Buy a Truck or SUV Before Year End, Get a Tax Break

Did you know that you can buy a large truck, SUV or other vehicle for your business, and be able to write off 100% of the purchase price as a tax deduction, according to IRS rules? If you’re reading this before December 31st, there’s still time to take advantage of this rule for the 2020 tax year. 

Small businesses can deduct the full purchase price of a business vehicle if it has a weight rating of over 6,000 pounds. Weight is based on an industry figure called Gross Vehicle Weight Rating (GVWR). 

If the vehicle qualifies for a full deduction, you do not have to depreciate it (i.e., spread out the deduction) over a period of years. You get the value of the full deduction all in one year — a considerable tax savings.

This rule used to be called the Hummer Loophole, which Congress technically eliminated years ago. However, the Tax Cuts and Jobs Act of 2017 brought back a version of the Hummer Loophole starting in 2018. To take advantage of the 100% deduction, you have to apply the rules about Section 179 expensing, together with Section 168 Bonus Depreciation rules, to get to the 100% deductibility. 

Criteria to Qualify

To take advantage of the deduction for the 2020 tax year, there are three main criteria:

1. Buy before December 31, 2020:  The vehicle must be purchased and placed into service during 2020, i.e., no later than December 31, 2020. 
2. GVWR rating of over 6,000 pounds: A business vehicle such as a large pickup truck, cargo van or large SUV,  having a GVWR of over 6,000, may qualify for the 100% deduction. In North America this weight rating must be labeled on the inside of the driver door, near the latch. Various option packages can affect a model’s GVWR so make sure to check the label of the actual vehicle you are buying. See the chart below for a partial list of qualifying vehicles based on weight.
3. Business purpose:  If you plan to use the vehicle partially for personal purposes, it must be used at least 50% for business.  However, if it is for partial personal use, you can only deduct the percentage used for business. Multiply the purchase price by the percent of business use (51% to 100%). 

What About Light Trucks and Cars?

Business vehicles rated 6,000 pounds or below still get a write-off. However, the deduction for the 2020 tax year for lighter vehicles is limited to the first $18,100. 

Any portion of the purchase price over and above $18,100 must be depreciated over a period of years per IRS depreciation rules.

What’s this Tax Break Worth?

Saying that you can deduct the full amount does not mean you deduct the purchase price amount dollar for dollar from your income tax liability. Rather, you need to know your tax bracket. You multiply the amount of the purchase price by your marginal rate to find the value of the tax break. 

Example: if the purchase price of a heavy truck is $95,000, and you are in the 24% tax bracket, to get a back-of-the-envelope figure for the value of your write-off, you multiply 95,000 x .24 = 22,800. Your deduction could reduce your taxes by $22,800 for 2020.  Not bad!

On top of the Section 179 and Bonus Depreciation deductions, remember that you can also deduct mileage costs for operating the vehicle. See 2020 IRS mileage rates.

Also, see: Top Small Business Tax Deductions.

Like all tax rules, there are a number of exceptions and exclusions, so check with your tax advisor about your situation and any limitations.

List of Heavy Trucks and SUVs That Qualify

This article, "Buy a Truck or SUV Before Year End, Get a Tax Break" was first published on Small Business Trends