If you use actual car expenses to figure your deduction for a car you own and use in your business, you can claim a depreciation deduction: that is, you can deduct a certain amount each year as a recovery of your cost or other basis in your car. You cannot use the standard mileage rate if you decide to take a depreciation deduction in the year you first place the car in service.
In addition, you may be able to claim the special depreciation allowance for new cars purchased and placed in service in 2003. See Special Depreciation Allowance.
You generally need to know the following things about the car you intend to depreciate.
Your basis in the car.
The date you place the car in service.
The method of depreciation and recovery period you will use.
Basis. Your basis in a car for figuring depreciation is generally its cost. This includes any amount you borrow or pay in cash, other property, or services.
Generally, you figure depreciation using your basis. However, in some situations (such as use of the straight line method) you will use your adjusted basis (your basis reduced by depreciation allowed or allowable in earlier years). For one of these situations see Exception under Methods of depreciation below.
If you change the use of a car from personal to business, your basis for depreciation is the lesser of the fair market value or your adjusted basis in the car on the date of conversion. Additional rules concerning basis are discussed under Unadjusted basis below.
Placed in service. You generally place a car in service when it is available for use in your work or business, in an income-producing activity, or in a personal activity. Depreciation begins when the car is placed in service for use in your work or business or for the production of income.
For purposes of computing depreciation, if you first start using the car only for personal use and later convert it to business use, you place the car in service on the date of conversion.
Car placed in service and disposed of in the same year. If you place a car in service and dispose of it in the same tax year, you cannot claim any depreciation deduction for that car.
Methods of depreciation. Generally, you figure depreciation on cars using the Modified Accelerated Cost Recovery System (MACRS). MACRS is discussed below.
Exception. If you used the standard mileage rate in the first year of business use and change to the actual expenses method in a later year, you cannot depreciate your car under the MACRS rules. You must use straight line depreciation over the estimated remaining useful life of the car.
To figure depreciation under the straight line method, you must reduce your basis in the car (but not below zero) by a set rate per mile for all miles for which you used the standard mileage rate. The rate per mile varies depending on the year(s) you used the standard mileage rate. For the rate(s) to use, see Depreciation adjustment when you used the standard mileage rate under Disposition of a Car.
This reduction of basis is in addition to those basis adjustments described below under Unadjusted basis. You must use your adjusted basis in your car to figure your depreciation deduction. For additional information on the straight line method of depreciation, see Publication 946.
More-than-50%-use test. Generally, you must use your car more than 50% for qualified business use during the year to use MACRS. You must meet this more-than-50%-use test each year of the recovery period (6 years under MACRS) for your car.
If your business use is 50% or less, you must use the straight line method to depreciate your car. This is explained under Car Used 50% or Less for Business.
Qualified business use. A qualified business use is any use in your trade or business. It does not include use for the production of income (investment use). However, you do combine your business and investment use to compute your depreciation deduction for the tax year.
Use of your car by another person. Do not treat any use of your car by another person as use in your trade or business unless that use meets one of the following three conditions.
It is directly connected with your business.
It is properly reported by you as income to the other person (and, if you have to, you withhold tax on the income).
It results in a payment of fair market rent. This includes any payment to you for the use of your car.
Business use changes. If you used your car more than 50% in qualified business use in the year you placed it in service, but 50% or less in a later year (including the year of disposition), you have to change to the straight line method of depreciation. See Qualified business use 50% or less in a later year under Car Used 50% or Less for Business.
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Property does not cease to be used more than 50% in qualified business use by reason of a transfer at death. |
Use for more than one purpose. If you use your car for more than one purpose during the tax year, you must allocate the use to the various purposes. You do this on the basis of mileage. Figure the percentage of qualified business use by dividing the number of miles you drive your car for business purposes during the year by the total number of miles you drive the car during the year for any purpose.
Change from personal to business use. If you change the use of a car from 100% personal use to business use during the tax year, you may not have mileage records for the time before the change to business use. In this case, you figure the percentage of business use for the year as follows.
Determine the percentage of business use for the period following the change. Do this by dividing business miles by total miles driven during that period.
Multiply the percentage in (1) by a fraction. The numerator (top number) is the number of months the car is used for business and the denominator (bottom number) is 12.
