax year 2023 should qualify for the Section 179 Deduction, assuming they spend less than $4,050,000. Most tangible goods used by American businesses, including off-the-shelf software and business-use vehicles, qualify for this deduction. 

When it comes to purchasing business vehicles, the heavy SUV tax deduction can be particularly beneficial. This is attributed to the more generous depreciation rules that apply to heavy SUVs compared to smaller vehicles. Passenger automobiles are subject to caps on annual depreciation and expensing deductions, which do not apply to trucks or vans rated at more than 6,000 pounds gross vehicle weight. 

In most cases, a majority of the cost of a new heavy SUV used entirely for business purposes can be written-off in the year it is placed into service. However, an inflation-adjusted limit applies separately from the general caps. The limit is $28,900 for an SUV placed in service in tax years beginning in 2023. This is a crucial consideration if you are contemplating electing Section 179 expensing for all or part of the cost of an SUV.

In conclusion, the Section 179 tax deduction is a significant benefit to businesses, particularly small and medium-sized businesses, facilitating the purchase of essential equipment and vehicles. It is advisable for businesses to consult with a tax professional to ensure they maximize this opportunity and stay within the guidelines set by the IRS.