There are limits on the amount you can deduct for depreciation of your car, truck or van, or electric car. The section 179 deduction is treated as depreciation for purposes of the limits. The maximum amount you can deduct each year depends on the year you place the car in service. These limits are shown in the following tables.
Maximum Depreciation Deduction for Cars
| Date Placed In Service | 1st Year | 2nd Year | 3rd Year | 4th & Later Years |
| 5/06/2003 - 12/31/2003 | $10,7101 | $4,900 | $2,950 | $1,775 |
| 1/01/2003 - 5/05/2003 | 7,6602 | 4,900 | 2,950 | 1,775 |
| 2002 | 7,6602 | 4,900 | 2,950 | 1,775 |
| 2001 | 7,6603 | 4,900 | 2,950 | 1,775 |
| 2000 | 3,060 | 4,900 | 2,950 | 1,775 |
| 1999 | 3,060 | 5,000 | 2,950 | 1,775 |
| 1998 | 3,160 | 5,000 | 2,950 | 1,775 |
| 1997 | 3,160 | 5,000 | 3,050 | 1,775 |
| 1996 | 3,060 | 4,900 | 2,950 | 1,775 |
| 1995 | 3,060 | 4,900 | 2,950 | 1,775 |
1$7,660 if you acquire the car before 5/6/2003. $3,060 if the car is not qualified property or if you elect not to claim any special depreciation allowance.
2$3,060 if the car is not qualified property or if you elect not to claim the special depreciation allowance.
3$3,060 if you acquired the car before 9/11/2003, the car is not qualified property, or you elect not to claim the special depreciation allowance.
Trucks and vans. For 2003, the maximum depreciation deductions for trucks and vans and passenger vehicles such as minivans and sport utility vehicles that are built on a truck chassis are generally higher than those for cars. For trucks and vans placed in service before 2003, use the Maximum Depreciation Deduction for Cars table.
Maximum Depreciation Deduction for Trucks and Vans
| Date Placed In Service | 1st Year | 2nd Year | 3rd Year | 4th & Later Years |
| 2003 | $11,010 *† | $5,400 | $3,250 | $1,975 |
* If the special depreciation allowance does not apply or you make the election not to claim the special depreciation allowance, the first year limit is $3,360.
†If the truck or van is acquired before 5/06/03, the truck or van is qualified property, and you claim the special depreciation allowance for the truck or van, the maximum deduction is $7,960.
Exceptions for clean-fuel cars. There are two exceptions to the depreciation limits for cars. They are effective after August 5, 1997, for cars that run on clean fuel. Clean-fuel cars are discussed in chapter 12 of Publication 535. The exceptions follow.
Amounts you pay for retrofit parts and components to modify a car to run on clean fuel are not subject to the depreciation limit on cars. Only the cost of the car before modification is subject to the limit.
If you place a car in service after August 5, 1997, that was produced to run on electricity, your depreciation limit is increased. The amounts are shown in the following tables.
Maximum Depreciation Deduction for Electric Cars Placed in Service After August 5, 1997.
| Date Placed In Service | 1st Year | 2nd Year | 3rd Year | 4th & Later Years |
| 5/06/2003 - 12/31/2003 | $32,0301 | $14,600 | $8,750 | $5,225 |
| 1/01/2003 - 5/05/2003 | 22,8802 | 14,600 | 8,750 | 5,225 |
| 2002 | 22,9802 | 14,700 | 8,750 | 5,325 |
| 2001 | 23,0803 | 14,800 | 8,850 | 5,325 |
| 2000 | 9,280 | 14,800 | 8,850 | 5,325 |
| 1999 | 9,280 | 14,900 | 8,950 | 5,325 |
| 1998 | 9,380 | 15,000 | 8,950 | 5,425 |
| 1997 | 9,480 | 15,100 | 9,050 | 5,425 |
1 $22,880 if you acquired the car before 5/6/2003. $9,080 if the car is not qualified property or if you elect not to claim any special depreciation allowance.
2 $9,180 if the car is not qualified property or if you elect not to claim the special depreciation allowance.
3 $9,280 if you acquire the car before 9/11/2001, the car is not qualified property, or you elect not to claim the special depreciation allowance.
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The examples throughout this chapter illustrate gas-fueled cars. |
Car used less than full year. The depreciation limits are not reduced if you use a car for less than a full year. This means that you do not reduce the limit when you either place a car in service or dispose of a car during the year. However, the depreciation limits are reduced if you do not use the car exclusively for business and investment purposes. See Reduction for personal use, later.
Example. Marie purchased a car in June 2003 for $20,000 to use exclusively in her business. She does not claim the section 179 deduction, but she does claim the special depreciation allowance, and she chooses the 200% DB method of depreciation.
Marie figures her special depreciation allowance of $10,000 (20,000 × 50%).
Marie's MACRS depreciation (using the rate from Table 3) is $2,000 (($20,000 - $10,000) × 20%) for a total depreciation deduction of $12,000 ($2,000 + $10,000). However, the maximum amount she can deduct for depreciation is $10,710. (See Deductions in years after the recovery period, later.)
Reduction for personal use. The depreciation limits are reduced based on your percentage of personal use. If you use a car less than 100% in your business or work, you must determine the depreciation deduction limit by multiplying the limit amount by the percentage of business and investment use during the tax year.
Example. In April 2003, Karl, an outside dental supply salesman, purchased a new car for $25,400 to make sales calls in a territory that extends 200 miles around his home base. He uses his car 85% for his business. Karl does not claim the section 179 deduction but, he does claim the special depreciation allowance, and he chooses the 200% DB method to figure his depreciation deduction.
