by Nori Gale
Fleet management small businesses tax deductions you can take
Are you a small business owner just getting off the ground or a seasoned business owner looking to grow your business? Making the most of your fleet spend at tax time, including mileage and leasing, can make a huge difference in your overall expenses. Rather than taking the traditional vehicle depreciation over time, business owners can now take immediate deductions.
If your business has purchased a vehicle(s) or truck(s) this year, new tax codes allow you to get your total tax break up front instead of spreading the deduction out over the life of your vehicle or asset. Two tax codes -- Section 179 deduction and bonus depreciation -- make it possible to take advantage of the depreciation now. Section 179 is available every year, whereas bonus depreciation may change year-to-year based on any tax changes issued by the federal government.
What are the differences between Section 179 and bonus depreciation?
The Section 179 special deduction tax code (enacted by Congress in 2015) allows businesses to write off up to $1 million dollars of depreciable assets, including vehicles considered SUVs or trucks that were purchased during the year. The second option of bonus depreciation (2017 Tax Cuts and Jobs Act) allows businesses to deduct a percentage of certain assets or vehicles they purchased during the year.
There are important differences between Section 179 and the bonus depreciation and it’s important for businesses to understand the two options to make the best decision for tax advantages. While Section 179 allows your business to deduct a specific dollar amount of new business assets (like vehicles or trucks), the bonus depreciation allows businesses to deduct a specific percentage. As of the 2020 bonus depreciation rules, businesses can now deduct or depreciate 100% of the cost of a vehicle or truck.
In other words, Section 179 gives you the ability to take all of your deduction in one year, whereas the bonus depreciation allows you to deduct the full cost of the vehicle(s) in one year. The question is figuring out which one provides the biggest tax advantage for your business.
Section 179: main points and limitations
- There is a yearly deduction limit to Section 179. The maximum you can deduct each year is $1,040,000. If your business purchased more than $2,500,000 worth of assets (equipment or vehicles) during the year, the amount you can deduct will begin to decrease.
- Businesses must show a profit or positive income at the end of the year.
- Vehicles must be purchased and serve your business by December 31.
- Only heavy SUVs, pick-ups and vans over 6000 lbs. in gross vehicle weight (GVW) qualify.
- Vehicles or fleet trucks and vans must be used for more than 50% of your business activity.
- You have the flexibility to choose which purchase(s) will be included in this tax deduction.
Bonus Depreciation: main points and limitations
- There is no maximum amount, and no limit on purchases. You can deduct your entire asset or vehicle fleet regardless of how much you paid for the vehicles.
- Businesses do not have to show positive income.
- For assets purchased after September 27, 2017, including used vehicles, the deduction percentage rises to 100% and will be phased down beginning in 2023.
- Vehicle must be driven for at least 50% of business purposes.
- There are maximum deductions for different types of vehicles.
- Delivery vehicles qualify.
- Specialty-use vehicles qualify.
Your small business fleet or work vehicles with limited potential for personal use will qualify. Examples are delivery vehicles, including cargo vans and box trucks without passenger seats, and specialty vehicles like an ambulance or a hearse. Vehicles can be new or used and can be financed by the dealership or bank.
Benefits of using bonus depreciation
Unlike Section 179, the bonus depreciation is not limited by your costs. In other words, you can deduct the entire amount of your asset or vehicle purchases without limitation. On top of that, the bonus depreciation has no restriction on your annual business income, and you can carry forward any unused deduction for a future tax break.
Under this bonus option, however, you must apply the depreciation to 100% of your asset costs and all assets must fall in the same category. For example, if you depreciate one 4-year asset like a heavy-duty truck, you must depreciate all 4-year assets purchased that year. Fortunately, you do have the flexibility to use both Section 179 and bonus depreciation in the same year. To decide which combination works best for your business, consult with a tax professional.
General deductions for business use of vehicles
Overall, vehicles that are not considered business vehicles are those operated as equipment (i.e., tractors) or those operated for hire (i.e., taxis or transport vans). For new and pre-owned (used) vehicles, the maximum write-off for the first year is $10,200, plus an additional $8,000 in bonus depreciation. For SUVs with weights over 6,000 lbs., but no heavier than 14,000 lbs., the full 100% of cost can be depreciated.
Important changes to depreciation limitations on luxury automobiles and personal use property:
The 2017 Tax Cuts and Jobs Act changed depreciation limits for passenger vehicles placed in service after Dec. 31, 2017. If the taxpayer doesn’t claim bonus depreciation, the greatest allowable depreciation deduction is:
- $10,000 for the first year,
- $16,000 for the second year,
- $9,600 for the third year, and
- $5,760 for each later taxable year in the recovery period.
If a taxpayer claims 100 percent bonus depreciation, the greatest allowable depreciation deduction is:
- $18,000 for the first year,
- $16,000 for the second year,
- $9,600 for the third year, and
- $5,760 for each later taxable year in the recovery period.
The new law also removes computer or peripheral equipment from the definition of listed property. This change applies to property placed in service after Dec. 31, 2017.
