Table of Contents
This chapter discusses expenses you can deduct for business transportation when you are not traveling away from home as defined in chapter 1. These expenses include the cost of transportation by air, rail, bus, taxi, etc., and the cost of driving and maintaining your car.
Transportation expenses include the ordinary and necessary costs of all of the following.
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Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. Tax home is defined in chapter 1.
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Visiting clients or customers.
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Going to a business meeting away from your regular workplace.
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Getting from your home to a temporary workplace when you have one or more regular places of work. These temporary workplaces can be either within the area of your tax home or outside that area.
Transportation expenses do not include expenses you have while traveling away from home overnight. Those expenses are travel expenses which are discussed in chapter 1. However, if you use your car while traveling away from home overnight, use the rules in this chapter to figure your car expense deduction. See Car Expenses, later.
Example.
You sometimes use your cell phone to make business calls while commuting to and from work. Sometimes business associates ride with you to and from work, and you have a business discussion in the car. These activities do not change the trip from personal to business. You cannot deduct your commuting expenses.
Example 1.
You regularly work in an office in the city where you live. Your employer sends you to a one-week training session at a different office in the same city. You travel directly from your home to the training location and return each day. You can deduct the cost of your daily round-trip transportation between your home and the training location.
Example 2.
Your principal place of business is in your home. You can deduct the cost of round-trip transportation between your qualifying home office and your client's or customer's place of business.
Example 3.
You have no regular office, and you do not have an office in your home. In this case, the location of your first business contact is considered your office. Transportation expenses between your home and this first contact are nondeductible commuting expenses. Transportation expenses between your last business contact and your home are also nondeductible commuting expenses. Although you cannot deduct the costs of these trips, you can deduct the costs of going from one client or customer to another.
If you use your car for business purposes, you ordinarily can deduct car expenses. You generally can use one of the two following methods to figure your deductible expenses.
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Standard mileage rate.
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Actual car expenses.
If you use actual expenses to figure your deduction for a car you lease, there are rules that affect the amount of your lease payments that you can deduct. See Leasing a Car, later.
In this publication, “car” includes a van, pickup, or panel truck. For the definition of “car” for depreciation purposes, see Car defined under Actual Car Expenses, later.
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It is given as an equipment maintenance allowance (EMA) to employees of the U.S. Postal Service.
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It is at the rate contained in the 1991 collective bargaining agreement. Any later agreement cannot increase the qualified reimbursement amount by more than the rate of inflation.
You may be able to use the standard mileage rate to figure the deductible costs of operating your car for business purposes. For 2007, the standard mileage rate for the cost of operating your car for business use is 48½ cents per mile.
If you use the standard mileage rate for a year, you cannot deduct your actual car expenses for that year. You cannot deduct depreciation, lease payments, maintenance and repairs, gasoline (including gasoline taxes), oil, insurance, or vehicle registration fees. See Choosing the standard mileage rate and Standard mileage rate not allowed, later.
You generally can use the standard mileage rate whether or not you are reimbursed and whether or not any reimbursement is more or less than the amount figured using the standard mileage rate. See chapter 6 for more information on reimbursements.
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Use the car for hire (such as a taxi),
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Use five or more cars at the same time (as in fleet operations),
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Claimed a depreciation deduction for the car using any method other than straight line, for example, MACRS (as discussed later under Depreciation Deduction),
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Claimed a section 179 deduction (discussed later) on the car,
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Claimed the special depreciation allowance on the car,
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Claimed actual car expenses after 1997 for a car you leased, or
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Are a rural mail carrier who received a qualified reimbursement. (See Rural mail carriers, earlier.)
Example 1.
Marcia, a salesperson, owns three cars and two vans that she alternates using for calling on her customers. She can use the standard mileage rate for the business mileage of the three cars and the two vans because she does not use them at the same time.
Example 2.
Tony and his employees use his four pickup trucks in his landscaping business. During the year, he traded in two of his old trucks for two newer ones. Tony can use the standard mileage rate for the business mileage of all six of the trucks he owned during the year.
Example 3.
Chris owns a repair shop and an insurance business. He and his employees use his two pickup trucks and van for the repair shop. Chris alternates using his two cars for the insurance business. No one else uses the cars for business purposes. Chris can use the standard mileage rate for the business use of the pickup trucks, van, and the cars because he never has more than four vehicles used for business at the same time.
Example 4.
