How to Depreciate Your Car on Your Taxes
We use our cars for everything — errands, school drop-offs, vet visits, and the daily commute to work. Some of us are so reliant on our vehicles that we even give them nicknames and soothingly pat the dash when they make noises we can’t afford.
Considering all the value they add to our daily lives, it shouldn’t be surprising that they help us save on taxes too! Believe it or not, your vehicle can be depreciated on your tax return to reduce your taxable income.
What is vehicle depreciation?
Put simply, depreciation is a way to measure the declining value of an asset. We all intuitively understand this concept: a Ford Focus purchased in 2014 is less valuable than a Ford Focus purchased in 2018. (I would know. Thanks for nothing, CarMax.)
The reason for this decline is also apparent: the more a car is used, the more wear and tear it gets. That’s why it’s always a bargain to find a used car with low mileage. (Who knew you’d get car buying tips here too!). The other contributing factor is that humans continue to innovate. Every year new models of cars are released with improved functionality and features. In other words, the car you bought five years ago simply can’t compete.
What auto depreciation means for your taxes
The general idea behind car depreciation for taxes is to spread the cost of a car out over its “useful life,” instead of writing off its whole cost the year you buy it.
Useful life describes the amount of time it takes for your vehicle to lose 100% of its original value. For tax purposes, the IRS generally considers five years to be standard for most vehicles. (In other words, your car has the life expectancy of a guinea pig).
There are two basic methods to depreciate your vehicle for taxes: mileage and actual expenses.
If you use the standard mileage deduction
Most people are familiar with the term “business mileage.” If you’re not, it’s exactly what it sounds like: the number of miles you drove for work in a given year. This is a great option for people who drive a lot for work, such as truckers or Uber and Lyft drivers.
For 2022, that rate is $0.585 per mile from January to June, and $0.625 per mile from July to the end of the year. (The IRS increased it for the last six months as a response to high gas prices.)
Calculating your standard mileage deduction
You can use these rates to calculate your tax deduction at the end of the year. For instance, let’s say you drive 12,000 miles in a year, 5,000 of which were for work. Let's say those were split evenly: 2,500 during the first half of the year and 2,500 during the second half.
Your mileage write-off would be $3,025. (2,500 x $0.585 = $1,462.50, and 2,500 x $0.625 = $1,562.50. Adding them together gives you $3,025).
Don't count the miles you spend commuting
The only rule is that “business mileage” does not include commuting mileage. Commuting miles are the distance you drive from home to work.
If you have a home office as your exclusive place of business (meaning you don’t have a second primary office somewhere else), you’re eligible to include the mileage to and from your home office.
If you use the actual expense method
This expense method allows you to claim your actual vehicle costs, such as gas, oil changes, repairs, insurance, and depreciation.
This method simplifies the recordkeeping requirement: you can track your auto expenses with all your other write-offs rather than maintaining a separate mileage log. And luckily, Keeper Tax makes this even easier by automatically tracking auto expenses through our app!
Make sure you carefully consider which method is most advantageous to you. If you claim mileage your first year, you can switch to actual car expenses the next year. But if you choose the actual method the first year, you're locked in and can't switch to mileage later on.
This is on a per-auto basis. So in theory, you could have two vehicles each using a different method. The only rule is that you can’t alternate between methods on the same vehicle.
How much can you write off for car depreciation?
If you choose the mileage, you won’t be able to claim depreciation as a standalone deduction -- it’s already included in the standard mileage rate. But if you use the actual expense method, the amount you can write off as depreciation is your “basis” in the vehicle.
Basis essentially means sunk cost. Let’s say you purchase a used car for $18,000, and after all the fees, taxes, and registration, the total price is $20,000. $20,000 is your basis in the vehicle (regardless of whether you need financing to make the purchase or not).
Before you rush to sign the dotted line, however, you need to be aware that only the business portion of your basis is eligible to depreciate on your taxes.
Most of us don’t have vehicles that are strictly for business use, so we have to treat our autos as “listed” assets, meaning we have to carve out the amount that’s personal. The business portion is calculated the same way as mileage above: business miles / annual mileage = business use.
The basis is multiplied by our business-use percentage to determine the “depreciable basis” of the vehicle for tax purposes. In the example shown above, the depreciable basis on our $20,000 vehicle would be $11,400.
See how this would be allocated on your taxes in the table below:
This table assumes the auto was placed in service at the beginning of the first year. See IRS table A-2 for further details.
Note that because the vehicle is over 50% for business use, we’re able to use MACRS depreciation (which stands for Modified Accelerated Cost Recovery System). This allows you to front-load the bulk of the expense in the first two years.
If the business use on your vehicle is under 50%, you’re required to use the straight-line depreciation method (SLD) instead. SLD is easy to calculate because it simply takes the depreciable basis and divides it evenly across the useful life. So $11,400 ÷ 5 = $2,280 annually.
When it’s time to file your return, you’ll use Form 4562 to report your car’s depreciation.
Can you get a bigger write-off upfront?
Many people are surprised to learn they can’t deduct the entire cost of their vehicle when they buy it. In response, the IRS has developed ways to “accelerate” depreciation in order to allow a bigger write-off in the first year.
There are currently two methods to accelerate depreciation.
Accelerating depreciation with Section 179
The Section 179 deduction was introduced to incentivize business owners to purchase machinery and equipment. The election enables you to write off the entire cost of the purchase in the first year, rather than depreciating it over its useful life.
The 179 deduction extends to automobiles as well, with the only caveat being that the max write-off is limited to $18,200 for 2021.
Note that the 179 deduction can’t be taken on vehicles used less than 50% for business.
Accelerating depreciation with bonus depreciation
Ushered in with the Tax Cuts and Jobs Act, bonus depreciation makes it possible to claim 100% of the cost of any machinery and equipment purchased.
Unfortunately, the same auto limits that apply to Section 179 also apply to bonus — the max deduction is $18,200 in the first year. In addition, bonus depreciation cannot be claimed on vehicles used less than 50% for business.
Section 179 vs. bonus depreciation: What’s the difference?
With regards to automobiles, Section 179 and bonus depreciation provide virtually the same results. The only difference is that bonus depreciation is automatic, meaning you don’t have to elect anything special to claim it.
Consequently, many people find this the more convenient method to use.
Depreciation on SUVs, trucks, and other heavy vehicles
Up until now we’ve been discussing depreciation as it relates to “passenger vehicles.” A passenger vehicle is what most of us drive. They’re typically not designed to seat more than nine people and usually weigh less than 6,000 pounds.
In many cases, however, freelancers and self-employed people work jobs that require more heavy-duty autos. SUVs, pickup trucks, and other heavy-weight vehicles are categorized as “transportation equipment.” Consequently you’re eligible to claim 100% of their cost under bonus depreciation and Section 179 expensing.
For instance, if you purchase a truck for $80,000, and it meets the transportation requirements, you can claim the full $80,000 in the first year.
To verify that your vehicle meets the transportation requirements, it must have a Gross Vehicle Weight Rating (GVWR) of above 6,000 pounds. Most manufacturers will note this on the vehicle’s label.
Similar to passenger vehicles, if the business use falls below 50%, you’ll have to depreciate it using the straight-line method over its useful life -- typically six years for heavy vehicles.
Calculating car depreciation is nobody’s first choice for a Saturday afternoon, but taking the time to consider your options is worth every penny!
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At Keeper Tax, we’re on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please email firstname.lastname@example.org if you have questions.