Example. You use a car only for personal purposes during the first 6 months of the year. During the last 6 months of the year, you drive the car a total of 15,000 miles of which 12,000 miles are for business. This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Your business use for the year is 40% (80% × 6/12).
Limits. The amount you can claim for section 179 and depreciation deductions may be limited. The maximum amount you can claim depends on the year in which you placed your car in service. You have to reduce the maximum amount if you did not use the car exclusively for business. See Depreciation Limits.
Unadjusted basis. You use your unadjusted basis (often referred to as your basis or your basis for depreciation) to figure your depreciation using the MACRS depreciation chart, explained below under Modified Accelerated Cost Recovery System (MACRS). Your unadjusted basis for figuring depreciation is your original basis increased or decreased by certain amounts.
To figure your unadjusted basis, begin with your car's original basis, which generally is its cost. Cost includes sales taxes, destination charges, and dealer preparation. Increase your basis by any substantial improvements you make to your car, such as adding air conditioning or a new engine. Decrease your basis by any deductible casualty loss, section 179 deduction, special depreciation allowance, diesel fuel tax credit, gas guzzler tax, clean-fuel vehicle deduction, and qualified electric vehicle credit. See Publication 535 for more information on the clean-fuel vehicle deduction and the qualified electric vehicle credit.
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If your business use later falls to 50% or less, you may have to recapture (include in your income) any excess depreciation. See Car Used 50% or Less for Business, for more information. |
If you acquired the car by gift or inheritance, see Publication 551, Basis of Assets, for information on your basis in the car.
Improvements. A major improvement to a car is treated as a new item of 5-year recovery property. It is treated as placed in service in the year the improvement is made. It does not matter how old the car is when the improvement is added. Follow the same steps for depreciating the improvement as you would for depreciating the original cost of the car. However, you must treat the improvement and the car as a whole when applying the limits on the depreciation deductions. Your car's depreciation deduction for the year (plus any section 179 deduction, special depreciation allowance, and depreciation on any improvements) cannot be more than the depreciation limit that applies for that year. See Depreciation Limits.
Effect of trade-in on basis. When you trade an old car for a new one, your original basis in the new car is generally your adjusted basis in the old car plus any additional payment you make.
Traded car used only for business. If you trade in a car that you used only in your business for another car that will be used only in your business, your original basis in the new car is your adjusted basis in the old car, plus any additional amount you pay for the new car.
Example 1. Paul trades in a car that has an adjusted basis of $3,000 for a new car. In addition, he pays cash of $17,000 for the new car. His original basis of the new car is $20,000 (his $3,000 adjusted basis in the old car plus the $17,000 cash paid). Paul's unadjusted basis would be the same unless he claims the section 179 deduction, special depreciation allowance, or has other increases or decreases to his original basis.
Example 2. In July 2000, Marcia purchased a car for $26,000 and placed it in service for 100% use in her business. She did not claim a section 179 deduction. Marcia's unadjusted basis for the car was $26,000. For 2000 through 2002, Marcia figured her depreciation deduction using the MACRS depreciation chart for those years.
In September 2003, Marcia traded that car in and paid $14,200 cash for a new car to be used 100% in her business. Marcia is allowed one-half of the MACRS depreciation amount figured for 2003 for her old car. (See Disposition of a Car.) Marcia does not claim either the special depreciation allowance or the section 179 deduction.
Marcia figures her basis in the new car as follows.
| Cost of old car | $26,000 |
| Less: Total depreciation allowed from 2000 through 2003 | - 12,408 |
| Adjusted basis of old car and basis of part of new car that must be depreciated over the remaining recovery period using the same depreciation method | $13,592 |
| Additional basis (cash paid) for new car that is treated as newly purchased MACRS property | + 14,200 |
| Total basis of new car | $27,792 |
Traded car used partly in business. If you trade in a car that you used partly in your business for a new car that you will use in your business, you must make a "trade-in" adjustment for the personal use of the old car. This adjustment has the effect of reducing your basis in your old car, but not below zero, for purposes of figuring your depreciation deduction for the new car. (This adjustment is not used, however, when you determine the gain or loss on the later disposition of the new car. See Publication 544, Sales and Other Dispositions of Assets, for information on how to report the disposition of your car.)
