Did you know owner-operators can deduct the full purchase price of most equipment and/or software purchased or financed during the tax year for their business? Section 179 of the IRS tax code allows businesses to that buy (or lease) a piece of qualifying equipment, to deduct the full purchase price from your gross income. It's an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves.
 
Several years ago, Section 179 was often referred to as the "SUV Tax Loophole" or the "Hummer Deduction" because many businesses have used this tax code to write-off the purchase of qualifying vehicles at the time (like SUV's and Hummers). But, that particular benefit of Section 179 has been severely reduced in recent years, see 'Vehicles & Section 179' for current limits on business vehicles.
 
Today, Section 179 is one of the few incentives included in any of the recent Stimulus Bills that actually helps owner-operators.  Although large businesses also benefit from Section 179 or Bonus Depreciation, the original target of this legislation was much needed tax relief for small businesses - and millions of small businesses, including owner-operators, are actually taking action and getting real benefits.
 
How does Section 179 work?
When your business buys certain items of equipment, it typically gets to write them off a little at a time through depreciation. In other words, if you spend $120,000 on a truck, you get to write off (say) $25,000 a year for five years (these numbers are only meant to give you an example). Now, while it's true that this is better than no write off at all, most business owners would really prefer to write off the entire equipment purchase price for the year they buy it.
 
In fact, if a business could write off the entire amount, they might add more equipment this year instead of waiting over the next few years. That's the whole purpose behind Section 179 - to motivate the American economy (and your business) to move in a positive direction. For most small businesses (adding total equipment, software, and vehicles totaling less than $139,000 in 2012), the entire cost can be written-off on the 2012 tax return.
 
Limits of Section 179
Section 179 does come with limits - there are caps to the total amount written off ($139,000 in 2012), which is close to or right at what a new truck can cost, and limits to the total amount of the equipment purchased ($560,000 in 2012). The deduction begins to phase out dollar-for-dollar after $560,000 is spent by a given business, so this makes it a true small and medium-sized business deduction.
 
Do you qualify for Section 179?
All businesses that purchase, finance, and/or lease less than $560,000 in new or used business equipment during tax year 2012 should qualify for the Section 179 Deduction. If a business is unprofitable in 2012, and has no taxable income to use the deduction, that business can elect to use 50% Bonus Depreciation and carry-forward to a year when the business is profitable.

Most tangible goods including "off-the-shelf" software and business-use vehicles (restrictions apply) qualify for the Section 179 Deduction. For basic guidelines on what property is covered under the Section 179 tax code, please refer to this list of qualifying equipment. Also, to qualify for the Section 179 Deduction, the equipment and/or software purchased or financed must be placed into service between January 1, 2012 and December 31, 2012.

The deduction begins to phase out if more than $560,000 of equipment is purchased - in fact, the deduction decreases on a dollar for dollar scale after that, making Section 179 a deduction specifically for small and medium-sized businesses. However, as noted above, large businesses can expense all qualifying capital expenditures with 50% Bonus Depreciation for the 2012 tax year.
 
What's the difference between Section 179 and Bonus Depreciation?
The most important difference is both new and used equipment qualify for the Section 179 Deduction (as long as the used equipment is "new to you"), while Bonus Depreciation covers new equipment only. Bonus Depreciation is useful to very large businesses spending more than $560,000 on new capital equipment in 2012. Also, businesses with a net loss in 2012 qualify to deduct some of the cost of new equipment and carry-forward the loss.

When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation - unless the business has no taxable profit in 2012 because the unprofitable business is allowed to carry the loss forward to future years.
 
Section 179's "More Than 50 Percent Business-Use" Requirement
The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify for the Section 179 Deduction. Simply multiply the cost of the equipment, vehicle(s), and/or software by the percentage of business-use to arrive at the monetary amount eligible for Section 179.
 
With the upcoming election this tax deduction could likely change for 2013. Take advantage of this tax deduction that benefits owner operators while you still can.  

