At the end of 1998, Bob had an unrecovered basis in the car of $13,393. This was the $28,600 original basis of his car less the $15,207 depreciation deductions allowed during the recovery period.

Bob continued to use the car 100% for business in 1999. He can claim a depreciation deduction of $1,675 for the year. If he continues to use the car 100% for business in 2000 and later years, Bob can deduct the lesser of $1,675 or his remaining unrecovered basis in each of those years until his deductions total the $11,718 unrecovered basis ($13,393 - $1,675 claimed in 1999).

If Bob's business use of the car was less than 100% during any year, his depreciation deduction would be less than the maximum amount allowable for that year. However, in determining his unrecovered basis in the car, he would still reduce his original basis by the maximum amount allowable. Bob's unrecovered basis at the beginning of 1999 would be $13,365 ($28,600 - $15,235) in this example. This is true even if his actual depreciation deduction for any year was less than the maximum amount shown.

Car Used 50% or Less for Business

If you use your car 50% or less in qualified business use (defined earlier under Depreciation Deduction), the following two special rules apply. (For this purpose, "car" was defined earlier under Actual Car Expenses.)

1.      You cannot take the section 179 deduction.

2.      You must figure depreciation using the straight line method over a 5-year period. You must continue to use the straight line method even if your percentage of business use increases to more than 50% in a later year.

Instead of making the computation yourself, you can use column (c) of Table 3 to find the percentage to use.

Example. On May 21, 1999, Dan bought a car for $15,000. He used it 40% for his consulting business. Because he did not use the car more than 50% for business, Dan cannot take any section 179 deduction, and he must use the straight line method over a 5-year period to recover the cost of his car.

Dan deducts $600 in 1999. This is the lesser of:

1.      $600 [($15,000 cost × 40% business use) × 10% recovery percentage (from column (c), Table 3)], or

2.      $1,224 ($3,060 maximum limit × 40% business use).

Business use drops to 50% or less in a later year. If you use your car more than 50% in qualified business use in the tax year it is placed in service but the business use drops to 50% or less in a later year, you can no longer use an accelerated depreciation method for that car. For the year the business use drops to 50% or less and all later years in the recovery period, you must use the straight line depreciation method over a 5-year recovery period. In addition, for the year your business use drops to 50% or less, you must determine and include in your gross income any excess depreciation (discussed later).

Example. In June 1996, you purchased a car for exclusive use in your business. You met the more-than-50%-use test for the first 3 years of the recovery period (1996 through 1998) but failed to meet it in the fourth year (1999). You determine your depreciation for 1999 using 20% (from column (c) of Table 3). You also will have to determine and include in your gross income any excess depreciation, discussed next.

Excess depreciation. You must include any excess depreciation in your gross income and add it to your car's adjusted basis for the first tax year in which you do not use the car more than 50% in qualified business use. Use Form 4797, Sales of Business Property, to report the excess depreciation in your gross income.

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