Could purchasing a vehicle reduce your taxes?
Are you considering purchasing a vehicle anytime soon, or have you already purchased one this year? Did you know that a business owner could receive tax benefits for buying a vehicle? The Internal Revenue Service (IRS) has set guidelines for business owners to claim these tax benefits under Section 179 of the Internal Revenue Code. Before you start calling your local car dealership and start negotiating on a new Corvette, you need to understand that there are a few rules and limitations to this.
Section 179
Section 179 of the U.S. internal revenue code allows businesses to take an immediate expense deduction on equipment, vehicles, and software for the given tax year. By utilizing Section 179, business owners can immediately reduce their tax burden, whereas capitalizing and then depreciating the asset will amount to smaller deductions over a longer period of time. For the fiscal year 2022, business owners can deduct up to $1,080,000 on qualifying equipment, and the limit on equipment purchases has increased to $2,700,000. Generally speaking, for a vehicle to qualify for the Section 179 tax deduction, there are rules you should keep in mind. One such rule is that the vehicle must be used at least 50% of the time for business-related purposes. Another limitation is that the Section 179 deduction cannot exceed your annual net taxable income, and the vehicle must be put into service or used for business purposes in the calendar year you buy it before December 31st. Vehicles can be categorized into two categories for tax benefits.
Small Vehicles
Millions of small businesses, independent contractors, and gig workers use small vehicles daily. The vehicles usually consist of passenger cars, crossovers, and small utility trucks. For a vehicle to be categorized as a small vehicle, it must weigh under 6,000 pounds and meet the rules mentioned earlier. The Section 179 deduction limit in the first year is $10,100 but can include bonus depreciation which will total the deduction to $18,100. However, the deduction allowance will be reduced if the vehicle is not used for business purposes 100% of the time, proportionate to its usage. For example, if the vehicle is used 75% of the time, the limit is $7,575 ($10,100 x .75).
Heavy Vehicles
A business vehicle must weigh at least 6,000 pounds and no more than 14,000 pounds to qualify as a heavy vehicle. Vehicles that fall under the heavy vehicles category consist of SUVs, vans, and pickup trucks. You can find the gross vehicle weight rating (GVWR), which can be found on the vehicle manufacturer’s label or in the vehicle information package. Section 179 has a deduction cap of $25,000 for heavy vehicles, but business owners can utilize bonus depreciation along with their deduction if they qualify. It’s also important to note that you do not have to purchase a brand-new vehicle for the deduction. The tax deduction qualifies for used vehicles as long as it’s new to the business, and the deduction can also be applied to vehicles that are being financed. It’s best to consult a tax professional to see how much of the deductions you qualify for.
Bonus Depreciation
Bonus Depreciation might seem similar to Section 179, but the two have their differences. Broadly speaking, large businesses typically use bonus depreciation, which is meant to be taken after the Section 179 deductions. Section 179 rules tend to be more flexible with timing than bonus depreciation, as business owners can choose to depreciate the entire value of certain assets immediately or defer a portion for the next tax year. However, bonus depreciation is not capped in regard to dollars. Large businesses can deduct a single multi-million asset in a year. In contrast, under Section 179, businesses are limited to $1,080,000 for year 2022 based on $2,700,000 capital equipment spend. Each program offers different tax advantages to business owners, and depending on the tax year, business owners can choose which option works best for them, if not both. Remember that to claim the tax benefits of Section 179 and bonus depreciation; you will have to fill out form 4562, as Section 179 and bonus depreciation are not automatically applied. It’s best to consult with your tax advisor so you can choose the best strategy that can benefit you the most.
Read MoreShould you lower the asking price?
Whether you’re selling a car, a house, or a business, it’d only make sense that you’d want to sell for the highest price possible. However, when it comes to selling a business, asking for the highest possible price doesn’t necessarily mean more. There are many variables when it comes to determining the valuation of a business and even unexpected and unforeseeable variables when it comes to selling a business. Some of these variables are not within our control, nor is it something we can factor out when it comes to selling businesses. Some of the things a seller controls when selling their businesses are the asking price, the timing, and how they choose to sell their business.