Maureen owns a car and four vans that are used in her housecleaning business. Her employees use the vans and she uses the car to travel to various customers. Maureen cannot use the standard mileage rate for the car or the vans. This is because all five vehicles are used in Maureen's business at the same time. She must use actual expenses for all vehicles.
If you do not use the standard mileage rate, you may be able to deduct your actual car expenses.
If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction.
Actual car expenses include:
Depreciation
Licenses |
Lease
payments |
Registration
fees |
Gas | Insurance | Repairs |
Oil | Garage rent | Tires |
Tolls | Parking fees |
If you have fully depreciated a car that you still use in your business, you can continue to claim your other actual car expenses. Continue to keep records, as explained later in chapter 5.
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An ambulance, hearse, or combination ambulance-hearse used directly in a business,
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A vehicle used directly in the business of transporting persons or property for pay or hire, or
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A truck or van that is a qualified nonpersonal use vehicle.
The section 179 deduction allows you to treat part or all of the business cost of a car as a current expense rather than taking depreciation deductions over a number of years.
The limit on total section 179 and depreciation deductions (discussed later) may reduce or eliminate any benefit from claiming the section 179 deduction.
You can claim the section 179 deduction only in the year you place the car in service. For this purpose, a car is placed in service when it is ready and available for a specific use, whether in a trade or business, a tax-exempt activity, a personal activity, or for the production of income. Even if you are not using the property, it is in service when it is ready and available for its specific use.
A car first used for personal purposes cannot qualify for the deduction in a later year when its use changes to business.
Example.
In 2006 you bought a new car and placed it in service for personal purposes. This year, you began to use it for business. Changing its use to business use does not qualify the cost of your car for a section 179 deduction this year. However, you can claim a depreciation deduction for the business use of the car. See Depreciation Deduction, later.
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The amount of the section 179 deduction,
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The section 179 deduction for sport utility and certain other vehicles, and
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The total amount of the section 179 deduction plus the depreciation deduction (discussed later) you can claim for a qualified property.
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Designed to have a seating capacity of more than nine persons behind the driver's seat,
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Equipped with a cargo area of at least 6 feet in interior length that is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment, or
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That has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.
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Your original tax return filed for the year the property was placed in service (whether or not you file it timely).
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An amended return filed within the time prescribed by law. An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. The amended return must also include any resulting adjustments to taxable income.
You may be able to claim the special depreciation allowance for your car if it qualifies as Gulf Opportunity (GO) Zone property and was placed in service in 2007. The allowance is an additional depreciation deduction of 50% of the car's depreciable basis (after any section 179 deduction, but before figuring your regular depreciation deduction under MACRS). The GO Zone special depreciation allowance applies only for the first year the car is placed in service. To qualify for the allowance more than 50% of the use of the car must be in the active conduct of your trade or business.
See Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, for the definition of the GO Zone.
Your combined section 179 deduction, GO Zone special depreciation allowance, and regular MACRS depreciation deduction is limited to the maximum allowable depreciation deduction for cars ($3,060), or trucks and vans ($3,260). See Depreciation Limits, later in this chapter.
You can elect not to claim the GO Zone special depreciation allowance for your car. If you make this election for your car, it applies to all property in the same class placed in service during the year.
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You purchased the car on or after August 28, 2005, but only if no binding written contract to acquire the car existed before August 28, 2005,
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You placed the car in service in your trade or business in 2007,
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Substantially all of the use of the car is in the GO Zone, and
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The original use of the car in the GO Zone began with you after August 28, 2005. Used cars can be qualified GO Zone property if not previously used within the GO Zone. Also, additional capital expenditures you incurred after August 25, 2005, to recondition or rebuild your car meet the original use test if the original use of the car in the GO Zone began with you.
Example.
Dan purchased a new car for $13,500 in June 2007, and used it 100% in his business. The car qualifies as GO Zone property. Dan's unadjusted basis is $13,500. Dan chooses not to claim any section 179 deduction but he does choose to claim the GO Zone special depreciation allowance. Dan figures his special allowance as $6,750 ($13,500 x 50%).
Dan chooses the MACRS 200% declining balance method but does not need to figure his regular depreciation deduction under MACRS (discussed later) because his special allowance ($6,750) exceeds the maximum depreciation deduction allowed ($3,060) for the first year the car is placed in service. Dan reports $3,060 as depreciation for his car in 2007. See Depreciation Limits later.
