Publication 463 |
2000 Tax Year |
Car Expenses
If you use your car for business purposes, you may be able to
deduct car expenses. You generally can use one of two methods to
figure your expenses: actual expenses or the standard mileage rate. 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.
You may be entitled to a tax credit for an electric vehicle or a
deduction from gross income for a part of the cost of a clean-fuel
vehicle that you place in service during the year. The vehicle must
meet certain requirements, and you do not have to use it in your
business to qualify for the credit or the deduction. However, you must
reduce your basis for depreciation of the electric vehicle or
clean-fuel vehicle property by the amount of the credit or deduction
you claim. See Depreciation Deduction, later, under
Actual Car Expenses. For more information on electric or
clean-fuel vehicles, see chapter 12 of Publication 535.
Rural mail carriers.
If you are a rural mail carrier, you may be able to treat the
amount of qualified reimbursement you received as the amount of your
allowable expense. Because the qualified reimbursement is treated as
paid under an accountable plan, your employer should not include the
amount of reimbursement in your income. And, since the reimbursement
equals the expense, you have no deduction to report on your tax
return.
A "qualified reimbursement" is the amount of reimbursement you
receive that meets both of the following conditions.
- It is given as an equipment maintenance allowance (EMA) to
employees of the U.S. Postal Service.
- 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.
See your employer for information on your reimbursement.
If you are a rural mail carrier and received a qualified
reimbursement, you cannot use the standard mileage rate.
Standard Mileage Rate
You may be able to use the standard mileage rate to figure the
deductible costs of operating your car for business purposes. For
2000, the standard mileage rate is 32 1/2 cents a
mile for all business miles. This rate is adjusted periodically.
If you use the standard mileage rate for a year, you cannot
deduct your actual car expenses for that year. These expenses
include depreciation or lease payments, maintenance and repairs,
gasoline (including gasoline taxes), oil, insurance, and 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.
Choosing the standard mileage rate.
If you want to use the standard mileage rate for a car you own, you
must choose to use it in the first year the car is available for use
in your business. Then in later years, you can choose to use either
the standard mileage rate or actual expenses.
If you want to use the standard mileage rate for a car you lease,
you must use it for the entire lease period. For leases that began on
or before December 31, 1997, the standard mileage rate must be used
for the entire portion of the lease period (including renewals) that
is after that date.
If you choose to use the standard mileage rate, you are considered
to have chosen not to use the depreciation methods discussed later.
This is because the standard mileage rate includes an allowance for
depreciation that is not expressed in terms of years. If you change to
the actual expenses method in a later year, but before your car is
fully depreciated, you have to estimate the remaining useful life of
the car and use straight line depreciation. For more information about
depreciation included in the standard mileage rate, see
Exception under Methods of depreciation under
Depreciation Deduction, later.
Standard mileage rate not allowed.
You cannot use the standard mileage rate if you:
- Use the car for hire (such as a taxi),
- Operate two or more cars at the same time (as in fleet
operations),
- Claimed a depreciation deduction using ACRS or MACRS
(discussed later) in an earlier year,
- Claimed a section 179 deduction (discussed later) on the
car,
- Claimed actual car expenses after 1997 for a car you leased,
or
- Are a rural mail carrier who received a qualified
reimbursement. (See Rural mail carriers, earlier.)
Two or more cars.
If you own two or more cars that are used for business at the same
time, you cannot use the standard mileage rate for the business use of
any car. However, you may be able to deduct your actual expenses for
operating each of the cars in your business. See Actual Car
Expenses for information on how to figure your deduction.
You are not using two or more cars for business at the
same time if you alternate using (use at different times) the cars for
business.
The following examples illustrate the rules for when you can and
cannot use the standard mileage rate for two or more cars.
Example 1.
Marcia, a salesperson, owns a car and a van that she alternates
using for calling on her customers. She can use the standard mileage
rate for the business mileage of the car and the van.
Example 2.
Tony uses his own pickup truck in his landscaping business. During
the year, he traded in his old truck for a newer one. Tony can use the
standard mileage rate for the business mileage of both the old and the
new trucks.
Example 3.
Chris owns a repair shop and an insurance business. He uses his
pickup truck for the repair shop and his car for the insurance
business. No one else uses either the truck or the car for business
purposes. Chris can use the standard mileage rate for the business use
of the truck and the car.
