How to Calculate Depreciation on a Vehicle

Depreciation is a financial concept that accounts for the reduction in value of an asset over its useful life. For vehicles, understanding depreciation is important because it impacts financial planning, helps assess the true cost of ownership, and affects tax obligations.

Fundamental Concepts and Inputs

Calculating vehicle depreciation requires understanding several foundational concepts and gathering specific data points. The original cost of a vehicle forms the starting point for any depreciation calculation. This cost includes the purchase price, sales tax, delivery charges, and other expenses associated with acquiring and preparing the vehicle for use.

Another essential input is the salvage value, which represents the estimated resale or scrap value of the vehicle at the end of its useful life. This is the amount the asset is expected to be worth when no longer useful to its current owner, whether through sale or trade-in. Estimating salvage value can involve considering market trends for similar used vehicles, anticipated condition, and the intended duration of ownership.

The useful life defines the period over which the vehicle is expected to provide economic benefits. This can be expressed in years, such as a five-year period, or in terms of operational metrics like mileage. For accounting purposes, the useful life is an estimate based on factors like the vehicle’s type, expected usage, and maintenance schedule.

Standard Accounting Depreciation Methods

Different accounting methods allocate a vehicle’s cost over its useful life in varying patterns, reflecting different assumptions about how the asset loses value. The straight-line depreciation method is the simplest approach, distributing the cost evenly over the vehicle’s useful life. The formula for straight-line depreciation is (Original Cost – Salvage Value) / Useful Life. For example, a vehicle purchased for $30,000 with an estimated salvage value of $5,000 and a useful life of 5 years would depreciate by $5,000 annually (($30,000 – $5,000) / 5).

Accelerated depreciation methods recognize a larger portion of the asset’s cost as expense in the earlier years of its useful life and smaller amounts in later years. The double-declining balance (DDB) method is one such approach. DDB calculates depreciation by applying a fixed rate, typically double the straight-line rate, to the vehicle’s book value at the beginning of each period. The formula is (2 / Useful Life) Book Value at Beginning of Year, and salvage value is only considered to ensure the book value does not fall below it. For instance, a vehicle with a 5-year useful life would have a DDB rate of 40% (2 / 5 years), meaning 40% of the remaining book value is expensed annually until it reaches salvage value.

Another accelerated method is the sum-of-the-years’ digits (SYD) depreciation. To calculate SYD, first determine the sum of the years of the useful life (e.g., for a 5-year life, 5+4+3+2+1 = 15). The depreciation for each year is then a fraction of the depreciable base (Cost – Salvage Value), where the numerator is the remaining useful life and the denominator is the sum of the years. For a $30,000 vehicle with a $5,000 salvage value and a 5-year life, the first year’s depreciation would be ($30,000 – $5,000) (5/15) = $8,333.33.

Tax Depreciation Rules

Tax depreciation for vehicles in the United States often follows rules distinct from standard accounting methods, primarily governed by the Modified Accelerated Cost Recovery System (MACRS). MACRS is the compulsory depreciation method for most tangible property. Under MACRS, vehicles are generally classified as 5-year property, meaning their cost is depreciated over five years using a predetermined schedule, typically the 200% declining balance method, which then switches to the straight-line method when it yields a larger deduction.

MACRS uses conventions based on when an asset is placed in service or disposed of. For vehicles, the half-year convention is most common, which treats all property placed in service or disposed of during any tax year as placed in service or disposed of on the midpoint of that tax year. This means only half a year’s depreciation is allowed in the first and last year of the recovery period, extending it over six calendar years for a five-year property. For example, a business vehicle placed in service in January will receive the same first-year depreciation as one placed in service in December under the half-year convention. However, if more than 40% of the total depreciable basis of MACRS property (excluding real estate) placed in service during the tax year is put into service during the last three months, the mid-quarter convention applies, which treats assets as placed in service at the midpoint of the quarter they were acquired.

Beyond MACRS, businesses can also leverage specific tax incentives to accelerate depreciation, such as the Section 179 deduction. Section 179 allows businesses to expense the full purchase price of qualifying equipment, including certain vehicles, in the year the asset is placed in service, rather than depreciating it over several years. For 2025, the maximum Section 179 deduction is $1,250,000, but this amount begins to phase out dollar-for-dollar when equipment purchases exceed $3,130,000, completely phasing out at $4,380,000. Vehicles over 6,000 pounds Gross Vehicle Weight Rating (GVWR) often qualify for the full Section 179 deduction, while passenger vehicles have lower limits. The vehicle must be used for business purposes more than 50% of the time to qualify, and the deduction is limited to the percentage of business use.

Bonus depreciation provides an additional first-year depreciation allowance for qualifying new and used property. For 2025, the bonus depreciation percentage is generally 40%. This deduction is applied after any Section 179 deduction. For instance, if a business purchases equipment for $10,000, a 40% bonus depreciation would allow an additional $4,000 deduction in the first year. Bonus depreciation has no income limitation, unlike Section 179.

However, there are specific limits on the amount of depreciation that can be claimed for passenger automobiles, including those with bonus depreciation and Section 179. For vehicles placed in service in 2025, the maximum depreciation deduction, including bonus depreciation, is $20,200 for the first year, $19,600 for the second year, $11,800 for the third year, and $7,060 for each succeeding year. If bonus depreciation does not apply, the first-year limit for 2025 is $12,200. These limits apply to passenger cars, SUVs, trucks, and vans.