|
A car first used for personal purposes cannot qualify for the deduction in
a later year when its use changes to business.
Example. In 2005 you bought a new car and placed it in service for
personal purposes. This year, you began to use if 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, later.
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 2006 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, discussed later.
Limits. There are limits on:
*The amount of the section 179 deduction,
*The section 179 deduction for sport utility and certain other vehicles,
and
*The total amount of the section 179 deduction plus the depreciation
deduction (discussed later) you can claim for a qualified property.
Limit on the amount of the section 179 deduction - For 2006, the
total amount you can choose to deduct under section 179 generally cannot be
more that $108,000.
If the cost of your qualifying section 179 property placed in service in
2006 is over $430,000, you must reduce the $108,000 dollar limit (but not
below zero) by the amount of cost over $430,000. If the cost of your
section 179 property placed in service during 2006 is $538,000 or more, you
cannot take a section 179 deduction.
The total amount you can deduct under section 179 each year after you apply
the limits listed above cannot be more than the taxable income from the
active conduct of any trade or business during the year.
If you are married and file a joint return, you and your spouse are treated
as one taxpayer in determining any reduction to the dollar limit,
regardless of which of you purchased the property or placed it in service.
If you and your spouse file separate returns, you are treated as one
taxpayer for the dollar limit. You must allocate the dollar limit (after
any reduction) between you.
For more information on the above section 179 deduction limits, see
Publication 946.
Limit for sport utility and certain other vehicles - For sport
utility and certain other vehicles placed in service in 2006, the portion
of the vehicle’s cost taken into account in figuring your section 179
deduction is limited to $25,000. This rule applies to any 4-wheeled vehicle
primarily designed or used to carry passengers over public streets, roads,
or highways, that is not subject to any of the passenger automobile limits
explained under “Depreciation Limits”, later, and that is rated at no more
than 14,000 pounds gross vehicle weight. However, the $25,000 limit does
not apply to any vehicle:
*Designed to have a seating capacity of more than nine persons behind the
driver’s seat,
*Equipped with a cargo area of at least 6 feet in interior length that is
an open area or is designed for use as an open area but is enclosed by a
cap and is not readily accessible directly from the passenger compartment,
or
*That has an integral enclosure, fully enclosing the driver compartment and
load carrying device, does not have seating rearward of the driver’s seat,
and has no body section protruding more than 30 inches ahead of the leading
edge of the windshield.
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 placed in service in 2006 is $2,960. The
limit is reduced if your business use of the car is less than 100%. See
Depreciation Limits, later, 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 79 and
depreciation deduction is limited to $1,776 ($2,960 limit × 60% business
use).
Cost of car - For purposes of the section 179 deduction, the cost of
the car does not include any 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. 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 within the time prescribed by law. An election
made on an amended return must specify the item of section 179 property to
which the election applies and the part of the cost of each such item to be
taken into account. The amended return must also include any resulting
adjustments to taxable income.
CAUTION – You must keep records that show the specific
identification of each piece of each piece of qualifying section 179
property. These records must show how you acquired the property, the person
you acquired it from, and when you placed it in service.
Revoking an election - An election (or any specification made in the
election) to take a section 179 deduction for 2006 can be revoked without
IRS approval by filing an amended return. The amended return must be filed
within the time prescribed by law. The amended return must also include any
resulting adjustment to taxable income. Once made, the revocation is
irrevocable.
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.
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). |
