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.
In this guide, we will deep dive into how to deduct depreciation for your car by discussing the following:
- What Car Depreciation Is
- What the Requirements are to Deduct Depreciation for Your Car
- The 3 Car Depreciation Methods
- How to Calculate Car Depreciation If you Don’t Use It More than 50% for Business
- Depreciation Limits
- How to Claim your Car Depreciation Tax Deduction
- What Documents You Should Keep on File
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.
- Section 179 Deduction
- MACRS Depreciation
- 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:
- You purchased the car this year.
- 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?
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 not subject 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.
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 bottom line 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:
- Did not use the standard mileage rate in the first year you claimed a tax deduction for your car.
- 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 that we will discuss later in this article.
We will refer to the chart below from IRS Pub 463 to walk through an example so you can see how this works.
Example – 200% Double Declining Balance
Let’s assume on March 1, 2016, you purchased a car for $12,000. You drove the car a total of 12,000 miles and 9,000 were for business. Therefore, your business use was 56%. You have decided to use the 200% DB rate since that will give you the largest tax deduction. Based on this info, according to the MACRS table above (column a) our depreciation rate is 20%. Now that we have all of the info we need, let’s calculate the depreciation deduction:
Step 1 – $12,000 X 0.56 = $6,720 (Depreciable Base)
Step 2 – $6,720 X 0.20 = $1,344 (Depreciation Tax Deduction)
Example – 150% Double Declining Balance
We will use the same vehicle cost of $12,000 and the business use of 56% from our first example to calculate the depreciation deduction using the 150% DB method. According to the MACRS table above (column b) our depreciation rate is 15%. Let’s calculate the depreciation deduction:
$6,720 X .15 = $1,008 (Depreciation Tax Deduction)
Example – Straight Line
Let’s assume on March 1, 2016, you purchased a car for $12,000. You drove the car a total of 12,000 miles and 6,000 were for business. Therefore, your business use was 50%. Using the MACRS Table above (column c), your depreciation rate is 10%. We would calculate your depreciation tax deduction as follows:
Step 1 – $12,000 X 0.50 = $6,000 (Depreciable Base)
Step 2 – $6,000 X 0.10 = $600 (Depreciation Tax Deduction)
Based on our examples, the depreciation tax deduction of $1,344 using the 200% DB method was higher than the $1,008 tax deduction calculated using the 150% DB method. At first glance, you might think that you would automatically use the 200%DB rate since it will give you the highest deduction. However, you may not be able to take the entire deduction if you have reached the depreciation deduction limit by taking either the Section 179 or the Special allowance deduction. Read on to learn more about the Depreciation Deduction Limits.
One other important note to make is that you must continue to use the same depreciation method each year. For example, if you use 200% DB to depreciate your car in the first year, you must continue to use 200% DB each year to calculate your depreciation tax deduction, unless your business use decreases to 50% or below. Read on to learn how to calculate depreciation for a car used 50% or less for Business.
3. Special Depreciation Allowance
Special depreciation allowance, also known as bonus depreciation, is a deduction that you may be able to take in addition to Section 179 if you hit the limit on Section 179. Alternatively, you could use the special depreciation allowance instead of Section 179 if you don’t qualify for Section 179.
Similar to Section 179, bonus depreciation must be taken in the first year that you put the car in service and can be as much as 50% of the cost of the car. To qualify for the special depreciation allowance deduction, you must meet the following requirements:
- You bought the car new on or after January 1, 2008.
- You started driving the car for business before January 1, 2020.
- You use the car more than 50% for business. As we discussed in the previous section, to calculate the percentage, you will need to keep track of the total miles driven for business vs. personal.
Similar to the Section 179 deduction, you can claim the special depreciation allowance by filing Form 4562.
What if I Use my Car 50% or Less for Business?
If you use your car 50% or less, you can still take a deduction for depreciation. However, the following rules apply:
- You can’t take the Section 179 deduction.
- You can’t take the Special Depreciation Allowance.
- You must calculate depreciation using the Straight Line method over 5 years
Refer to our Straight Line example above for the steps on how to calculate depreciation if you use your car 50% or less for business.
Depreciation Deduction Limits
In this article, we have kept our examples of how to calculate car depreciation simple. However, there are limits on the amount that you can deduct for depreciation of your car, truck, or van. These limits apply to all 3 depreciation methods we have discussed in this article: section 179, special depreciation allowance, and MACRS.
The maximum amount that you can deduct each year depends on the year that you placed the car in service. Below, you will find two tables from IRS Pub 463. The first table shows the maximum depreciation deduction allowed for cars; the second table shows the maximum depreciation allowed for trucks and vans. For example, for a new car purchased in 2016, the maximum first year’s depreciation is $11,160 (regardless of which depreciation method or methods you use).
How Do I Claim my Depreciation Tax Deduction?
To claim your depreciation tax deduction using section 179, special allowance, or the MACRS method, you will need to file Form 4562. This tax form is used to claim depreciation for all assets that you use in your business, including cars.
What Documents Should I Keep on File?
A good rule of thumb is to always have documentation to prove any tax deductions that you claim on your tax return. In general, this documentation should include items such as receipts, canceled checks, or contracts that show the date of purchase, the company that you purchased from, and the amount you paid.
You also need to have a written log of the miles that you have driven to prove the percentage of time you drove your vehicle for business. Be sure to check out our Best Mileage Tracker App guide. Mileage tracker apps will keep track of the miles that you drive for business and personal reasons. Most mileage apps also have a feature that will allow you to keep track of expenses like gas and parking fees by typing them directly into the app or taking a picture of the receipt.
The Bottom Line
If you feel like calculating your depreciation deduction for your car is complex, you are right. It can be complicated. The good news is that you generally won’t have to do this on your own. In fact, I don’t recommend that you do. Instead, hire a tax pro to complete your tax return for you or use tax software like TurboTax.