For the current tax year (2016), the PATH Act and Section 179 deductions are still in effect; possibly not for long. For you, as a paint business owner, this means you can purchase a vehicle for your paint business and fully deduct the cost on your taxes, thereby savings thousands of dollars on the purchase of a work vehicle. There are a few guidelines you must follow in order to take the full deduction in the year of purchase.
First of all, you must choose a vehicle that qualifies for a full deduction. In general, vehicles that are not likely to be used for personal purposes are qualified for full deduction. To qualify for a full section 179 deduction the vehicle must meet one of the following descriptions:
1. Vehicles with a fully-enclosed cargo area, with no seating behind the driver’s seat, and no body section protruding more than 30 inches ahead of the windshield (AKA: a cargo van).
2. Heavy vehicles with a cargo area with at least six feet in length and not accessible from passenger compartment. For example, a pickup truck with full-sized cargo beds would qualify.
3. Vehicles that seat more than 9 passengers behind the driver’s seat. For example, a large van.
So for a paint contractor, number 1 or number 2 would likely suit your needs best. Most paint contractors go with a enclosed cargo area, or cargo van, for security reasons. You can finance or buy a used cargo van for about $15,000. With the section 179 deduction and assuming a 28% tax bracket, the actual cost of the van would be 10,800 (15,000 - (15,000 x .28)), thus saving you $4,200!
You should note, if you finance the purchase with a loan, you might actually profit from the purchase. Using the same example, say you buy the cargo van in July and monthly payments on your vehicle loan are $400. By the end of the year, you would have spent $2,400 (400 x 6) towards your vehicle loan. However, on your taxes you would save $4,200, thus making a profit of $1,800 ($4,200 - 2,400)!
Note: the vehicle can be new or used. As long as it’s new to you. Additionally, you must use the vehicle at least 50% towards your business to qualify for the section 179 deduction. Ideally, you would use the vehicle 100% for your business, so you can claim the full deduction. Any amount below 100% and above 50% reduces your deduction by the applicable percentage. Staying with the cargo van example, if you only use the cargo van 70% of the time for your paint business and 30% of the time for your personal use, only $10,500 ($15,000 x .70) would be section 179 deductible.
As a final note, ensure you check with your tax accountant before purchasing a vehicle for your paint business to maximize your profits. The section 179 is supposed to remain unchanged through 2016, but might be altered moving forward.
About the Author
Daniel Honan is a bookkeeper and tax accountant who is also a former painting business owner and military officer. With his painting and accounting experience, he is uniquely positioned to help painting contractors save time, money, and resources.