Example 2. In July 1996, 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 1996 through 1998, Marcia figured her depreciation deduction using the MACRS chart for those years.

In September 1999, 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 regular depreciation amount for 1999 for her old car. (See Disposition of a Car, later.)

Marcia figures her original basis in the new car, $27,792, as follows.

Traded car used partly in business. If you trade in a car (that you acquired after June 18, 1984) 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.)

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:

1.      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

2.      The total of the amounts actually allowable as depreciation during those years.

Example 1. In March, Mark traded his 1995 van (placed in service in 1995) for a new 1999 model. He used the old van 75% for business use and he used the new van 75% for business use in 1999. Mark claimed actual expenses (including $8,494 depreciation expense) for the business use of the old van since 1995. He did not claim a section 179 deduction for the old or the new van.

Mark paid $12,800 for the 1995 van in June 1995. He paid an additional $9,800 when he acquired the 1999 van. Mark was allowed 1/2 of the depreciation deduction amount (which is included in the $8,494 depreciation expense total) for his old van for 1999, the year of disposition, as explained later under Disposition of a Car.

Mark figures the unadjusted basis for depreciating his new van as shown next.

Example 2. Rob paid $15,000 for a new car that he placed in service in 1996. He used it partly for business in 1996 (9,000 business miles of 15,000 total miles), 1997 (12,000 business miles of 16,000 total miles), and 1998 (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, later.)

On January 2, 1999, 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.

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