Running a small business as a freelancer or a sole proprietor can be incredibly challenging. Many new business owners have trouble keeping their heads above water, especially when tax season rolls around. Paying self-employment taxes can wind up taking a large chunk out of any freelancer or sole proprietor’s profits, but there are ways to reduce business expenses that can help. Writing off all or part of the purchase and upkeep of a car for business purposes is one great example.
Understanding Section 179
The part of the tax code that allows business owners to write off some or all of their vehicles’ purchase prices and the cost of upkeep is known as section 179. Section 179 deductions allow some taxpayers to deduct the cost of properties, in this case, vehicles, as expenses, but according to realtimecampaign.com, it applies only when they’re used as a service. In other words, only the business use of a vehicle will be covered, not the personal use.
Who Is Eligible?
With recent talk about “How The U.S Govt Helps You Write-off A Mercedes-Benz G-Wagon As A Tax Deductible”, it might seem like anyone can write off the purchase of a vehicle as a tax deduction. Unfortunately, that’s not the case. This part of the tax code only applies to employers and self-employed individuals.
Not all vehicles will qualify under section 179. To qualify, the vehicle must be placed in service as a business asset that’s readily available for specific use by the business during the year in which the deduction is applied. Qualifying vehicles must also meet weight requirements and, more importantly, can only be used for personal use less than 50% of the time. Vehicle owners are required to keep track of their business vs. personal use of the vehicle and to provide proof, if necessary. Apps like MileIQ make it easier to both keep track of mileage and provide an audit trail for the IRS.
Limits on Section 179 Deductions
There are two limits on what business owners can claim. The first is a general limit on the deductions of all business properties, which must add up to no more than $1,080,000. Aside from the dollar limit, there is also a business income limit.
The cost that businesses can deduct each year is limited to the taxable income from that year, which means there’s no way to use section 179 deductions to claim a loss. However, section 179 deductions can be carried over to the next year. Business owners can check this out to see how.
Deduct Only Qualifying Expenses
It’s important to note that section 179 deductions are only to be applied to expenses associated with the purchase of property for use by a business. Sole proprietors and independent contractors may be tempted to claim these write-offs even when they don’t apply, but that’s a great way for any business owner to get audited. By all means, take advantage of this valuable deduction, but stay within the limits of the tax code and be prepared to provide data to support the claim.