Uber Car Depreciation: How It Works and What You Need to Know
Understand how Uber car depreciation affects your taxes, expenses, and vehicle value over time with key methods for tracking and managing depreciation.
Driving for Uber puts significant wear on a vehicle, rapidly decreasing its value. Depreciation is one of the biggest costs drivers face, making it essential to understand how it works to manage expenses and maximize tax benefits.
Determining Vehicle’s Business Percentage
Only the portion of miles driven for Uber can be deducted or depreciated. The IRS requires drivers to calculate this by dividing business miles by total annual miles.
Accurate mileage tracking is crucial in case of an audit. The IRS accepts records from mileage-tracking apps like Everlance, MileIQ, and Stride, as well as handwritten logs, provided they include the date, purpose, and distance of each trip. Uber’s trip history helps but does not account for miles driven between passenger pickups or while waiting for requests—these should also be included.
If a driver logs 30,000 total miles in a year and 21,000 are for Uber, the business-use percentage is 70%. This percentage applies to depreciation, fuel, maintenance, and other vehicle-related deductions.
Depreciation Methods
Depreciation allows Uber drivers to recover vehicle costs over time, reducing taxable income. The IRS offers multiple methods, each affecting tax deductions differently. Choosing the right approach depends on how long the car will be used for business and how quickly deductions are needed.
Straight-Line
The straight-line method spreads depreciation evenly over five years, the IRS-assigned recovery period for business vehicles under the Modified Accelerated Cost Recovery System (MACRS).
For a $30,000 car with a $5,000 residual value, the annual depreciation deduction is:
(30,000 – 5,000) ÷ 5 = 5,000
This method provides consistent deductions, making tax planning easier, but may not be ideal for those seeking larger deductions early on.
Declining Balance
The declining balance method accelerates depreciation, allowing larger deductions in the early years. The IRS permits a 200% declining balance for vehicles, meaning depreciation is calculated at twice the straight-line rate (40% per year). However, the deduction is applied to the remaining book value each year.
For a $30,000 vehicle with no salvage value, the first-year depreciation is:
30,000 × 40% = 12,000
In the second year, based on the remaining $18,000:
18,000 × 40% = 7,200
This continues until switching to the straight-line method provides a larger deduction. This approach benefits those seeking maximum tax savings early, though deductions decrease over time.
Bonus Depreciation
Bonus depreciation allows a significant first-year deduction. Under the Tax Cuts and Jobs Act of 2017, 100% bonus depreciation was available for qualified property placed in service before 2023. This percentage is phasing out—80% in 2023, 60% in 2024, and continuing to decline.
To qualify, the vehicle must be used at least 50% for business. If a driver buys a $30,000 car in 2024 and meets the requirements, they can deduct:
30,000 × 60% = 18,000
The remaining cost is depreciated using another method. While bonus depreciation provides immediate tax relief, it reduces future deductions. If business use falls below 50%, the IRS may require recapturing some of the deduction.
Tracking Adjusted Basis
A vehicle’s adjusted basis is its remaining value for tax purposes after depreciation and other adjustments. The initial basis includes the purchase price, taxes, fees, and improvements. Depreciation reduces this amount over time.
Each year, total depreciation claimed lowers the adjusted basis. For instance, if a car was purchased for $30,000 and $12,000 was deducted using the declining balance method, the adjusted basis drops to $18,000. Improvements that extend the vehicle’s useful life, such as replacing an engine or upgrading a transmission, can increase the adjusted basis. Routine maintenance does not qualify, as it is a deductible expense rather than a capital improvement.
Tracking adjusted basis is crucial if business use changes. If it drops significantly, the IRS may require recapturing excess depreciation, leading to additional taxable income. For example, if a driver initially used the car 80% for business but later reduced it to 40%, prior deductions may need to be partially reversed.
Handling a Sale or Trade-In
Selling or trading in a business vehicle has tax consequences based on the adjusted basis and sale price. If the sale price exceeds the adjusted basis, the difference is considered a gain and may be subject to capital gains tax or depreciation recapture under Section 1245 of the Internal Revenue Code. Depreciation recapture occurs when previously deducted depreciation is taxed as ordinary income rather than at lower capital gains rates.
For example, if a driver purchased a car for $30,000 and claimed $18,000 in depreciation, the adjusted basis is $12,000. If the car is sold for $15,000, the $3,000 difference is taxable, with at least part treated as recaptured depreciation. The IRS taxes this recaptured amount at the driver’s ordinary income rate. However, if the car is sold for less than its adjusted basis, the loss is generally not deductible unless it was used exclusively for business.
Trading in a vehicle complicates tax treatment. Under the Tax Cuts and Jobs Act of 2017, like-kind exchanges under Section 1031 no longer apply to personal property, including vehicles. Previously, drivers could defer gains by rolling them into a new car’s basis, but now any gain on a trade-in is immediately taxable. If a driver trades in a vehicle with an adjusted basis of $10,000 for a new car valued at $20,000 and receives a $12,000 trade-in credit, the $2,000 gain is taxable in the year of the exchange.