Comments (15)

Heather Dunn

Heather started with ATBS in April of 2012 as the Digital Marketing Manager. Heather is a graduate of Michigan State University earning her Bachelor of Arts in Communication with a specialization in Public Relations. When Heather is not working she enjoys being outdoors. She loves the beach, the mountains, and riding her cruiser bike.

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I had to make the decision to purchase another "cash" truck before the end of the year. I will write the truck purchase off this year and by another trailer early next year.

December 31, 2012 1:22:57 AM

Whenever I purchase anything for my truck or my business I always I always submit the receipt. ATBS has been taking care of my taxes since I started my business in 2004. They haven't let me down yet.

Whenever I make a large purchase (such as recently purchased tires and an APU) they have always discussed the tax ramifications with me when it's time to file my tax return.

Take advantage of every deduction you can. It's your money, not the government's! If you don't know what you can and can't deduct, ask questions. To not ask questions (of someone who knows trucking industry taxes) could cost you thousands.

November 12, 2012 16:03:52 PM

I am with Linda on this. With only a small company sometimes taking too much of a deduction the first year will leave us hurting in the next. We don't need to make a lot of purchases year after year so the one or two big purchases we make one year put us right up there in the deductions.

October 21, 2012 15:33:06 PM

I need to keep this in mind

October 18, 2012 19:10:41 PM

I could see how a person could get themselves into quite a bind if they did not use this deduction correctly. To be of benefit to you in the long run, you have to be very disciplined for this practice of accelerated depreciation. I would never use this deduction as a bet that the next year will more profitable than the current year.This is robbing Peter to pay Paul and sooner or later Peter wants paid back. I have also noticed many owner operators get into trouble with financing a truck for five or six years.The tax write off is only good on depreciation of the truck for three years.

October 07, 2012 10:32:38 AM

Linda - you are correct. If a taxpayer elects to accelerate the depreciation then it leaves less deduction in future tax years. It isn't for every taxpayer or every situation. When we use 179 at ATBS, we discuss the ramifications with the clients as the situation you outlined can easily happen. A driver may continue to have a truck payment in a year when he doesn't have any deductions for it. When we discuss taking additional depreciation with clients, we generally try to take as little as necessary while still trying maximize certain tax credits, like the Earned Income Tax Credit.
David - Section 179 is part of the United State Internal Revenue Code so it isn't part of the Canadian tax laws. However, they do have their own laws and ways of taking depreciation. Unfortunately, I am not familiar enough with Canadian tax to make any definitive statements.

October 05, 2012 14:31:59 PM

Ray - If you are looking for help with your taxes ATBS is a very knowledgeable company that can help you. They specialize in working with owner-operators. Their clients make over 30% more profit than the average owner-operator. You can call them at (888) 640-4829 or go to www.atbsshow.com

October 05, 2012 10:33:53 AM

When and why would you recommend leasing a truck and what is the best way to lease a truck?

October 04, 2012 17:26:43 PM

Kim Behne - Rather than finance - have you thought about leasing?

October 04, 2012 16:41:04 PM

Very well written article. Appreciate the information.

October 04, 2012 15:17:38 PM

This is a very good article that I discuss with many clients.

October 04, 2012 10:57:40 AM

I am so bad at taxes that it's not even funny. It's just one of those things that I can never get my brain wrapped around. What usually happens is that I get different laws jumbled up in my head and end up creating a whole new law that doesn't even exist. So, needless to say, leaving me in charge of my own taxes is the equivalent of leaving a lit match in charge of dynamite. This is great info that I had never heard of before. Maybe I can keep this one straight. Great article, Andrew, thanks!

October 04, 2012 6:08:14 AM

Any info on financing a truck?

October 04, 2012 4:26:42 AM

I am under the impression that if we were to deduct the maximum possible of the purchase price of our truck we will lose the deduction for the next year and will end up paying more in taxes while still making the truck payment.

One of the worries I have heard from O/O is having a huge tax bill at the end of the year and not being able to make the truck payments and also put money away for the taxes. Something to consider before taking the full deduction.

October 03, 2012 13:50:12 PM

Great information, but I will have to check the Canadian tax laws but I am sure they are the same.Thanks

October 03, 2012 8:43:45 AM