In 2003, Karl figures his special depreciation allowance of $6,477 (($25,400 × 85%) × 30%). Karl then figures his MACRS deduction by first figuring his unadjusted basis of $15,113 (($25,400 × 85%) - $6,477), and then multiplying it by the MACRS rate from Table 3 to get $3,023 ($15,113 × 20%). Karl's total depreciation for 2003 is $9,500 ($6,477 + $3,023). However, Karl's deduction is limited to $6,511. This is the depreciation limit ($7,660) multiplied by the business use percentage (85%).
Karl continues to use his car 85% for business. Depreciation in the next four years continues to be subject to deduction limits. Karl figures his depreciation limits for those years as follows.
| Year | Limit x Business Use | Depreciation |
| 2004 | $ 4,900 × 85% | $4,165 |
| 2005 | 2,950 × 85% | 2,508 |
| 2006, 2007 | 1,775 × 85% | 1,509 |
In 2008, using the rate from Table 3, Karl's MACRS deduction is $871 ($15,113 × 5.76%). Since that amount is less than the depreciation limit of $1,509 ($1,775 × 85%), Karl's depreciation deduction for 2008 is $871.
If Karl continues to use his car for business after 2008, he can continue to claim a depreciation deduction for his unrecovered basis. However, he cannot deduct more than $1,775 multiplied by his business use percentage. See Deductions in years after the recovery period, later.
Section 179 deduction. The section 179 deduction is treated as a depreciation deduction. If you place a car that is not a truck, van, or electric vehicle in service in 2003, use it only for business, and choose the section 179 deduction, the combined section 179 and depreciation deduction for that car for 2003 is limited to $10,710 ($7,660 if you purchased the car before May 6, 2003, and $3,060 if you elect not to claim the special depreciation allowance for the car or the car is not qualified property).
Example. On September 4, 2003, Jack bought a used car for $10,000 and placed it in service. He used it 80% for his business and he chooses to take a section 179 deduction for the car.
Before applying the limit, Jack figures his maximum section 179 deduction to be $8,000. This is the cost of his qualifying property (up to the maximum $100,000 amount) multiplied by his business use ($10,000 × 80%).
Jack then figures that his section 179 deduction for 2003 is limited to $2,448 (80% of $3,060). He then has an unadjusted basis of $5,552 (($10,000 × 80%) - $2,448) for determining his depreciation deduction. Since he has already reached the maximum limit for 2003, Jack will use the unadjusted basis to figure his depreciation deduction for 2004.
Deductions in years after the recovery period. If the depreciation limits apply to your car, you may have unrecovered basis in your car at the end of the recovery period. If you continue to use your car for business, you can deduct that unrecovered basis after the recovery period ends.
Unrecovered basis. This is your cost or other basis in the car reduced by any clean-fuel vehicle deduction, electric vehicle credit, and depreciation and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use.
The recovery period. For 5-year property, your recovery period is 6 calendar years. A part year's depreciation is allowed in the first calendar year, a full year's depreciation is allowed in each of the next 4 calendar years, and a part year's depreciation is allowed in the 6th calendar year.
Under MACRS, your recovery period is the same whether you use declining balance or straight line depreciation. You determine your unrecovered basis in the 7th year after you placed the car in service.
How to treat unrecovered basis. If you continue to use your car for business after the recovery period, you can claim a depreciation deduction in each succeeding tax year until you recover your full basis in the car. The maximum amount you can deduct each year is determined by the date you placed the car in service and your business-use percentage. For example, no deduction is allowed for a year you use your car 100% for personal purposes.
Example. In May 1997, Bob bought and placed in service a car that he used exclusively in his business. The car cost $28,600. Bob did not claim a section 179 deduction for the car. He continued to use the car 100% in his business throughout the recovery period (1997 through 2002). For those years, Bob used Table 3 and the Maximum Depreciation Deduction for Cars table to compute his depreciation deductions as shown in the following table.
| Year | MACRS % | MACRS Amount | Maximum Deduction | Deprec. Allowed |
| 1997 | 20.00 | $5,720 | $3,160 | $3,160 |
| 1998 | 32.00 | 9,152 | 5,000 | 5,000 |
| 1999 | 19.20 | 5,491 | 3,050 | 3,050 |
| 2000 | 11.52 | 3,295 | 1,775 | 1,775 |
| 2001 | 11.52 | 3,295 | 1,775 | 1,775 |
| 2002 | 5.76 | 1,647 | 1,775 | 1,647 |
| Total | $16,535 | $16,407 |
At the end of 2002, Bob had an unrecovered basis in the car of $12,193. This was the $28,600 original basis of his car less the $16,407 depreciation deductions allowed during the recovery period.
Bob continued to use the car 100% for business in 2003. He can claim a depreciation deduction of $1,775 (the maximum allowed for each subsequent year) for the year. If he continues to use the car 100% for business in 2004 and later years, Bob can deduct the lesser of $1,775 or his remaining unrecovered basis in each of those years until his deductions total the $10,418 unrecovered basis ($12,193 - $1,775 claimed in 2003).
If Bob's business use of the car was less than 100% during any year, his depreciation deduction would be less than the maximum amount allowable for that year. However, in determining his unrecovered basis in the car, he would still reduce his original basis by the maximum amount allowable. Bob's unrecovered basis at the beginning of 2003 would be $12,065 ($28,600 - $16,535) in this example. This is true even if his actual depreciation deduction for any year was less than the maximum amount shown.
Information courtesy of the Internal Revenue Service.
