The section 179 deduction allows you to treat part or all of the business cost of a car as a current expense rather than taking depreciation deductions over a number of years.
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The limit on total section 179 and depreciation deductions may reduce or eliminate any benefit from claiming the section 179 deduction. |
You can claim the section 179 deduction only in the year you place the car in service. For this purpose, a car is placed in service when it is ready and available for a specific use, whether in a trade or business, a tax-exempt activity, a personal activity, or for the production of income. Even if you are not using the property, it is in service when it is ready and available for its specific use.
A car first used for personal purposes cannot qualify for the deduction in a later year when its use changes to business.
Example. In 2002 you bought a new car and placed it in service for personal purposes. This year, you began to use it for business. Changing its use to business use does not qualify the cost of your car for a section 179 deduction this year. However, you can claim a depreciation deduction for the business use of the car. See Depreciation Deduction.
More than 50% business use requirement. You must use the property more than 50% for business to claim any section 179 deduction. If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. The result is the cost of the property that can qualify for the section 179 deduction.
Example. Peter purchased a car in April 2003 for $19,500 and he used it 60% for business. The total cost of Peter's car that qualifies for the section 179 deduction is $11,700 ($19,500 cost × 60% business use). But see Limit on total section 179 and depreciation deductions.
Limits. There are limits on:
The total cost of qualifying property you can choose to treat as a section 179 deduction, and
The total amount of the section 179 deduction plus the depreciation deduction you can claim for a qualifying property.
Limit on cost of qualifying property. Generally, you can choose to treat up to $100,000 of the cost of qualifying property as a section 179 deduction in 2003.
Limit on total section 179 and depreciation deductions. Generally, the total amount of section 179 and depreciation deductions that you can claim for a qualified car that you acquired after December 31, 2002, and before May 6, 2003, cannot be more than $7,660. If you acquired a qualified car after May 5, 2003, the limit is $10,710. The limit is $3,060 if you elect not to claim the special depreciation allowance for the car or the car is not qualified property as explained under Special Depreciation Allowance. The limit is reduced if your business use of the car is less than 100%. See Depreciation Limits for more information.
Example. In the earlier example under More than 50% business use requirement, Peter had a car with a qualifying cost (for purposes of the section 179 deduction) of $11,700. However, Peter's total section 179 and depreciation deduction is limited. If Peter claims the special depreciation deduction, the total of the two deductions cannot be more than $4,596 ($7,660 limit x 60% business use).
If Peter had purchased the car after May 5, 2003, then the total section 179 and depreciation deduction could not be more than $6,426 ($10,710 limit × 60% business use). If Peter's car does not qualify for the special depreciation allowance or Peter elects not to claim the allowance, the total of the two deductions cannot be more than $1,836 ($3,060 x 60% business use).
Cost of car. For purposes of the section 179 deduction, the cost of the car does not include any amount figured by reference to any other property held by you at any time. For example, if you buy (for cash and a trade-in) a new car to use in your business, your cost for purposes of the section 179 deduction does not include your adjusted basis in the car you trade in for the new car. Your cost includes only the cash you paid.
Basis of car for depreciation. The amount of the section 179 deduction reduces your basis in your car. If you choose the section 179 deduction, you must subtract the amount of the deduction from the cost of your car. The resulting amount is the basis in your car that you use to figure your depreciation deduction.
When to choose. If you want to take the section 179 deduction, you must make the choice in the tax year you both purchase the car and place it in service for business or work.
How to choose. Employees use Form 2106 to make this choice and report the section 179 deduction. All others use Form 4562.
File the appropriate form with either of the following.
Your original tax return filed for the year the property was placed in service (whether or not you file it timely).
An amended return filed no later than the due date (including extensions) for your return for the year the property was placed in service.
If you timely filed your return for the year without making the election, you still can make the election by filing an amended return within six months of the due date of the return (excluding extensions). Attach the appropriate election form (2106 or 4562) to it and print "Filed pursuant to section 301.9100-2" on the amended return. File the amended return at the same address you filed the original return.
Once made, the choice can be changed only with the consent of the Internal Revenue Service (IRS).
Reduction in business use. To be eligible to claim the section 179 deduction, you must use your car more than 50% for business or work in the year you acquired it. If your business use of the car is 50% or less in a later tax year during the recovery period, you have to recapture (include in income) in that later year any excess depreciation. Any section 179 deduction claimed on the car is included in calculating the excess depreciation. For information on this calculation, see Excess depreciation under Car Used 50% or Less for Business.
Dispositions. If you dispose of a car on which you had claimed the section 179 deduction, the amount of that deduction is treated as a depreciation deduction for recapture purposes. You treat any gain on the disposition of the property as ordinary income up to the amount of the section 179 deduction and any allowable depreciation (unless you establish the amount actually allowed). For information on the disposition of a car, see Disposition of a Car.
Information courtesy of the Internal Revenue Service.