Small business vehicle expenses for tax deductions
Understanding the best way to expense your vehicles or small business fleet can mean significant savings in taxes. In addition to vehicle depreciation, it is important to consider mileage deduction and buying vs. leasing when looking at overall tax savings for your small business.
Keeping good records, including business mileage and other expenses, are essential for any small business taking tax deductions. You can decide whether to use the standard mileage rate or actual costs to get the best advantage. As a general rule, the standard rate makes the most sense for economical vehicles whereas the actual cost is preferred if there are high operating expenses (repairs, tires, gas, etc.).
Mileage deductions: standard rate vs. actual costs
For 2021, the standard mileage rate is .56 per mile for employees and self-employed. It is important to keep a record of the total number of miles driven over the year, and the total miles driven just for business purposes. Keeping a written log of mileage used for business daily or downloading a mileage app on your smartphone are easy ways to track your miles. Fleet cards can make it easy to keep track of mileage, too.
Some other vehicle deductions that qualify include turnpike tolls, parking fees, registration fees, and auto loan interest. These must be documented as legitimate expenses for your small business or fleet operations. If you decide to use the actual vehicle costs expense method, you can also deduct maintenance and repairs, insurance, licenses, lease payments, depreciation, and gas.
How to figure the actual cost deduction
The actual cost deduction is based on the percentage of miles the vehicle is driven or used for the business. If you use your vehicle 60% of the time for business, for example (100,000 total miles and 60,000 for business purposes), you can deduct 60% of your total actual vehicle expenses. Again, fleet management fuel cards make it easy to keep track of business miles driven.
Deduction for depreciation or “wear and tear”
Self-employed people or employees can also take a deduction for the wear and tear on vehicles. If the vehicle was purchased in 2021 and you used the actual costs method, the maximum first year depreciation, including the bonus depreciation, is $18,200 multiplied by the percentage of total actual vehicle expenses (60% in the example above).
Most small businesses will allow employees who use their personal vehicle for work purposes to submit a reimbursement request form that itemizes their expenses, which reduces the need for unnecessarily tedious record-keeping. Refer to the IRS Business Use of Car section of their site.
Special considerations for leasing a vehicle
If you lease a vehicle and use the standard mileage rate on your taxes, the lease payment is not considered deductible. If you lease a vehicle and use the actual expense method, the vehicle cannot be depreciated but the business portion/payment of the lease payment can be deducted.
There is also an income inclusion rule to even out the tax benefits between leasing and owning. If the FMV (fair market value) of a leased vehicle is above a certain amount, the lessee may have to report additional income. The amount of your car expense that can be deducted will, of course, depend on how much your vehicle or truck is used for business. A fee or “inclusion amount” is a fixed dollar amount issued by the IRS that will reduce the amount you can deduct, in some cases. See IRS Publication 463, Travel, Gift, and Car Expenses.
The big picture: your total fleet costs
If you’re a fleet manager or small business owner with more than one vehicle or truck, your fleet management costs can make up a large portion of your operating budget. From licenses and permits to monthly payments and depreciation, the ongoing costs can have a huge impact on your overall bottom line. Other indirect costs like fuel, parts replacement, regular maintenance, parking fees and tolls, can add up quickly.
The ability to capitalize on these direct and indirect vehicle and fleet expenses can mean large savings at tax time. In addition, by looking at the “big picture” with a trusted tax consultant, you can figure out ways to increase your fleet efficiency during the year. From managing your fuel expenses with a fleet card to examining your yearly maintenance costs, you can begin to proactively plan for the upcoming year’s expenses.
Federal government tax incentives can also help you right-size your fleet to ensure the best use of every truck or vehicle you have on the road. Are they all working to your best advantage or are some under-utilized and only an added expense? Looking at the big picture of your fleet management cost every year will help you streamline your small business operations and expenses.
Closing out 2021 and making the most of your tax deductions
Whether you are a small business, self-employed and working on your own, or a fleet management company, the way you expense your work vehicle(s) or truck(s) can make a huge difference when filing your taxes. To use the Section 179 deduction and bonus depreciation to lower your tax bill, any vehicle purchases must be finalized before the end of the calendar year.
It is important to remember that while Section 179 allows your business to deduct a specific dollar amount of new business assets (like vehicles or trucks), the bonus depreciation allows businesses to deduct a specific percentage: as of the 2020, 100% of the cost of a vehicle or truck. Section 179 is available every year, whereas bonus depreciation may change year-to-year. Taking advantage of these tax savings now is a smart business move.
Making the most of your vehicle or fleet expenses, including mileage and leasing, can help your new business get off to a great start, or help a seasoned business grow and thrive. Rather than taking the traditional vehicle depreciation over time, business owners can now take an immediate deduction.
Whether you need to increase the number of vehicles in your fleet or buy a new or pre-owned commercial truck for yourself, the advantages of making these purchases before the end of the year can be very beneficial at tax filing time.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your tax, legal and accounting advisors before engaging in any transaction.
All fleet cards are not the same, and different types of fuel cards suit the needs of different kinds and sizes of businesses. View WEX’s fleet card comparison chart to see which fleet fuel card is right for you.
Editorial note: This article was originally published on December 11, 2020, and has been updated for this publication.