Claiming the GO Zone special depreciation allowance may result in a larger depreciation deduction in the year the car is placed in service, but subsequent year depreciation deductions may be smaller than if you had not claimed the GO Zone special depreciation allowance.
If you use actual car expenses to figure your deduction for a car you own and use in your business, you can claim a depreciation deduction: that is, you can deduct a certain amount each year as a recovery of your cost or other basis in your car.
You generally need to know the following things about the car you intend to depreciate.
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Your basis in the car.
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The date you place the car in service.
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The method of depreciation and recovery period you will use.
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It is directly connected with your business.
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It is properly reported by you as income to the other person (and, if you have to, you withhold tax on the income).
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It results in a payment of fair market rent. This includes any payment to you for the use of your car.
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Determine the percentage of business use for the period following the change. Do this by dividing business miles by total miles driven during that period.
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Multiply the percentage in (1) by a fraction. The numerator (top number) is the number of months the car is used for business and the denominator (bottom number) is 12.
Example.
You use a car only for personal purposes during the first 6 months of the year. During the last 6 months of the year, you drive the car a total of 15,000 miles of which 12,000 miles are for business. This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Your business use for the year is 40% (80% × 6/12).
If your business use later falls to 50% or less, you may have to recapture (include in your income) any excess depreciation. See Car Used 50% or Less for Business, later, for more information.
If you acquired the car by gift or inheritance, see Publication 551, Basis of Assets, for information on your basis in the car.
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You can elect to treat the transaction as a tax-free disposition of the old car and the purchase of the new car. If you make this election, you treat the old car as disposed of at the time of the trade-in. The depreciable basis of the new car is the adjusted basis of the old car (figured as if 100% of the car's use had been for business purposes) plus any additional amount you paid for the new car. You then figure your depreciation deduction for the new car beginning with the date you placed it in service. You make this election by completing Form 2106, Part II, Section D. This method is explained later, beginning at Effect of trade-in on basis.
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If you do not make the election described in (1), you must figure depreciation separately for the remaining basis of the old car and for any additional amount you paid for the new car. You must apply two depreciation limits (see Depreciation Limits, later). The limit that applies to the remaining basis of the old car generally is the amount that would have been allowed had you not traded in the old car. The limit that applies to the additional amount you paid for the new car generally is the limit that applies for the tax year, reduced by the depreciation allowance for the remaining basis of the old car. You must use Form 4562 to compute your depreciation deduction. You cannot use Form 2106, Part II, Section D. This method is explained in Publication 946.
Example 1.
Paul trades in a car that has an adjusted basis of $5,000 for a new car. In addition, he pays cash of $20,000 for the new car. His original basis of the new car is $25,000 (his $5,000 adjusted basis in the old car plus the $20,000 cash paid). Paul's unadjusted basis is $25,000 unless he claims the section 179 deduction, or has other increases or decreases to his original basis, discussed under Unadjusted basis, earlier.
Example 2.
In October 2004, Marcia purchased a car for $26,000 and placed it in service for 100% use in her business. Marcia did not claim a section 179 deduction but she did claim the special depreciation allowance. Marcia's unadjusted basis for the car was $15,390 ($26,000 - $10,610 (50% special depreciation allowance, up to the maximum amount allowed)). For 2004 through 2006, Marcia figured her depreciation deduction using the MACRS depreciation chart for those years.
In September 2007, Marcia traded that car in and paid $14,200 cash for a new car to be used 100% in her business. Marcia is allowed one-half of the MACRS depreciation amount figured for 2007 for her old car. (See Disposition of a Car, later.)
Marcia figures her basis in the new car as follows.
Cost of old car | $26,000 | |
Less total depreciation allowed:
2007—($15,390 × .1152) × ½ (Limit: $1,675) |
$886 | |
2006—($15,390 × .192)
(Limit: $2,850) |
2,850 | |
2005—($15,390 × .32)
(Limit: $4,800) |
4,800 | |
2004—($26,000 × .50)
1 ($15,390 × .20) (Limit: $10,610) |
10,610 | |
Total depreciation allowed | -19,146 | |
Adjusted basis of old car and basis of part of new car that can be treated as newly purchased MACRS property | $ 6,854 | |
Additional basis (cash paid) for new car that is treated as newly purchased MACRS property | +14,200 | |
Total basis of new car | $21,054 | |
1 50% special depreciation allowance ($26,000 × 50% = $13,000). Unadjusted basis of the car: ($26,000 - $10,610 = $15,390). Regular depreciation: ($15,390 × .20 = $3,078). Total depreciation ($13,000 + $3,078 = $16,078) cannot exceed first year limit ($10,610). |
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The total of the amounts that would have been allowable as depreciation during the tax years before the trade if 100% of the use of the car had been business and investment use, over
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The total of the amounts actually allowable as depreciation during those years.