Variables
Some of the most common variables when determining a business valuation for the purpose of selling are the profitability of the business, assets, the sector the company is in, owners’ hours, etc. Those are variables associated directly with the business, but some variables affect the valuation and the purchase price of the company that is not directly tied to the business itself. According to recent Market Pulse reports (a quarterly survey of market conditions for businesses sold in Main Street and the lower middle market by the IBBA and M&A Source), macro events have brought certain variables into the spotlight affecting business Purchase Prices.
- Labor Shortages
- Supply Chain Disruption
- Interest Rates
- Inflation
- Market
If we look at the charts below, we can see how these variables, such as inflation and interest rates, have affected purchase prices for businesses, which will factor into business valuations as markets adjust.
(Above is a data chart of CPI provided by the U.S. Bureau of Labor Statistics)
(Graph of fed interest rate from Oct 1st, 2021 – Sep 1st, 2022)
These variables can have a ripple effect as buyers, sellers, and advisors must adapt to the changing market conditions. As these variables impact a business’s profitability and the sellers’ net income, the businesses’ valuation and the purchase price will be adjusted accordingly, thus changing median multiples across the market.
We can see how much of a difference there was when comparing Q2 of 2021 and Q2 of 2022. It’s important to note that these multiples are median, and the multiple will vary depending on the industry. After reviewing these charts, we can see how these variables affect business purchase prices. As inflation started rising, it started eating into business profitability and SDE, followed by the fed trying to tame inflation, thus raising interest rates and pushing out once-qualified buyers from the market. As shown in the chart above, business owners who sold their businesses in Q2 of 2021 received a higher price than those who waited to sell for a higher price. On the other hand, business owners that had listed their businesses on the market declined an offer for lower than the asking price and waited for the total asking price to sell for lower than the offer they received previously as the buyer pool and market multiples has shrunk.
So, lower the price?
Although price can and will play a significant role in anything you sell, especially for businesses, you don’t want to leave any money on the table either. Although inflation has caused interest rates to rise and the median in market multiples to shrink, it doesn’t mean you need to lower the asking price immediately. Current events such as labor shortages, supply chain issues, and rising costs have caused buyers to search for “recession-proof” businesses. Depending on the industry and market sector the company is in, the demand from buyers is much higher and is not affected as much or at all, even though the cost of borrowing and market multiples have shifted.
As you can see in the chart above, the top-selling businesses in the market sector of $500k or below were restaurants, while business services were the top sellers in the market sectors from $500k to $2 Million. Finding the correct asking price can be tricky as many variables are involved. Having a reputable business broker and M&A Advisor like V-AID Business Investments assist when selling your business can help determine the valuation of your business and get the best results when it comes to selling your business.
About V-AID
Since 2001, V-AID Business Investment, a team of resilient business brokers and M&A advisors in Dallas, TX, has been specializing in selling small to mid-size businesses in the main street to the lower middle market. V-AID’s experienced team of experts has a proven strategy that will ensure strict confidentiality, a streamlined selling process, and the maximum value for the business. With deep expertise accumulated from hundreds of done deals, V-AID delivers superior results by providing clients with strategic planning and creative solutions tailored to each transaction. Combining V-AID’s proprietary database of buyer networks and industry-leading marketing, V-AID offers a proven selling method that has been the solution to a value-added exit for hundreds of business owners with a completion of 585 transactions totaling over 124 Million Dollars and continuing.
Sources
https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths
https://assets.ibba.org/wp-content/uploads/2022/05/IBBA_Q1_2022_Executive-Report.pdf?_ga=2.58834475.761602016.1663699207-584194243.1663163676&_gl=1*1eghuo5*_ga*NTg0MTk0MjQzLjE2NjMxNjM2NzY.*_ga_WCBM3ZRXC4*MTY2MzY5OTIwNi4zLjAuMTY2MzY5OTIwNi42MC4wLjA.
https://tradingeconomics.com/united-states/interest-rate
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