Calculating Your Car Depreciation Schedule

When you use a vehicle for business, you can often deduct some of its ownership and operating costs on your taxes. This process, known as depreciation, allows you to account for the vehicle’s loss in value over time. The deduction is available to self-employed individuals and businesses that use a car, truck, or van for work-related activities. Calculating this deduction involves a few decisions and calculations to comply with tax regulations.

Actual Expenses vs. Standard Mileage Rate

Before calculating depreciation, you must choose between two methods for deducting vehicle expenses: the actual expense method or the standard mileage rate. The standard mileage rate is a simplified approach where you deduct a set amount for each business mile driven, such as the 2024 IRS rate of 67 cents per mile. This rate includes a component for depreciation, so you cannot take a separate depreciation deduction if you choose this option.

The alternative is the actual expense method, which involves tracking and deducting the specific costs of operating your vehicle for business. To claim depreciation as a separate deduction, you must use this method. These costs include:

• Gasoline
• Oil changes
• Insurance
• Registration
• Repairs
• Depreciation

This choice has long-term implications. If you choose the actual expense method in the first year, you cannot switch to the standard mileage rate for that same vehicle in a future year. Conversely, if you start with the standard mileage rate, you may switch to the actual expense method later.

Determining Your Vehicle’s Depreciable Basis

Calculating depreciation begins with establishing the vehicle’s basis, which is the figure used for the calculation. The basis is the vehicle’s purchase price plus any costs incurred at acquisition, such as sales tax, destination fees, and title fees. Any improvements made after purchase that add value or extend its useful life also increase the basis.

You must then determine the percentage of time the car is used for business. This is found by dividing the total business miles driven during the year by the total miles the car was driven for all purposes. For example, if you drove 20,000 total miles and 15,000 were for business, your business-use percentage is 75%.

To find the depreciable basis, you multiply the vehicle’s total basis by your business-use percentage. If the car from the previous example had a total basis of $40,000, its depreciable basis would be $30,000 ($40,000 multiplied by 75%). This figure is the starting point for applying a depreciation method.

Applying the MACRS Depreciation Method

The tax code requires most business vehicles to be depreciated using the Modified Accelerated Cost Recovery System (MACRS). Under MACRS, passenger cars are classified as 5-year property, meaning their cost is recovered over five years. The system uses specific depreciation percentages for each year, which are provided in IRS Publication 946, How To Depreciate Property.

Two limitations often override the standard MACRS calculation for vehicles. The first is the annual depreciation limit for luxury passenger automobiles. The IRS sets a maximum dollar amount that can be deducted each year, regardless of the vehicle’s cost or the calculated MACRS percentage. For a vehicle placed in service in 2024, the first-year limit is $12,400, meaning your deduction is capped at this amount.

A second factor is bonus depreciation, which allows for an additional first-year deduction. For 2024, bonus depreciation is set at 60% of the depreciable basis. When bonus depreciation is claimed, the first-year luxury auto limit increases by $8,000, bringing the total potential deduction to $20,400 for 2024.

For instance, consider a car with a depreciable basis of $30,000 placed in service in 2024. The 60% bonus depreciation would be $18,000. The remaining basis of $12,000 is then subject to the standard 20% MACRS first-year rate, resulting in $2,400 of regular depreciation. The total tentative deduction is $20,400 ($18,000 + $2,400), and since this amount equals the first-year limit with bonus depreciation, the full amount can be deducted.

Reporting Depreciation on Form 4562

After you have calculated the correct depreciation amount, you must report it to the IRS on Form 4562, Depreciation and Amortization. This form is used to claim deductions for the depreciation of tangible property. You will complete Part V of the form, which is specifically designated for listing property, including vehicles.

You will need to list the following:

• The date the vehicle was placed in service for business use
• Its basis for depreciation
• Its recovery period, which is five years for a car
• The depreciation method and convention used
• The final depreciation deduction you calculated

The form requires you to answer a series of questions to confirm the vehicle was used more than 50% for business and to provide evidence of mileage records. Once Part V is completed, the total depreciation deduction for vehicles is combined with depreciation for other assets. The grand total from Form 4562 is then carried over and entered as a deduction on your primary business tax return, such as Schedule C for sole proprietors.