Example 1.
In March, Mark traded his 2003 van (placed in service in June 2003) for a new 2007 model. He used the old van 75% for business and he used the new van 75% for business in 2007. Mark claimed actual expenses (including $14,538 depreciation expense) for the business use of the old van since 2003. He did not claim a section 179 deduction for the old or the new van.
Mark paid $19,500 for the 2003 van in June 2003. He paid an additional $12,500 when he acquired the 2007 van. Mark was allowed ½ of the depreciation deduction amount (which is included in the $14,538 depreciation expense total) for his old van for 2007, the year of disposition, as explained later under Disposition of a Car.
Mark figures the unadjusted basis for depreciating his new van as shown next.
Cost of old van | $19,500 | |
Less: Total depreciation allowed on
the business cost of old van from 2003-2007 |
-14,538 | |
Adjusted basis of old van before trade-in adjustment | $ 4,962 | |
Trade-in adjustment: | ||
Depreciation at 100% business use: | ||
2007—($9,750 × .1152) × ½ | ||
(Limit: $1,775) | $ 562 | |
2006—($9,750 × .1152) | ||
(Limit: $1,775) | 1,123 | |
2005—($9,750 × .192) | ||
(Limit: $2,950) | 1,872 | |
2004—($9,750 × .32) | ||
(Limit: $4,900) | 3,120 | |
2003—($19,500 × .50)
1 ($9,750 x .20) |
||
(Limit: $10,710) | 10,710 | |
Total | $17,387 | |
Less: Actual depreciation
allowed |
-14,538 | |
Excess of 100% over actual | $ 2,849 | |
Less: Lesser of excess amount | ||
($2,849) or adjusted basis
of old van ($6,460) |
- 2,849 | |
Unadjusted basis of part of new van
that can be treated as newly purchased MACRS property |
$ 2,113 | |
Additional basis (cash paid) for new
van that is treated as newly purchased MACRS property |
$12,500 | |
150% special depreciation allowance ($19,500 x 50% = $9,750). Unadjusted basis of the car: ($19,500 - $9,750 = $9,750). Regular depreciation: ($9,750 x .20 = $1,950). Total depreciation ($9,750 + $1,950 = $11,700) cannot exceed first year limit ($10,710). |
Example 2.
Rob paid $21,000 for a new car that he placed in service in 2004. He used it partly for business in 2004 (9,600 business miles of 15,000 total miles), 2005 (12,000 business miles of 16,000 total miles), and 2006 (14,400 miles of 18,000 total miles). He used the standard mileage rate in those years to claim the business use of his car. (See Depreciation adjustment when you used the standard mileage rate under Disposition of a Car, later.)
On January 3, 2007, Rob traded in this car and paid an additional $10,000 for his new car. Rob figures the unadjusted basis for his new car as shown next.
Cost of old car | $21,000 | ||
Less: Total depreciation allowed: | |||
2006—14,400 mi. × .17 | $2,448 | ||
2005—12,000 mi. × .17 | 2,040 | ||
2004—9,600 mi. × .16 | 1,536 | - 6,024 | |
Adjusted basis of old car before trade-in adjustment | $14,976 | ||
Trade-in adjustment: | |||
Depreciation at 100% business use: | |||
2006—18,000 mi. × .17 | $3,060 | ||
2005—16,000 mi. × .17 | 2,720 | ||
2004—15,000 mi. × .16 | 2,400 | ||
Total | $8,180 | ||
Less: Actual depreciation
allowed |
- 6,024 | ||
Excess of 100% over actual | $2,156 | ||
Less: Lesser of excess amount | |||
($2,156) or adjusted basis
of old car ($14,976) |
- 2,156 | ||
Unadjusted basis of part of new car
that can be treated as newly purchased MACRS property |
$12,820 | ||
Additional basis (cash paid) for new
car that is treated as newly purchased MACRS property |
$10,000 |
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The 200% declining balance method (200% DB) over a 5-year recovery period that switches to the straight line method when that method provides an equal or greater deduction.
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The 150% declining balance method (150% DB) over a 5-year recovery period that switches to the straight line method when that method provides an equal or greater deduction.
