In 2004, Karl's MACRS deduction is $1,244 [($25,400 × 85%) × 5.76%]. Since that amount is less than the depreciation limit of $1,509 ($1,775 × 85%), Karl's depreciation deduction for 2004 is $1,244.

If Karl continues to use his car for business after 2004, he can continue to claim a depreciation deduction for his unrecovered basis. However, he cannot deduct more than $1,775 multiplied by his business use percentage. See Deductions in years after the recovery period, later.

Section 179 deduction. The section 179 deduction is treated as a depreciation deduction. If you place a car in service in 1999, use it only for business, and choose the section 179 deduction, the combined section 179 and depreciation deduction for that car for 1999 is limited to $3,060.

Example. On September 4, 1999, Jack bought a used car for $6,000 and placed it in service. He used it 80% for his business and he chooses to take a section 179 deduction for the car.

Before applying the limit, Jack figures his maximum section 179 deduction to be $4,800. This is the cost of his qualifying property (up to the maximum $19,000 amount) multiplied by his business use ($6,000 × 80%).

Jack then figures that his section 179 deduction for 1999 is limited to $2,448 (80% of $3,060). He then has an unadjusted basis of $2,352 [($6,000 × 80%) - $2,448] for determining his depreciation deduction. Since he has already reached the maximum limit for 1999, Jack will use the unadjusted basis to figure his depreciation deduction for 2000.

Deductions in years after the recovery period. If the depreciation limits apply to your car, you may have unrecovered basis in your car at the end of the recovery period. If you continue to use your car for business, you can deduct that unrecovered basis after the recovery period ends.

Unrecovered basis. This is your cost or other basis in the car reduced by any clean-fuel vehicle deduction, electric vehicle credit, and depreciation and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use.

The recovery period. For cars placed in service after 1986, your recovery period is 6 calendar years. For a 5-year recovery period, a part year's depreciation is allowed in the first calendar year, a full year's depreciation is allowed in each of the next 4 calendar years, and a part year's depreciation is allowed in the 6th calendar year.

Your recovery period is the same whether you use MACRS, declining balance, or straight line depreciation. Under MACRS, you determine your unrecovered basis in the 7th year after you placed the car in service.

How to treat unrecovered basis. If you continue to use your car for business after the recovery period, you can claim a depreciation deduction for that business use in each succeeding tax year until you recover your full basis in the car. The maximum amount you can deduct is determined by the date you placed the car in service and your business-use percentage. For example, no deduction is allowed for a year you use your car 100% for personal purposes.

Example. In May 1993, Bob bought and placed in service a car that he used exclusively in his business. The car cost $28,600. Bob did not claim a section 179 deduction for the car. He continued to use the car 100% in his business throughout the recovery period (1993 through 1998). For those years, Bob used the appropriate MACRS Depreciation Chart and Maximum Depreciation Limits for Cars table (as explained earlier) to compute his depreciation deductions as shown in the following table.

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