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If you use the actual expense method, you must keep track of and deduct the cost of gas and other expenses you incur. Vehicle depreciation is one of the largest deductions you’ll be able to take each year with this method.
What is the Vehicle Depreciation Deduction?The vehicle depreciation deduction is an amount you can deduct over time to account for the decline in the business car’s value due to wear and tear. You do not get a depreciation deduction if you deduct business drives using the standard mileage rate. Depreciation is already including in the standard mileage deduction rate.
Unlike other business property, the depreciation deduction has some special rules. These apply to most types of vehicles and typically results in a lower yearly deduction than other property.
How Much Can You Write Off With the Vehicle Depreciation Deduction?The vehicle depreciation deduction allows you to write off your investment in a business vehicle. This is also called “basis.” To determine the amount you can depreciate each year, multiply the basis amount by the percentage of business use of the vehicle. For example, if you use a car 100% for business, you may depreciate its entire basis. If you use it 50% for business, you may depreciate only 50% of its basis.
How you determine your car’s basis depends on how you acquired it and when you began to use it for your business. If you buy a vehicle and use it for business that same year, your basis is its cost. If you trade in your old vehicle to a dealer to buy a new one, your basis is equal to the adjusted basis of the trade-in. This includes the original cost minus depreciation taken, plus the cash you pay. The cash includes the out-of-pocket-costs or if you financed with a loan.
Annual Vehicle Depreciation Deduction Limits for Passenger Automobiles
The annual depreciation deduction for automobiles is a set dollar amount each year. The annual limit applies to all vehicles that qualify as “passenger automobiles.” A passenger automobile is any four-wheeled vehicle made for use on public streets and highways. It also must have an unloaded gross weight of 6,000 pounds or less.
Because the annual limits are so low, it can take many years to fully depreciate a car.
The IRS has two different sets of deduction limits for passenger automobiles: one for passenger automobiles other than trucks and vans, and slightly higher limits for trucks and vans that qualify as passenger automobiles (based on their weight) and are built on a truck chassis. This includes minivans and sport utility vehicles built on a truck chassis (as long as they meet the weight limit).
There are two methods you can choose for calculating depreciation on an asset:
In this method depreciation is worked out on the adjusted tax value of the asset (the purchase price, less any depreciation already claimed in previous years). Diminishing value has higher deductions in the first few years than straight line depreciation and these deductions decrease each year.
In this method depreciation is worked out on the purchase price of the asset and the same amount is claimed each year.
Both methods deduct the same amount over the lifetime of the asset.
You don't have to use the same depreciation method for all your assets but the method you choose for an asset must be used for the full income tax year. You can change depreciation methods at the end of a year. When you change depreciation methods you'll need to use the adjusted tax value to calculate depreciation and not the original purchase price of the asset.
You have the option to pool or group lower value assets and depreciate them as though they were a single asset.
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