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This is for a tax question.What method do I use for depreciation of an auto and for how many years?
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3/10/2018
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,980
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Hi. My name’s Lane …

I hold a law degree (J.D.), with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, to clients on three continents, since 1986.

I’m reading your question now.

Bear with me a moment while I type up my response.

….

Then if you have further questions we can go from there.

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There are 3 ways that you can depreciate a car that you use for business purposes.

  1. Section 179 Deduction
  2. MACRS Depreciation
  3. Special Depreciation Allowance

...

The Section 179 Deduction (called the special depreciation allowance) allows you to deduct up to $500,000 of assets on your tax return in the year of purchase, including cars and other equipment purchases.

But there are special limits for cars and trucks under 6000 Gross Vehicle Rate Weighting (GVRW): For passenger vehicles, trucks, and vans (not meeting the definitions of likely ONLY to be used for business), that are used more than 50% in a qualified business use, the total deduction for depreciation including both the Section 179 expense deduction is limited to $11,060 for cars and $11,160 for trucks and vans.

...

What 179 is really doing is allowing you to accelerate the normal 5 year class life depreciation (11160 of it) all into the first year placed into business.

...

For SUV's and crossovers that are OVER 6000 lbs GVWR, the limit is 25,000

...

After you've accelerated up to the limit for the first year, you can carry the unused portion over and then once that limited amount is used, you depreciate the car under regular MACRS until you used up (recovered) the full cost basis

...

MACRS (Modified Accelerated Cost Recovery System) is the most common method of depreciation used to calculate depreciation for vehicles. After you have calculated your depreciation using the Section 179 and Special Depreciation allowance methods (or if you don’t qualify for those), you can use MACRS to calculate any remaining depreciation you might be eligible to take for your car.

...

Car Depreciation: How to Calculate Your Deduction

By Crystalynn Shelton on February 11, 2017 | Accounting, Bookkeeping, Business Taxes, How To | Comments (2)

When it comes to deducting expenses for a car driven for business purposes, there are two options to choose from. The first option is the standard mileage rate deduction. The standard mileage rate deduction allows a tax deduction based on the total number of miles driven times a set mileage rate (53.5 cents for 2017). If you use the standard mileage rate then you cannot deduct depreciation for your car. To learn more, check out our standard mileage rate vs. actual car expenses guide.

The second option is the actual expense deduction. With this method, you can deduct actual costs paid during the year for things like gas, repairs, tolls, and depreciation.

If you want to avoid the complications that come with car depreciation, we recommend you track it with QuickBooks online. That way, come tax time, you’ll be prepared and have those numbers recorded with the rest of your accounting information. Click here to try it free for a month.

Visit QuickBooks Online

In this guide, we will deep dive into how to deduct depreciation for your car by discussing the following:

What is Car Depreciation?

When you purchase a car for your business, you generally are not allowed to deduct the entire cost on your tax return in the same year that you purchased it. Depreciation allows you to deduct a portion of your car each year until you have fully recovered the amount paid.

One exception to this rule is the Section 179 deduction. If you meet certain requirements, Section 179 will allow you to depreciate up to $500,000 worth of assets in the year that you purchased them. We will discuss the requirements of Section 179 in more detail in the 3 Depreciation Methods section of this article.

For more info on what depreciation is and how it works, check out our general depreciation guide. You can also track and record depreciation with QuickBooks Online. Click here to sign up for a free 30-day trial. If you are not familiar with how to use QuickBooks, Fit Small Business offers a free course.

What are the Requirements to Deduct Depreciation for My Car?

To qualify to deduct depreciation for your car, you must meet the following requirements:

  • You own the car that you want to claim a deduction for.
  • You use the car for business.
  • You use the actual car expense method and not the standard mileage rate method to deduct car expenses.

What are the 3 Car Depreciation Methods?

There are 3 ways that you can depreciate a car that you use for business purposes.

  1. Section 179 Deduction
  2. MACRS Depreciation
  3. Special Depreciation Allowance

Let’s discuss each of these depreciation methods in more detail.

1. Section 179 Deduction

The Section 179 Deduction allows you to deduct up to $500,000 of assets on your tax return in the year of purchase, including cars and other equipment purchases. You can only claim the Section 179 deduction if you meet the following requirements:

  1. You purchased the car this year.
  2. You use the car more than 50% for business. To calculate the business use percentage, you will need to keep track of the total miles driven for business vs. personal. You can use a smartphone mileage tracker app to do this. Let’s walk through an example.

To claim the Section 179 deduction, you must file Form 4562.

How Do I Calculate My Car Depreciation Deduction Using Section 179?

Example

Let’s assume that you purchased a used car this year for $12,000. You drove a total of 16,000 miles, 9,000 of which was to attend business meetings with clients and a few out-of-town conferences. We will calculate your business use percentage as follows:

9,000/16,000 = 56%*

Based on our calculation, you have met the second test for the Section 179 deduction because you used your car more than 50% of the time for business.