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The straight line method (SL) over a 5-year recovery period.
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Using the straight line method provides equal yearly deductions throughout the recovery period.
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Using the declining balance methods provides greater deductions during the earlier recovery years with the deductions generally getting smaller each year.
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You file your return on a fiscal year basis.
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You file your return for a short tax year (less than 12 months).
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During the year, all of the following conditions apply.
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You placed some property in service from January through September.
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You placed some property in service from October through December.
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Your basis in the property you placed in service from October through December (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) was more than 40% of your total bases in all property you placed in service during the year.
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Example.
Phil bought a used truck in February 2006 to use exclusively in his landscape business. He paid $9,200 for the truck with no trade-in. Phil did not claim any section 179 deduction, the truck did not qualify for any special depreciation allowance, and he chose to use the 200% DB method to get the largest depreciation deduction in the early years.
Phil used the MACRS depreciation chart in 2006 to find his percentage. The unadjusted basis of his truck equals its cost because Phil used it exclusively for business. He multiplied the unadjusted basis of his truck, $9,200, by the percentage that applied, 20%, to figure his 2006 depreciation deduction of $1,840.
In 2007, Phil used the truck for personal purposes when he repaired his father's cabin. His records show that the business use of his truck was 90% in 2007. Phil used Table 4-1 to find his percentage. Reading down the first column for the date placed in service and across to the 200% DB column, he locates his percentage, 32%. He multiplies the unadjusted basis of his truck, $8,280 ($9,200 cost × 90% business use), by 32% to figure his 2007 depreciation deduction of $2,650.
There are limits on the amount you can deduct for depreciation of your car, truck, or van. The section 179 deduction is treated as depreciation for purposes of the limits. The maximum amount you can deduct each year depends on the year you place the car in service. These limits are shown in the following tables.
Maximum Depreciation Deduction for Cars
Date | 4th & | |||
Placed | 1st | 2nd | 3rd | Later |
In Service | Year | Year | Year | Years |
2007 | $3,060 | $4,900 | $2,850 | $1,775 |
2006 | 2,960 | 4,800 | 2,850 | 1,775 |
2005 | 2,960 | 4,700 | 2,850 | 1,675 |
2004 | 10,610 1 | 4,800 | 2,850 | 1,675 |
5/06/2003-
12/31/2003 |
10,710 2 | 4,900 | 2,950 | 1,775 |
1/01/2003-
5/05/2003 |
7,660 3 | 4,900 | 2,950 | 1,775 |
2001-2002 | 7,660 3 | 4,900 | 2,950 | 1,775 |
2000 | 3,060 | 4,900 | 2,950 | 1,775 |
1999 | 3,060 | 5,000 | 2,950 | 1,775 |
1998 | 3,160 | 5,000 | 2,950 | 1,775 |
1997 | 3,160 | 5,000 | 3,050 | 1,775 |
1995-1996 | 3,060 | 4,900 | 2,950 | 1,775 |
1$2,960 if the car is not qualified property or if you elect not to claim the special depreciation allowance. | ||||
2$7,660 if you acquired the car before 5/6/2003. $3,060 if the car is not qualified property or if you elect not to claim any special depreciation allowance. | ||||
3$3,060 if you acquired the car before 9/11/2001, the car is not qualified property, or you elect not to claim the special depreciation allowance. |
Date | 4th & | |||
Placed | 1st | 2nd | 3rd | Later |
In Service | Year | Year | Year | Years |
2007 | $3,260 | $5,200 | $3,050 | $1,875 |
2005-2006 | 3,260 | 5,200 | 3,150 | 1,875 |
2004 | 10,910 1 | 5,300 | 3,150 | 1,875 |
2003 | 11,010 2,3 | 5,400 | 3,250 | 1,975 |
1If the special depreciation allowance does not apply or you make the election not to claim the special depreciation allowance, the first year limit is $3,260. | ||||
2If the special depreciation allowance does not apply or you make the election not to claim the special depreciation allowance, the first year limit is $3,360. | ||||
3If the truck or van was acquired before 5/06/03, the truck or van is qualified property, and you claim the special depreciation allowance for the truck or van, the maximum deduction is $7,960. |
Example.
Marie purchased a car in June 2007 for $20,000 to use exclusively in her business. She does not claim the section 179 deduction and she chooses the 200% DB method of depreciation.