To figure the unadjusted basis of your new car for depreciation, first add to your adjusted basis in the old car any additional amount you pay for the new car. Then subtract from that total the excess, if any, of:
The total of the amounts that would have been allowable as depreciation during the tax years before the trade if 100% of the use of the car had been business and investment use, over
The total of the amounts actually allowable as depreciation during those years.
For information about figuring depreciation, see Modified Accelerated Cost Recovery System (MACRS), which follows Example 2 below.
Example 1. In March, Mark traded his 1999 van (placed in service in 1999) for a new 2003 model. He used the old van 75% for business and he used the new van 75% for business in 2003. Mark claimed actual expenses (including $8,494 depreciation expense) for the business use of the old van since 1999. He did not claim a section 179 deduction for the old or the new van.
Mark paid $12,800 for the 1999 van in June 1999. He paid an additional $9,800 when he acquired the 2003 van. Mark was allowed ½ of the depreciation deduction amount (which is included in the $8,494 depreciation expense total) for his old van for 2003, the year of disposition, as explained under Disposition of a Car. Mark does not claim the special depreciation allowance.
Mark figures the unadjusted basis for depreciating his new van as shown next.
| Cost of old van | $12,800 | |
| Less: Total depreciation allowed on the business cost of old van, $9,600 ($12,800 × 75%), from 1999-2003 |
- 8,494 | |
| Adjusted basis of old van before trade-in adjustment | $ 4,306 | |
| Trade-in adjustment: | ||
| Depreciation at 100% business use: | ||
| 2003-($12,800 × .1152) × ½ (Limit: $1,775) |
$ 737 | |
| 2002-12,800 × .1152 (Limit: $1,775) |
1,475 | |
| 2001-12,800 × .192 (Limit: $2,950) |
2,458 | |
| 2000-12,800 × .32 (Limit: $5,000) |
4,096 | |
| 1999-12,800 × .20 (Limit: $3,060) |
2,560 | |
| Total | $11,326 | |
| Less: Actual depreciation allowed | - 8,494 | |
| Excess of 100% over actual | $2,832 | |
| Less: Lesser of excess amount ($2,832) or adjusted basis of old van ($4,306) | - 2,832 | |
| Unadjusted basis of part of new van that must be depreciated over the remaining recovery period using the same depreciation method | $1,474 | |
| Additional basis (cash paid) for new van that is treated as newly purchased MACRS property | $9,800 | |
Example 2. Rob paid $15,000 for a new car that he placed in service in 2000. He used it partly for business in 2000 (9,600 business miles of 15,000 total miles), 2001 (12,000 business miles of 16,000 total miles), and 2002 (14,400 miles of 18,000 total miles). He used the standard mileage rate in those years to claim the business use of his car. (See Depreciation adjustment when you used the standard mileage rate under Disposition of a Car.)
On January 2, 2003, Rob traded in this car and paid an additional $6,000 for his new car. Rob figures the unadjusted basis for his new car as shown next.
| Cost of old car | $15,000 | |
| Less: Total depreciation allowed: | ||
| 2002-14,400 mi. × .15 | $2,160 | |
| 2001-12,000 mi. × .15 | 1,800 | |
| 2000-9,600 mi. × .14 | 1,344 | - 5,304 |
| Adjusted basis of old car before trade-in adjustment | $9,696 | |
| Trade-in adjustment: | ||
| Depreciation at 100% business use: | ||
| 2002-18,000 mi. × .15 | $2,700 | |
| 2001-16,000 mi. × .15 | 2,400 | |
| 2000-15,000 mi. × .14 | 2,100 | |
| Total | $7,200 | |
| Less: Actual depreciation allowed | - 5,304 | |
| Excess of 100% over actual | $1,896 | |
| Less: Lesser of excess amount | ||
| ($1,896) or adjusted basis of old car ($9,696) | - 1,896 | |
| Unadjusted basis of part of new car that must be depreciated over the remaining recovery period using the same depreciation method | $7,800 | |
| Additional basis (cash paid) for new car that is treated as newly purchased MACRS property | $6,000 | |
Modified Accelerated Cost Recovery System (MACRS). The Modified Accelerated Cost Recovery System (MACRS) is the name given to the tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income.
The maximum amount you can deduct is limited, depending on the year you placed your car in service. See Depreciation Limits.
