How To Calculate Depreciation and Determine IRS Limits

There are limits on the amount you can deduct for depreciation of your 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.

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These limits are shown in the following table.

Maximum Depreciation Limits for Cars

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 15 of Publication 535. The exceptions follow.

1.      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.

2.      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 table.

3.      Maximum Depreciation Limits For
Electric Cars Placed in Service
After August 5, 1997

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 1999 for $16,000 to use exclusively in her business. She does not claim the section 179 deduction and she chooses the 200% DB method of depreciation.

Marie's depreciation (using the rate from Table 3) is $3,200 ($16,000 × 20%). However, the maximum amount she can deduct for depreciation (from the Maximum Depreciation Limits for Cars table) is $3,060. (See Deductions in years after the recovery period, later.)

Reduction for personal use. The depreciation limits are further 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 June 1999, Karl, an outside dental supply salesman, purchased a 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 and he chooses the 200% DB method to figure his depreciation deduction.

In 1999, Karl computes his MACRS deduction to be $4,318 [($25,400 × 85%) × 20%]. However, Karl's deduction is limited to $2,601. This is the depreciation limit ($3,060) 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 computes his depreciation limits for those years as follows.

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