Business Tips

Business vehicle depreciation — how auto write-offs work

Updated February 2020

The business vehicle depreciation deduction for your work car can lead to some significant tax savings. You can use the depreciation if you use the actual expense method. Let’s go over some of the basics you should know about vehicle depreciation.

What you need to know about the business vehicle depreciation deduction

We’ll dive into the specifics below, but the key takeaways are:

  • You must use the actual expense method for vehicle depreciation
  • Vehicle depreciation has special rules compared to other business equipment
  • Rules apply to vehicles that qualify as “passenger vehicles”
  • There are two ways to deduct vehicle depreciation

What is the vehicle depreciation deduction?

Your business car declines in value over time due to wear and tear. The vehicle depreciation deduction allows you to write off that value.

You can’t take this deduction if you’ve already deducted business drives, though. That’s because the standard mileage rate already factors in depreciation.

The business vehicle depreciation deduction has some special rules to be aware of. These apply to most types of vehicles. Typically, it results in a lower yearly deduction than other property.

What are the annual vehicle depreciation deduction limits for passenger vehicles?

The depreciation limits for passenger vehicles have changed with the 2018 tax law.

Here are the greatest allowable depreciation deductions for vehicles placed in service during the calendar year 2019. An additional $8,000 may be claimed as bonus depreciation the first year.

  • $10,100 for the first tax year ($18,100 with bonus depreciation)
  • $16,100 for the second tax year
  • $9,700 for the third tax year
  • $5,760 for each succeeding taxable year

Below are the depreciation deduction limits for passenger cars acquired before September 28, 2017, and placed in service during the calendar year 2019. An additional $4,800 may be claimed as bonus depreciation in the first year.

  • $10,100 for the first tax year ($14,900 with bonus depreciation)
  • $16,100 for the second tax year
  • $9,700 for the third tax year
  • $5,760 for each succeeding taxable year

How much can you write off with the vehicle depreciation deduction?

This deduction lets you write off your investment in a business vehicle, which is also called “basis.” Multiply the basis amount by the percentage of business use of the vehicle to determine how much you can depreciate each year. If you use a car 100 percent for business, you may depreciate its entire basis. If you use it 50 percent for business, you may depreciate only half of its basis.

How do you determine your car’s basis?

It depends on how you got it and when you began to use it for your business.

If you buy a business vehicle and use it that same year, your basis is its cost. In the case of trading in your old car to a dealer to buy a new one, your basis is equal to the adjusted basis of the trade-in. This amount includes the original cost minus depreciation taken, plus the cash you pay. The cash consists of the out-of-pocket costs or if you financed with a loan.

If you convert a vehicle that you previously owned for personal use to a business vehicle, your basis is the lower of what you paid for it or its fair market value at the time you convert it to business use. Your basis will usually be its fair market value, as this is often the lower number. You can determine the fair market value by checking used car value guides, such as the Kelley Blue Book.

Depreciation deduction methods

There are two basic methods to depreciate a vehicle: the straight-line method which gives you equal deductions each year except for the first and last year; and accelerated depreciation, which provides you with larger deductions the first few years you own your car. You must use your vehicle for business more than 50 percent of the time to use accelerated depreciation.

However, no matter which method you use, your deduction will be subject to the annual limits set forth above. Thus, depending on the value of your vehicle, it may not make much difference which method you use.

What vehicles qualify for the full section 179 deduction?

SUVs, trucks, vans, and other vehicles that don’t qualify as passenger vehicles aren’t subject to the IRS limits. You can take a full depreciation deduction each year. Using bonus depreciation and Section 179, you may be able to deduct all or most of the cost of such a vehicle in a single year.

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Business Insights and Ideas does not constitute professional tax or financial advice. You should contact your own tax or financial professional to discuss your situation.