Example 4.
Maureen owns a car and a van that are both used in her
housecleaning business. Her employees use the van and she uses the car
to travel to the various customers. Maureen cannot use the standard
mileage rate for the car or the van. This is because both vehicles are
used in Maureen's business at the same time. She must use actual
expenses for both vehicles.
Interest.
If you are an employee, you cannot deduct any interest paid on a
car loan. This applies even if you use the car 100% for business as an
employee.
However, if you are self-employed and use your car in your
business, you can deduct that part of the interest expense that
represents your business use of the car. For example, if you use your
car 60% for business, you can deduct 60% of the interest on Schedule C
(Form 1040). You cannot deduct the rest of the interest expense.
If you use a home equity loan to purchase your car, you may be able
to deduct the interest. See Publication 936,
Home Mortgage
Interest Deduction, for more information.
Personal property taxes.
If you itemize your deductions on Schedule A (Form 1040), you can
deduct on line 7 state and local personal property taxes on motor
vehicles. You can take this deduction even if you use the standard
mileage rate or if you do not use the car for business.
If you are self-employed and use your car in your business, you can
deduct the business part of state and local personal property taxes on
motor vehicles on Schedule C, Schedule C-EZ, or Schedule F (Form
1040). If you itemize your deductions, you can include the remainder
of your state and local personal property taxes on the car on Schedule
A (Form 1040).
Parking fees and tolls.
In addition to using the standard mileage rate, you can deduct any
business-related parking fees and tolls. (Parking fees that you pay to
park your car at your place of work are nondeductible commuting
expenses.)
Sale, trade-in, or other disposition.
If you sell, trade in, or otherwise dispose of your car, you may
have a gain or loss on the transaction or an adjustment to the basis
of your new car. See Disposition of a Car, later.
Actual Car Expenses
If you do not choose to use the standard mileage rate, you may be
able to deduct your actual car expenses.
If you qualify to use both methods, before choosing a method, you
may want to figure your deduction both ways to see which gives you a
larger deduction.
Actual car expenses include the costs of:
Depreciation
|
Lease
payments |
Registration
fees |
Licenses |
Insurance |
Repairs |
Gas |
Oil |
Tires |
Garage rent |
Parking fees |
Tolls |
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.
Business and personal use.
If you use your car for both business and personal purposes, you
must divide your expenses between business and personal use. You can
divide based on the miles driven for each purpose.
Example.
You are a sales representative for a clothing firm and drive your
car 20,000 miles during the year: 12,000 miles for business and 8,000
miles for personal use. You can claim only 60% (12,000 x
20,000) of the cost of operating your car as a business expense.
Employer-provided vehicle.
If you use a vehicle provided by your employer for business
purposes, you can deduct your actual unreimbursed car expenses. You
cannot use the standard mileage rate. See Vehicle Provided by
Your Employer in chapter 6.
Interest on car loans.
If you are an employee, you cannot deduct any interest paid on a
car loan. This interest is treated as personal interest and is not
deductible. If you are self-employed and use your car in that
business, see Interest, earlier, under Standard
Mileage Rate.
Taxes paid on your car.
If you are an employee, you can deduct personal property taxes paid
on your car if you itemize deductions. Enter the amount paid on line 7
of Schedule A (Form 1040).
You cannot deduct luxury or sales taxes, even if you use your car
100% for business. Luxury and sales taxes are part of your car's basis
and may be recovered through depreciation. See Depreciation
Deduction, later.
Fines and collateral.
You cannot deduct fines and collateral you pay for traffic
violations.
Casualty and theft losses.
If your car is damaged, destroyed, or stolen, you may be able to
deduct part of the loss that is not covered by insurance. See
Publication 547,
Casualties, Disasters, and Thefts (Business and
Nonbusiness), for information on deducting a loss on your car.
Depreciation and section 179 deductions.
Generally, the cost of a car, plus sales tax, luxury tax, and
improvements, is a capital expense. Because the benefits last longer
than one year, you generally cannot deduct a capital expense. However,
you can recover this cost by claiming a section 179 deduction (the
deduction allowed by section 179 of the Internal Revenue Code) and/or
a depreciation deduction. By using depreciation, you recover the cost
over more than one year by deducting part of it each year. The section
179 deduction and the depreciation deduction are discussed later.