Recovery period. Under MACRS, cars are classified as 5-year property. You actually depreciate the cost of a car, truck, or van over a period of 6 calendar years. This is because your car is generally treated as placed in service in the middle of the year and you claim depreciation for one-half of both the first year and the sixth year.
Depreciation deduction for certain Indian reservation property. Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations after 1993 and before 2005. The recovery period that applies for a business-use car is 3 years instead of 5 years. However, the depreciation limits will still apply.
For more information on the qualifications for this shorter recovery period and the percentages to use in figuring the depreciation deduction, see chapter 4 of Publication 946.
Depreciation methods. You can use one of the following three methods to depreciate your car.
The 200% declining balance method (200% DB) over a 5-year recovery period that switches to the straight line method when that method provides an equal or greater deduction.
The 150% declining balance method (150% DB) over a 5-year recovery period that switches to the straight line method when that method provides an equal or greater deduction.
The straight line method (SL) over a 5-year recovery period.
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If you use Table 3 to determine your depreciation rate for 2003, you do not need to determine in what year using the straight line method provides an equal or greater deduction. This is because the chart has the switch to the straight line method built into its rates. |
Before choosing a method, you may wish to consider the following facts.
Using the straight line method provides equal yearly deductions throughout the recovery period.
Using the declining balance methods provides greater deductions during the earlier recovery years with the deductions generally getting smaller each year.
MACRS depreciation chart. A 2003 MACRS Depreciation Chart and instructions are included in this chapter as Table 3. Using this table will make it easy for you to figure the 2003 depreciation deduction for your car. A similar chart appears in the Instructions for Form 2106.
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You may have to use the tables in Publication 946 instead of using this MACRS Depreciation Chart. |
You must use the Depreciation Tables in Publication 946 rather than the 2003 MACRS Depreciation Chart in this publication if any one of the following three conditions applies to you.
You file your return on a fiscal year basis.
You file your return for a short tax year (less than 12 months).
During the year, all of the following conditions apply.
You placed some property in service from January through September.
You placed some property in service from October through December.
Your basis in the property you placed in service from October through December (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) was more than 40% of your total bases in all property you placed in service during the year.
Depreciation in future years. If you use the percentages from the chart, you generally must continue to use them for the entire recovery period of your car. However, you cannot continue to use the chart if your basis in your car is adjusted because of a casualty. In that case, for the year of the adjustment and the remaining recovery period, figure the depreciation without the chart using your adjusted basis in the car at the end of the year of the adjustment and over the remaining recovery period. See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946.
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In future years, do not use the chart in this edition of the publication. Instead, use the chart in the publication or the form instructions for those future years. |
Disposition of car during recovery period. If you dispose of the car before the end of the recovery period, you are generally allowed a half year of depreciation in the year of disposition unless you purchased the car during the last quarter of a year. See Depreciation deduction for the year of disposition under Disposition of a Car, for information on how to figure the depreciation allowed in the year of disposition.
How to use the 2003 chart. To figure your depreciation deduction for 2003, find the percentage in the column of the chart based on the date that you first placed the car in service and the depreciation method that you are using. Multiply the unadjusted basis of your car (defined earlier) by that percentage to determine the amount of your depreciation deduction. If you prefer to figure your depreciation deduction without the help of the chart, see Publication 946.
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Your deduction cannot be more than the maximum depreciation limit for cars. See Depreciation Limits. |
Example. Phil bought a used truck in February 2002 to use exclusively in his landscape business. He paid $6,200 for the truck with no trade-in. Phil did not claim any section 179 deduction, and he chose to use the 200% DB method to get the largest depreciation deduction in the early years.
Phil used the MACRS depreciation chart in 2002 to find his percentage. The unadjusted basis of his truck equals its cost because Phil used it exclusively for business. He multiplied the unadjusted basis of his truck, $6,200, by the percentage that applied, 20%, to figure his 2002 depreciation deduction of $1,240.
In 2003, Phil used the truck for personal purposes when he repaired his father's cabin. His records show that the business use of his truck was 90% in 2003. Phil used Table 3 to find his percentage. Reading down the first column for the date placed in service and across to the 200% DB column, he locates his percentage, 32%. He multiplies the unadjusted basis of his truck, $5,580 ($6,200 cost × 90% business use), by 32% to figure his 2003 depreciation deduction of $1,786.
Information courtesy of the Internal Revenue Service.
