Business Vehicle Expenses – Depreciation Allowed
By Luci Roseman
Taxpayers are able to depreciate their vehicle if it is used for business purposes. Generally the 200% Declining Balance Method is used over a five year life. This method results in greater deprecation at the beginning of the five-year period and less at the end. Taxpayers may also elect to use the Straight Line or 150% Declining Balance Methods over a five-year life. Assuming the business use percentage remains constant, choosing the Straight Line Method will result in even depreciation over the 5 year life.
Taxpayers may also be allowed Section 179 and/or bonus depreciation deductions. In order to qualify for these deductions, the vehicle must be purchased and placed into service in the same year the deduction is to be claimed, and greater than 50% of the miles driven must be business miles. The Section 179 deduction can be taken on new or used equipment and is limited to $139,000 in 2012. This deduction is reduced dollar for dollar if you place more than $560,000 worth of equipment in service during the tax year. In other words, if you place $699,000 worth of assets into service during 2012, your Section 179 deduction will be zero; if you place $600,000 worth of assets into service during 2012, your total Section 179 deduction will be limited to $99,000. Besides the limitation just mentioned, the business also must have income in the tax year for this deduction to be claimed or it is carried forward. The bonus depreciation deduction is to be used on new equipment only and allows up to 50% of the purchase cost to be deducted in 2012.
The above deductions are limited based on the type of vehicle and its gross vehicle weight (GVW). For example, in 2012 a car with GVW of 6,000 pounds or less will be limited to $11,160 of total depreciation if bonus or Section 179 depreciation is utilized or $3,160 regular depreciation if neither of these special depreciation options is elected or the taxpayer does not qualify for them. For trucks and vans with loaded GVW of 6,000 pounds or less, the 2012 total depreciation limits utilizing special depreciation and regular depreciation are $11,360 and $3,360, respectively. The depreciation amounts are also limited by the percentage of business miles versus total miles driven during the year. For example, if based on 100% business use the depreciation allowed is calculated to be $1,000 and the taxpayer drove 4,000 business miles and 10,000 total miles. The depreciation deduction would be 40% or $400.
As always, depreciation reduces the basis in the vehicle, so if the vehicle is sold, the calculation of the gain or loss will be affected by the amount of depreciation taken.
If you have any questions or would like more information, please contact Mary Knigge at (302) 656-6632.