Generally, there are limits on both of these deductions. Special
rules apply if you use your car 50% or less in your work or business.
You can claim a section 179 deduction and use a depreciation method
other than straight line only if you do not use the standard mileage
rate to figure your business-related car expenses in the year you
first place a car in service. If you claim either a section 179
deduction or depreciation using a method other than straight line for
its estimated useful life in the year you first place a car in
service, you cannot use the standard mileage rate on that car in any
future year.
Car defined.
For depreciation purposes, a car is any four-wheeled vehicle
(including a truck or van) that is made primarily for use on public
streets, roads, and highways. Its unloaded gross vehicle weight (gross
vehicle weight in the case of a truck or van) must not be more than
6,000 pounds. A car includes any part, component, or other item that
is physically attached to it or is usually included in the purchase
price.
A car does not include:
- An ambulance, hearse, or combination ambulance-hearse used
directly in a business, or
- A vehicle used directly in the business of transporting
persons or property for pay or hire.
See Publication 946
for more information on how to depreciate your
vehicle.
Section 179 Deduction
The section 179 deduction allows you to choose to treat part or all
of the business cost of a car as a current expense rather than taking
depreciation deductions over a specified recovery period.
Even though you may be able to claim a section 179 deduction, the
limit on total section 179 and depreciation deductions (discussed
later) may reduce or eliminate any benefit from claiming it.
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
trade or business, the production of income, a tax-exempt activity, or
a personal activity. 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 1999 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.
Limits.
There are limits on:
- The total cost of property qualifying for a section 179
deduction, and
- The total amount of the section 179 deduction plus
the depreciation deduction (discussed later).
Limit on cost of qualifying property.
Generally, you can choose to treat up to $20,000 of the cost of
qualifying property as a section 179 deduction in 2000. (The amount
increases each year up to 2003.) The yearly limit, however, depends on
the percentage of business use, and you must use the property
more than 50% for business to claim any section 179
deduction.
Example.
Peter purchased a car this year for $14,500 and he used it 60% for
business. The total cost of Peter's car that qualifies for the section
179 deduction is $8,700 ($14,500 cost x 60% business use). But
see Limit on total section 179 and depreciation deductions,
discussed next.
Limit on total section 179 and depreciation deductions.
Generally, the total amount of section 179 and depreciation
deductions that you can claim for a car that you place in service in
2000 cannot be more than $3,060. The limit is reduced if your business
use of the car is less than 100%. See Depreciation Limits,
later, for more information.
Example.
Peter, in the previous example, had a car with a qualifying cost of
$8,700 for his section 179 deduction. However, Peter is limited to a
total section 179 deduction plus depreciation deduction of $1,836
($3,060 limit x 60% business use).
Cost of car.
For purposes of the section 179
deduction, the cost of the car does not include any amount figured by
reference to any other property held by you at any time. For example,
if you buy (for cash and a trade-in) a new car to use in your
business, your cost for purposes of the section 179 deduction does not
include your adjusted basis in the car you trade in for the new car.
Basis of car.
The amount of the section 179 deduction reduces your basis in your
car. If you choose the section 179 deduction, you must reduce your
basis in your car before you figure your depreciation deduction.
Choosing a section 179 deduction can give you a larger total
deduction (depreciation plus section 179 deduction) in the first year.
Not choosing it can give you a larger depreciation deduction in later
years.
Example.
On January 2, 2000, Stella bought a car for $12,000, including
sales tax, to use exclusively in her delivery business. She paid
$9,000 cash and received $3,000 in trade for her old car (also used in
her business). Her adjusted basis in her old car was $3,000.
Only the $9,000 cash Stella paid qualifies for the section 179
deduction. If she does not choose section 179, her basis for
depreciation is $12,000. The total of her section 179 and depreciation
deductions is limited to $3,060, the first year maximum. If she does
not choose section 179, her depreciation deduction, using the MACRS
method (discussed later), is $2,400 [$12,000 basis x 20%
(double declining balance rate)] from Table 3,
explained later.
When to choose.