Marie's MACRS depreciation (using the rate from Table 4-1) is $4,000 ($20,000 × 20%). However, the maximum amount she can deduct for depreciation is $3,060. (See the Maximum Depreciation Deduction for Cars table earlier.)
Example.
In April 2007, Karl, an outside dental supply salesman, purchased a new car for $25,400 to make sales calls in a territory that extends 200 miles around his home base. He uses his car 85% for his business. Karl does not claim the section 179 deduction and he chooses the 200% DB method to figure his depreciation deduction.
In 2007, Karl figures his MACRS depreciation deduction to be $4,318 (($25,400 x 85%) x 20%). However, Karl's deduction is limited to $2,601. This is the depreciation limit ($3,060) multiplied by the business use percentage (85%).
Karl continues to use his car 85% for business. Depreciation in the next 4 years continues to be subject to deduction limits. Karl figures his depreciation limits for those years as follows.
Year | Limit x Business Use | Depreciation |
2008 | $4,900 × 85% | $4,165 |
2009 | 2,850 × 85% | 2,423 |
2010, 2011 | 1,775 × 85% | 1,509 |
In 2012, using the rate from Table 4-1, Karl's MACRS deduction is $1,244 (($25,400 × 85%) × 5.76%). Since that amount is less than the depreciation limit of $1,509 ($1,775 × 85%), Karl's depreciation deduction for 2012 is $1,244.
If Karl continues to use his car for business after 2012, he can continue to claim a depreciation deduction for his unrecovered basis. However, he cannot deduct more than $1,775 multiplied by his business use percentage. See Deductions in years after the recovery period, later.
Example.
On September 4, 2007, Jack bought a used car for $10,000 and placed it in service. He used it 80% for his business and he chooses to take a section 179 deduction for the car.
Before applying the limit, Jack figures his maximum section 179 deduction to be $8,000. This is the cost of his qualifying property (up to the maximum $125,000 amount) multiplied by his business use ($10,000 × 80%).
Jack then figures that his section 179 deduction for 2007 is limited to $2,448 (80% of $3,060). He then has an unadjusted basis of $5,552 (($10,000 × 80%) - $2,448) for determining his depreciation deduction. Since he has already reached the maximum limit for 2007, Jack will use the unadjusted basis to figure his depreciation deduction for 2008.
Example.
In May 2001, Bob bought and placed in service a car that he used exclusively in his business. The car cost $31,500. Bob did not claim a section 179 deduction for the car. He continued to use the car 100% in his business throughout the recovery period (2001 through 2006). For those years, Bob used Table 4-1 and the Maximum Depreciation Deduction for Cars table (as explained earlier) to compute his depreciation deductions as shown in the following table.
MACRS | MACRS | Maximum | Deprec. | |
Year | % | Amount | Deduction | Allowed |
2001 | 20.00 | $ 6,300 | $ 3,060 | $ 3,060 |
2002 | 32.00 | 10,080 | 4,900 | 4,900 |
2003 | 19.20 | 6,048 | 2,950 | 2,950 |
2004 | 11.52 | 3,629 | 1,775 | 1,775 |
2005 | 11.52 | 3,629 | 1,775 | 1,775 |
2006 | 5.76 | 1,814 | 1,775 | 1,775 |
Total | $31,500 | $16,235 | $16,235 |
At the end of 2006, Bob had an unrecovered basis in the car of $15,265. This was the $31,500 original basis of his car less the $16,235 depreciation deductions allowed during the recovery period.
Bob continued to use the car 100% for business in 2007. He can claim a depreciation deduction of $1,775 (the maximum allowed for each subsequent year) for the year. If he continues to use the car 100% for business in 2008 and later years, Bob can deduct the lesser of $1,775 or his remaining unrecovered basis in each of those years until his deductions total the $13,490 unrecovered basis ($15,265 - $1,775 claimed in 2007).
If Bob's business use of the car was less than 100% during any year, his depreciation deduction would be less than the maximum amount allowable for that year. However, in determining his unrecovered basis in the car, he would still reduce his original basis by the maximum amount allowable. Bob's unrecovered basis at the beginning of 2007 would be $15,265 ($31,500 - $16,235) in this example. This is true even if his actual depreciation deduction for any year was less than the maximum amount shown.
If you use your car 50% or less for qualified business use (defined earlier under Depreciation Deduction) either in the year the car is placed in service or in a later year, special rules apply. The rules that apply in these two situations are explained in the following paragraphs. (For this purpose, “car” was defined earlier under Actual Car Expenses and includes certain trucks and vans.)
