Guidelines for Calculating and Deducting Depreciation As an Expense

If you use a car you own in your business, you can claim a depreciation deduction: that is, you can deduct a certain amount each year as a recovery of your cost or other basis in the car. You cannot use the standard mileage rate if you decide to take a depreciation deduction in the year you first place the car in service.

You generally need to know the following three things about the car you intend to depreciate.

1.      Your basis in the car.

2.      The date you place the car in service.

3.      The method of depreciation you will use.

Basis. Your basis in the car for figuring depreciation is generally its cost. This includes any amount you pay in cash, in other property, or in services. Additional rules concerning basis are discussed later in this chapter under Unadjusted basis.

Placed in service. You generally place a car in service when it is available for use in your work or business, in the production of income, or in a personal activity. Depreciation begins when the car is ready for use in your work or business or for the production of income.

For purposes of computing depreciation, if you first start using the car only for personal use and later convert it to business use, you place the car in service on the date of conversion. Your basis is the lesser of the fair market value or your adjusted basis in the car on the date of conversion.

Car placed in service and disposed of in the same year. If you place a car in service and dispose of it in the same tax year, you cannot claim any depreciation deduction for that car.

Methods of depreciation. Generally, one depreciation system is available for cars: the Modified Accelerated Cost Recovery System (MACRS). MACRS rules for cars are discussed later in this chapter.

Exception. If you used the standard mileage rate in the first year of business use and change to the actual expenses method in a later year, you cannot depreciate your car under the MACRS rules. You must use straight line depreciation over the estimated remaining useful life of the car.

To figure depreciation under the straight line method, you must reduce your basis in the car (but not below zero) by a set rate per mile for all miles for which you used the standard mileage rate. The rate per mile varies depending on the year(s) you used the standard mileage rate. For the rate(s) to use, see Depreciation adjustment when you used the standard mileage rate under Disposition of a Car, later.

This reduction of basis is in addition to those basis adjustments described later under Unadjusted basis. You must use your adjusted basis in your car to figure your depreciation deduction. For additional information on the straight line method of depreciation, see Publication 534, Depreciating Property Placed in Service Before 1987.

Cars placed in service before 1987. If you are still depreciating a car you placed in service before 1987, continue to follow the rules appropriate for that method. See Publication 534 for more information.

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