If you want to take the section 179 deduction, you must make the
choice in the tax year you both purchase the car and place
it in service for business or work. Employees use Form 2106 to make
this choice and report the section 179 deduction. All others use Form
4562. Make your choice by taking the deduction on the appropriate form
and file it with your original tax return. If you timely filed your
return for the year without making the election, you can still make
the election by filing an amended return within six months of the due
date of the return (excluding extensions). You cannot make
the choice on an amended tax return filed after the due date of your
return (including extensions). If you make the election on
an amended return, attach the appropriate election form (2106 or 4562)
to it and write "Filed pursuant to section 301.9100-2" on
the election statement. File the amended return at the same address
you filed the original return. Once made, the choice can be changed
only with the consent of the Internal Revenue Service (IRS).
Reduction in business use.
To be eligible to claim the section 179 deduction, you must use
your car more than 50% for business or work in the year you acquired
it. If your business use of the car is 50% or less in a later tax year
during the recovery period, you have to include in income in that
later year any excess depreciation. Any section 179 deduction claimed
on the car is included in calculating the excess depreciation. For
information on this calculation, see Excess depreciation
later in this chapter under Car Used 50% or Less for
Business.
Dispositions.
If you dispose of a car on which you had claimed the section 179
deduction, the amount of that deduction is treated as a depreciation
deduction for recapture purposes. You treat any gain on the
disposition of the property as ordinary income up to the amount of the
section 179 deduction and any depreciation you claimed. For
information on the disposition of depreciable property, see chapter 3 of Publication 544,
Sales and Other Dispositions of Assets.
Depreciation Deduction
If you use a car you own 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 the car. You cannot
use the standard mileage rate if you decide to take a depreciation
deduction in the year you first place the car in service.
You generally need to know the following three things about the car
you intend to depreciate.
- Your basis in the car.
- The date you place the car in service.
- The method of depreciation, recovery period, and convention
you will use.
Basis.
Your basis in the car for figuring depreciation is generally its
cost. This includes any amount you borrow or pay in cash, in other
property, or in services. Additional rules concerning basis are
discussed later in this chapter under Unadjusted basis.
Placed in service.
You generally place a car in service when it is available for use
in your work or business, in the production of income, or in a
personal activity. Depreciation begins when the car is ready for use
in your work or business or for the production of income.
For purposes of computing depreciation, if you first start using
the car only for personal use and later convert it to business use,
you place the car in service on the date of conversion. Your basis is
the lesser of the fair market value or your adjusted basis in the car
on the date of conversion.
Car placed in service and disposed of in the same year.
If you place a car in service and dispose of it in the same tax
year, you cannot claim any depreciation deduction for that car.
Methods of depreciation.
Generally, one depreciation system is available for cars: the
Modified Accelerated Cost Recovery System (MACRS). MACRS rules for
cars are discussed later in this chapter. Exception.
If you used the standard mileage rate in the first year of business
use and change to the actual expenses method in a later year, you
cannot depreciate your car under the MACRS rules. You must use
straight line depreciation over the estimated remaining useful life of
the car.
To figure depreciation under the straight line method, you must
reduce your basis in the car (but not below zero) by a set rate per
mile for all miles for which you used the standard mileage rate. The
rate per mile varies depending on the year(s) you used the standard
mileage rate. For the rate(s) to use, see Depreciation adjustment
when you used the standard mileage rate under Disposition
of a Car, later.
This reduction of basis is in addition to those basis adjustments
described later under Unadjusted basis. You must use your
adjusted basis in your car to figure your depreciation deduction. For
additional information on the straight line method of depreciation,
see Publication 534, Depreciating Property Placed in Service
Before 1987.
Percentage of business use.
Generally, you must use your car more than 50% for qualified
business use (defined next) to qualify for the section 179 deduction
and MACRS deduction. If your business use is 50% or less, you must use
the straight line method to depreciate your car. This is explained
later under Car Used 50% or Less for Business.
Qualified business use.
A qualified business use is any use in your trade or business. It
does not include use for the production of income (investment use).
However, you do combine your business and investment use to compute
your depreciation deduction for the tax year.
Use of your car by another person.
Do not treat any use of your car by another person as use in your
trade or business unless that use meets one of the following three
conditions.
- It is directly connected with your business.
- It is properly reported by you as income to the other person
(and, if you have to, you withhold tax on the income).