To calculate your Section 179 deduction, you simply take the total purchase price of the car ($12,000) and multiply it by the percentage used for business, which is 56% in our example. Therefore, your car deduction using the Section 179 method is calculated as follows:

$12,000 X 0.56 = $6,720

Section 179 Limitations

Limited to $11,160 For Cars

You are limited to a maximum deduction of $11,160 for passenger cars under current Section 179 tax rules. The following limits apply to other vehicles:

  • $11,560 for passenger trucks and vans
  • $25,000 for SUVs and similar vehicles between 6,000 and 14,000 lbs

Non-passenger vehicles (such as a utility van, ambulance or hearse) are not subject to this limitation. Taxis and other passenger vehicles used directly in the trade or business are also notsubject to the $11,160 maximum (See more on the IRS website).

Total Assets Purchased

There is a limit of $500,000 under the current tax rules for the Section 179 deduction. This means that the maximum amount of depreciation that you can deduct under section 179 for assets you have purchased for your business during the year cannot exceed $500,000.

Deduction cannot exceed taxable income

In order for you to take the Section 179 deduction, the taxable income from your business must be more than the Section 179 tax deduction amount.

Let’s walk through an example to see how this limitation can affect our depreciation deduction.

Example

Let’s say that you purchased a car, some office furniture, and a couple of computers for your business. The grand total of these items comes to $30,000. Your bot***** *****ne net income for the business was $25,000 this year. We will assume that you have met all other section 179 requirements.

Even though the value of total assets was well below the $500K limit, your taxable income was only $25,000. Since the Section 179 deduction cannot exceed your taxable income, you could not take the entire $30,000 deduction. Your Section 179 tax deduction would be limited to $25,000.

2. MACRS Depreciation

MACRS (Modified Accelerated Cost Recovery System) is the most common method of depreciation used to calculate depreciation for vehicles. After you have calculated your depreciation using the Section 179 and Special Depreciation allowance methods (or if you don’t qualify for those), you can use MACRS to calculate any remaining depreciation you might be eligible to take for your car.

To qualify to use MACRS to calculate your depreciation, you:

  1. Did not use the standard mileage rate in the first year you claimed a tax deduction for your car.
  2. Use the car more than 50% for business. If not, you have to use the straight line method of depreciation which we will discuss in the next section.

How Do I Calculate My Car Depreciation Deduction Using MACRS?

Calculating the depreciation deduction using MACRS is a two step process. First, we need to calculate the business use percentage as we did in the Section 179 section above. In the second step we will multiply the amount from step 1 by the depreciation rate from the MACRS Depreciation chart provided by the IRS.

Here is the formula for calculating MACRS car depreciation:

Step 1 – Calculate Depreciable Basis

  • Basis of your car X Business use percentage

Step 2 – Calculate Depreciation Tax Deduction

  • Depreciable basis X 200% DB rate

In order to calculate your depreciation tax deduction using MACRS, you need the following info:

  • Your basis in the car – The basis of the car is the amount that you paid for the car, including sales tax.
  • Date you placed the car in service – This is the date that you began using the car in your business.
  • Recovery period – The recovery period is the length of time you can depreciate an asset. Cars are generally depreciated over 5 years.
  • Method of depreciation – You can use one of 3 methods to depreciate your car: 200% declining balance method (200%DB), 150% declining balance method (150%DB), and the straight line method.

...

Both the 200% DB and the 150% DB methods are accelerated depreciation methods that will allow you to take a higher deduction in the early years and smaller deductions in later years which works well for assets like cars that lose their value within the first couple of years. The straight line method of depreciation allows you to take the same deduction amount annually. In general, you would not use the straight line method of depreciation over the 200% DB or the 150% DB methods because it will result in a lower tax deduction. However, you may have to use straight line if your depreciation deduction exceeds the depreciation deduction limits.

...

For passenger automobiles (other than trucks or vans) placed in service during calendar year 2017, the depreciation limit under Sec. 280F(d)(7) is $11,160 for the first tax year,.

...

I'll attach two tables that show the depreciation deduction limits (published yearly by IRS)

Ask Your Own Tax Question

Here are the Maximums

Ask Your Own Tax Question

did you see my answer?

...

I'd appreciate a positive rating (using the stars on your screen, and then clicking “submit")

That’s the only way JustAnswer.com will credit me for the work.

But again, let me know if you need more here,

Lane

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Customer reply replied 1 month ago
I guess I'm a little confused. I'm not interested in the 179. I just want to know what method and for how many years? I think the years is 5 but I want to be very clear about the method.
Customer reply replied 1 month ago
Lastly, can you do an auto depreciation and mileage for the same year? Or is it one or the other?

If you're not going to use §179 or bonus, then it's MACRS (regular depreciation)

...

Under MACRS, you can use straight line if you like, and yes, class life for an auto is Five years.

...

And, yes that's right, you can only use actual cost (one of those costs being depreciation) or mileage, not both.

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,980
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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