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You cannot take the section 179 deduction.
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You must figure depreciation using the straight line method over a 5-year recovery period. You must continue to use the straight line method even if your percentage of business use increases to more than 50% in a later year.
Example.
On May 22, 2007, Dan bought a car for $17,500. He used it 40% for his consulting business. Because he did not use the car more than 50% for business, Dan cannot take any section 179 deduction and he must use the straight line method over a 5-year recovery period to recover the cost of his car.
Dan deducts $700 in 2007. This is the lesser of:
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$700 (($17,500 cost × 40% business use) × 10% recovery percentage (from column (c), Table 4-1)), or
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$1,224 ($3,060 maximum limit × 40% business use).
Example.
In June 2004, you purchased a car for exclusive use in your business. You met the more-than-50%-use test for the first 3 years of the recovery period (2004 through 2006) but failed to meet it in the fourth year (2007). You determine your depreciation for 2007 using 20% (from column (c) of Table 4-1). You also will have to determine and include in your gross income any excess depreciation, discussed next.
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The amount of the depreciation deductions allowable for the car (including any section 179 deduction claimed and any special depreciation allowance claimed) for tax years in which you used the car more than 50% in qualified business use, minus
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The amount of the depreciation deductions that would have been allowable for those years if you had not used the car more than 50% in qualified business use for the year you placed it in service. This means the amount of depreciation figured using the straight line method.
Example.
On September 25, 2004, you bought a car for $20,500 and placed it in service. You did not claim the section 179 deduction but you did claim the 50% special depreciation allowance. You used the car exclusively in qualified business use for 2004, 2005, and 2006. For those years, you figured the special depreciation allowance and you used the appropriate MACRS Depreciation Chart to figure depreciation deductions totaling $15,858 ($10,610 for 2004, $3,280 for 2005, and $1,968 for 2006) under the 200% DB method.
During 2007, you used the car 30% for business and 70% for personal purposes. Since you did not meet the more-than-50%-use test, you must switch from the 200% DB depreciation method to the straight line depreciation method for 2007, and include in gross income for 2007 your excess depreciation determined as follows.
Total depreciation claimed:
(MACRS 200% DB method) |
$15,858 | |
Minus total depreciation allowable:
(Straight line method) |
||
2004—50% of $20,500, plus | ||
10% of $10,250 | $10,610 | |
(Limit: $10,610) | ||
2005—20% of $10,250 | 2,050 | |
(Limit: $4,900) | ||
2006—20% of $10,250 | 2,050 | 14,710 |
(Limit: $2,950) | ||
Excess depreciation | $1,148 |
In 2007, using Form 4797, you figure and report the $1,148 excess depreciation you must include in your gross income. Your adjusted basis in the car is also increased by $1,148. Your 2007 depreciation deduction is $533 ($10,250 (unadjusted basis) × 30% (business use percentage) × 20% (from column (c) of Table 4-1 on the line for Jan. 1— Sept. 30, 2004) limited to $533 ($1,775 x 30% business use)).
If you lease a car, truck, or van that you use in your business, you can use the standard mileage rate or actual expenses to figure your deductible expense. This section explains how to figure actual expenses for a leased car, truck, or van.
If you lease a car that you use in your business for a lease term of 30 days or more, you may have to include an inclusion amount in your income for each tax year you lease the car. To do this, you do not add an amount to income. Instead, you reduce your deduction for your lease payment. (This reduction has an effect similar to the limit on the depreciation deduction you would have on the car if you owned it.)
The inclusion amount is a percentage of part of the fair market value of the leased car multiplied by the percentage of business and investment use of the car for the tax year. It is prorated for the number of days of the lease term in the tax year.
The inclusion amount applies to each tax year that you lease the car if the fair market value (defined next) of the car when the lease began was more than the amounts shown in the following table.
Year Lease Began | Fair Market Value* | ||
2007 | $15,500 | ||
2005-2006 | 15,200 | ||
2004 | 17,500 | ||
2003 | 18,000 | ||
1999-2002 | 15,500 | ||
1997-1998 | 15,800 | ||
1995-1996 | 15,500 | ||
1994 | 14,600 | ||
1993 | 14,300 | ||
1992 | 13,700 | ||
1991 | 13,400 | ||
1987-1990 | 12,800 | ||
*For 2007, the fair market value for trucks and vans is $16,400. |
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Locate the appendix that applies to you. To find the inclusion amount, do the following.