- It results in a payment of fair market rent. This includes
any payment to you for the use of your car.
Business use changes.
If you used your car more than 50% in qualified business use in the
year you placed it in service, but 50% or less in a later year
(including the year of disposition), you have to change to the
straight line method of depreciation. See Business use drops to
50% or less in a later year under Car Used 50% or Less for
Business, later.
More-than-50%-use test.
You meet this test for any tax year if you use your car more than
50% in qualified business use. You must meet this test each year of
the recovery period (6 years under MACRS) for your car.
If you use your car for more than one purpose during the tax year,
you must allocate the use to the various purposes. You do this on the
basis of mileage. Figure the percentage of qualified business use by
dividing the number of miles you drive your car for business purposes
during the year by the total number of miles you drive the car during
the year for any purpose.
Property does not cease to be used more than 50% in qualified
business use by reason of a transfer at death.
Change from personal to business use.
If you change the use of a car from 100% personal use to business
use during the tax year, you may not have mileage records for the time
before the change to business use. In this case, you figure the
percentage of business use for the year as follows.
- 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.
- 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 x 15,000)
for that period. Your business use for the year is 40% (80% x 6/12).
Limits.
The amount you can claim for section 179 and depreciation
deductions may be limited. Maximum limits apply depending on the year
in which you placed your car in service. You have to adjust the limits
if you did not use the car exclusively for business. See
Depreciation Limits, later
Unadjusted basis.
You use your unadjusted basis to figure your depreciation using the
MACRS depreciation chart explained later under Modified
Accelerated Cost Recovery System (MACRS). Your unadjusted basis
for figuring depreciation is your original basis increased or
decreased by certain amounts.
To figure your unadjusted basis, begin with your original basis in
your car, which generally is its cost. Cost includes sales and luxury
taxes, destination charges, and dealer preparation. Increase your
basis by any substantial improvements you make to your car, such as
adding air conditioning or a new engine. Decrease your basis by any
deductible casualty loss, section 179 deduction, diesel fuel tax
credit, gas guzzler tax, clean-fuel vehicle deduction, and qualified
electric vehicle credit. See Publication 535
for more information on
the clean-fuel vehicle deduction, and the qualified electric vehicle
credit.
If your business use later falls to 50% or less, you may have to
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.
Improvements.
A major improvement to a car is treated as a new item of 5-year
recovery property. It is treated as placed in service in the year the
improvement is made. It does not matter how old the car is when the
improvement is added. Follow the same steps for depreciating the
improvement as you would for depreciating the original cost of the
car. However, you must treat the improvement and the car as a whole
when applying the limits on the depreciation deductions. Your car's
depreciation deduction for the year (plus the depreciation on any
improvements) cannot be more than the depreciation limit that applies
for that year. See Depreciation Limits, later.
Effect of trade-in on basis.
When you trade an old car for a
new one, your original basis in the new car is generally your adjusted
basis in the old car plus any additional payment you make.
Traded car used only for business.
If you trade in a car that you used only in your business for
another car that will be used only in your business, your original
basis in the new car is your adjusted basis in the old car, plus any
additional amount you pay for the new car.
Example 1.
Paul trades in a car that has an adjusted basis of $3,000 for a new
car. In addition, he pays cash of $7,000 for the new car. His original
basis of the new car is $10,000 (his $3,000 adjusted basis in the old
car plus the $7,000 cash paid). Paul's unadjusted basis would be the
same unless he claims the section 179 deduction or has other increases
or decreases to his original basis.
Example 2.
In July 1997, Marcia purchased a car for $26,000 and placed it in
service for 100% use in her business. She did not claim a section 179
deduction. Marcia's unadjusted basis for the car was $26,000. For 1997
through 1999, Marcia figured her depreciation deduction using the
MACRS chart for those years.
In September 2000, 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 regular depreciation amount for 2000 for her old car.
(See Disposition of a Car, later.)
Marcia figures her original basis in the new car, $27,792, as
follows.
Cost of old car |
$26,000 |
Less: Total depreciation allowed
from 1997 through 2000 |
- 12,408 |
Adjusted basis of old car |
| $13,592 |
Plus: Additional cost for
new car |
| + 14,200 |
Basis of new car |
| $27,792 |
Traded car used partly in business.
