If you use your car 50% or less for qualified business use (defined earlier under Depreciation Deduction) either in the year the car is placed in service or in a later year, special rules apply. The rules that apply in these two situations are explained in the following paragraphs. (For this purpose, "car" was defined earlier under Actual Car Expenses and includes certain trucks and vans and electric cars.)
Qualified business use 50% or less in year placed in service. If you use your car 50% or less for qualified business use (defined under Depreciation Deduction) in the year the car is placed in service, the following three special rules apply.
You cannot take the section 179 deduction.
You cannot take the special depreciation allowance.
You must figure depreciation using the straight line method over a 5-year recovery period. You must continue to use the straight line method even if your percentage of business use increases to more than 50% in a later year.
Instead of making the computation yourself, you can use column (c) of Table 3 to find the percentage to use
Example. On May 22, 2003, Dan bought a car for $15,000. He used it 40% for his consulting business. Because he did not use the car more than 50% for business, Dan cannot take any section 179 deduction or the special depreciation allowance and he must use the straight line method over a 5-year recovery period to recover the cost of his car.
Dan deducts $600 in 2003. This is the lesser of:
$600 (($15,000 cost × 40% business use) × 10% recovery percentage (from column (c), Table 3)), or
$1,224 ($3,060 maximum limit × 40% business use).
Qualified business use 50% or less in a later year. If you use your car more than 50% in qualified business use in the tax year it is placed in service but the business use drops to 50% or less in a later year, you can no longer use an accelerated depreciation method for that car.
For the year the business use drops to 50% or less and all later years in the recovery period, you must use the straight line depreciation method over a 5-year recovery period. In addition, for the year your business use drops to 50% or less, you must recapture (include in your gross income) any excess depreciation (discussed later). You also increase the adjusted basis of your car by the same amount.
Example. In June 2000, you purchased a car for exclusive use in your business. You met the more-than-50%-use test for the first 3 years of the recovery period (2000 through 2002) but failed to meet it in the fourth year (2003). You determine your depreciation for 2003 using 20% (from column (c) of Table 3). You also will have to determine and include in your gross income any excess depreciation, discussed next.
Excess depreciation. You must include any excess depreciation in your gross income and add it to your car's adjusted basis for the first tax year in which you do not use the car more than 50% in qualified business use. Use Form 4797, Sales of Business Property, to figure and report the excess depreciation in your gross income.
Excess depreciation is:
The amount of the depreciation deductions allowable for the car (including any section 179 deduction claimed and any special depreciation allowance claimed) for tax years in which you used the car more than 50% in qualified business use, minus
The amount of the depreciation deductions that would have been allowable for those years if you had not used the car more than 50% in qualified business use for the year you placed it in service. This means the amount of depreciation figured using the straight line method.
Example. On June 25, 2000, you bought a car for $11,000 and placed it in service. You did not claim the section 179 deduction. You used the car exclusively in qualified business use for 2000, 2001, and 2002. For those years, you used the appropriate MACRS Depreciation Chart to figure depreciation deductions totaling $7,832 ($2,200 for 2000, $3,520 for 2001, and $2,112 for 2002) under the 200% DB method.
During 2003, you used the car 50% for business and 50% for personal purposes. Since you did not meet the more-than-50%-use test, you must include in gross income for 2003 your excess depreciation determined as follows.
| Total depreciation claimed: (MACRS 200% DB method) |
$7,832 | |
| Minus total depreciation allowable: (Straight line method) |
||
| 2000-10% of $11,000 | $1,100 | |
| 2001-20% of $11,000 | 2,200 | |
| 2002-20% of $11,000 | 2,200 | 5,500 |
| Excess depreciation | $2,332 |
In 2003, using Form 4797, you figure and report the $2,332 excess depreciation you must include in your gross income. Your adjusted basis in the car is also increased by $2,332. Your 2003 depreciation deduction is $1,100 ($11,000 (unadjusted basis) × 50% (business use percentage) × 20% (from column (c) of Table 3 on the line for Jan. 1- Sept. 30, 2000)).
Information courtesy of the Internal Revenue Service.