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Find the line that includes the fair market value of the car on the first day of the lease term.
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Go across the line to the column for the tax year in which the car is used under the lease to find the dollar amount. For the last tax year of the lease, use the dollar amount for the preceding year.
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Prorate the dollar amount from (1)(b) for the number of days of the lease term included in the tax year.
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Multiply the prorated amount from (2) by the percentage of business and investment use for the tax year. This is your inclusion amount.
Example.
On January 17, 2006, you leased a car for 3 years and placed it in service for use in your business. The car had a fair market value of $32,250 on the first day of the lease term. You use the car 75% for business and 25% for personal purposes during each year of the lease. Assuming you continue to use the car 75% for business, you use Appendix A-5 to arrive at the following inclusion amounts for each year of the lease:
Tax
year |
Dollar
amount |
Proration |
Business
use |
Inclusion
amount |
2006 | $116 | 349/365 | 75% | $83 |
2007 | 252 | 365/365 | 75% | 189 |
2008 | 374 | 366/366 | 75% | 281 |
2009 | 374 | 16/365 | 75% | 12 |
For each year of the lease that you deduct lease payments, you must reduce your deduction by the inclusion amount computed for that year.
Example.
On August 16, 2006, Will leased an electric car with a fair market value of $58,600 for 3 years. He used the car exclusively in his own data processing business. On November 5, 2007, Will closed his business and went to work for a company where he is not required to use a car for business. Using Appendix C-5, Will computed his inclusion amount for 2006 and 2007 as shown in the following table and reduced his deductions for lease payments by those amounts.
Tax
year |
Dollar
amount |
Proration |
Business
use |
Inclusion
amount |
2006 | $89 | 138/365 | 100% | $34 |
2007 | 194 | 309/365 | 100% | 164 |
Example.
In March 2005, Janice leased a car for 4 years for personal use. On June 1, 2007, she started working as a self-employed advertising consultant and started using the leased car for business purposes. Her records show that her business use for June 1 through December 31 was 60%. To figure her inclusion amount for 2007, Janice obtained an appraisal from an independent car leasing company that showed the fair market value of her 2005 car on June 1, 2007, was $21,650. Using Appendix A-6, Janice computed her inclusion amount for 2007 as shown in the following table.
Tax
year |
Dollar
amount |
Proration |
Business
use |
Inclusion
amount |
2007 | $44 | 214/365 | 60% | $16 |
If you dispose of your car, you may have a taxable gain or a deductible loss. The portion of any gain that is due to depreciation (including any section 179 deduction, clean-fuel vehicle deduction, and special depreciation allowance) that you claimed on the car will be treated as ordinary income. However, you may not have to recognize a gain or loss if you dispose of the car because of a casualty, theft, or trade-in.
This section gives some general information about dispositions of cars. For information on how to report the disposition of your car, see Publication 544.
Depreciation | |||
Year(s) | Rate per Mile | ||
2007 | $.19 | ||
2005-2006 | .17 | ||
2003-2004 | .16 | ||
2001-2002 | .15 | ||
2000 | .14 | ||
1994-1999 | .12 | ||
1992-1993 | .11½ | ||
1989-1991 | .11 | ||
1988 | .10½ | ||
1987 | .10 | ||
1986 | .09 | ||
1983-1985 | .08 | ||
1982 | .07½ | ||
1980-1981 | .07 | ||
Example.
In 2002, you bought a car for exclusive use in your business. The car cost $22,500. From 2002 through 2007, you used the standard mileage rate to figure your car expense deduction. You drove your car 14,100 miles in 2002, 16,300 miles in 2003, 15,600 miles in 2004, 16,700 miles in 2005, 15,100 miles in 2006, and 14,900 miles in 2007. Your depreciation is figured as follows.
Year | Miles x Rate | Depreciation | |
2002 | 14,100 × .15 | $2,115 | |
2003 | 16,300 × .16 | 2,608 | |
2004 | 15,600 × .16 | 2,496 | |
2005 | 16,700 × .17 | 2,839 | |
2006 | 15,100 × .17 | 2,567 | |
2007 | 14,900 × .19 | 2,831 | |
Total depreciation | $15,456 |
At the end of 2007, your adjusted basis in the car is $7,044 ($22,500 - $15,456).
Month | Percentage |
Jan., Feb., March | 12.5% |
April, May, June | 37.5% |
July, Aug., Sept. | 62.5% |
Oct., Nov., Dec. | 87.5% |
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