How to Calculate Depreciation on a Car

Car depreciation is the reduction in a vehicle’s value over time due to factors like age and wear and tear. For business owners, calculating depreciation is a step for tax deductions, allowing them to recover the cost of the vehicle over its useful life. The Internal Revenue Service (IRS) provides rules and methods for these calculations, which impact a business’s taxable income.

Information Needed to Calculate Car Depreciation

Before calculating depreciation for tax purposes, several pieces of information must be gathered. All calculations and deductions are reported to the IRS on Form 4562, Depreciation and Amortization.

• The vehicle’s cost basis, which is the starting point for the calculation. This figure includes the purchase price, sales taxes, destination charges, and title fees. Significant improvements that add value or extend its useful life are also added to the basis.
• The date when the vehicle is ready and available for its intended business use, which may not be the same as the purchase date. This date determines the start of the depreciation period.
• The percentage of time the car is used for business. Only the business-use portion of the car’s expenses can be deducted. This requires keeping a mileage log that tracks the date, mileage, and purpose of every business trip.
• The recovery period assigned by the IRS. For cars and light trucks, this is a 5-year period under the Modified Accelerated Cost Recovery System (MACRS).

The Straight-Line Depreciation Method

The straight-line method of depreciation spreads the deduction evenly across the vehicle’s useful life. This method is required if the business use of the vehicle is 50% or less, or if you used the standard mileage rate in the first year and later switched to the actual expense method.

The calculation uses the car’s cost basis, its salvage value, and its useful life with the formula: (Cost Basis – Salvage Value) / Useful Life. Salvage value is the car’s estimated resale value at the end of its useful life, which is five years for tax purposes.

For example, a car with a $30,000 cost basis and a $5,000 salvage value has a depreciable amount of $25,000. Dividing this by the 5-year useful life results in an annual depreciation deduction of $5,000.

The MACRS Depreciation Method

The primary method for depreciating business vehicles is the Modified Accelerated Cost Recovery System (MACRS). This system allows for accelerated depreciation, meaning larger deductions are taken in the early years. To use MACRS, a vehicle must be used for business more than 50% of the time.

The calculation begins with the car’s cost basis, multiplied by the business-use percentage to find the depreciable basis. This basis is then multiplied by a percentage provided by the IRS for each year. For cars, which are 5-year property, the IRS provides percentages for a 6-year period due to the half-year convention, which assumes the asset was placed in service mid-year.

For a car classified as 5-year property, the MACRS percentages are:

• Year 1: 20%
• Year 2: 32%
• Year 3: 19.2%
• Year 4: 11.52%
• Year 5: 11.52%
• Year 6: 5.76%

For instance, if a car has a depreciable basis of $20,000, the first-year deduction would be $4,000 (20% of $20,000). The second-year deduction would be $6,400 (32% of $20,000). This method is detailed in IRS Publication 946, “How To Depreciate Property,” which provides the necessary tables and rules.

Special Deductions and Annual Limits

Beyond standard depreciation, businesses may use special deductions to write off more of a vehicle’s cost in the first year. The Section 179 deduction allows a business to expense the purchase price of qualifying equipment. For heavy SUVs with a gross vehicle weight rating over 6,000 pounds, the deduction is limited to $31,300 for 2025.

Bonus depreciation is another accelerated option that allows an additional first-year deduction. For 2025, bonus depreciation is set at 40% of the cost of the asset. This rate is scheduled to decrease to 20% in 2026 and phase out completely in 2027. For passenger vehicles, the additional first-year bonus depreciation is limited to $8,000.

The IRS also imposes annual “luxury auto limits” on the total depreciation that can be claimed for passenger automobiles. For a car placed in service in 2025, the first-year depreciation limit is $20,200 if bonus depreciation is taken, and $12,200 if it is not. Your deduction is capped at that year’s maximum amount if your calculated depreciation exceeds the limit.