If you trade in a car that you used partly in your business for a
new car that you will use in your business, you must make a
"trade-in" adjustment for the personal use of the old car. This
adjustment has the effect of reducing your basis in your old car, but
not below zero, for purposes of figuring your depreciation deduction
for the new car. (This adjustment is not used, however, when you
determine the gain or loss on the later disposition of the new car.
See Publication 544
for information on how to report the disposition
of your car.)
To figure the unadjusted basis of your new car for depreciation,
first add to your adjusted basis in the old car any additional amount
you pay for the new car. Then subtract from that total the excess, if
any, of:
- 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
- The total of the amounts actually allowable as depreciation
during those years.
For information about figuring depreciation, see Modified
Accelerated Cost Recovery System (MACRS), which follows
Example 2, later.
Example 1.
In March, Mark traded his 1996 van (placed in service in 1996) for
a new 2000 model. He used the old van 75% for business and he used the
new van 75% for business in 2000. Mark claimed actual expenses
(including $8,494 depreciation expense) for the business use of the
old van since 1996. He did not claim a section 179 deduction for the
old or the new van.
Mark paid $12,800 for the 1996 van in June 1996. He paid an
additional $9,800 when he acquired the 2000 van. Mark was allowed 1/2 of the depreciation deduction amount (which is included
in the $8,494 depreciation expense total) for his old van for 2000,
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 |
$12,800 |
Less: Total depreciation allowed on the
business cost of old van, $9,600
($12,800 x 75%), from 1996-2000 |
- 8,494 |
Adjusted basis of old van |
| $ 4,306 |
Plus: Add'l cost for new van |
| + 9,800 |
Basis of new van before trade-in
adjustment |
| $14,106 |
Trade-in adjustment: |
Depreciation at 100% business use: |
2000-($12,800 x .1152) x 1/2 yr |
$ 737 |
(Limit: $1,775) |
1999-12,800 x .1152 |
1,475 |
(Limit: $1,775) |
1998-12,800 x .192 |
2,458 |
(Limit: $2,950) |
1997-12,800 x .32 |
4,096 |
(Limit: $4,900) |
1996-12,800 x .20 |
2,560 |
(Limit: $3,060) |
Total |
$11,326 |
Less: Actual depreciation allowed |
- 8,494 |
Excess of 100% over actual |
$2,832 |
Less: Lesser of Excess amount ($2,832) |
or Adjusted basis of old van
($4,306) |
- 2,832 |
Unadjusted basis of new van
for depreciation |
$11,274 |
Example 2.
Rob paid $15,000 for a new car that he placed in service in 1997.
He used it partly for business in 1997 (9,000 business miles of 15,000
total miles), 1998 (12,000 business miles of 16,000 total miles), and
1999 (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 2, 2000, Rob traded in this car and paid an additional
$6,000 for his new car. Rob figures the unadjusted basis for his new
car as shown next.
Cost of old car |
| $15,000 |
Less: Total depreciation allowed: |
1999-14,400 mi. x .12 |
$1,728 |
1998-12,000 mi. x .12 |
1,440 |
1997- 9,000 mi. x .12 |
1,080 |
- 4,248 |
Adjusted basis of old car |
| $10,752 |
Plus: Additional cost for new car |
| + 6,000 |
Basis of new car before trade-in
adjustment |
| $16,752 |
Trade-in adjustment: |
Depreciation at 100% business use: |
1999--18,000 mi. x .12 |
$2,160 |
1998--16,000 mi. x .12 |
1,920 |
1997--15,000 mi. x .12 |
1,800 |
Total |
$5,880 |
Less: Actual depreciation allowed |
4,248 |
Excess of 100% over actual |
$1,632 |
Less: Lesser of Excess amount ($1,632) |
or Adjusted basis of old car
($10,752) |
- 1,632 |
Unadjusted basis of new car
for depreciation |
$15,120 |
Modified Accelerated Cost Recovery System (MACRS).
The Modified Accelerated Cost Recovery System (MACRS) is the name
given to the tax rules for getting back (recovering) through
depreciation deductions the cost of property used in a trade or
business or to produce income.
The maximum amount you can deduct is limited, depending on the year
you placed your car in service. See Depreciation Limits,
later.
Recovery period.
Under MACRS, cars are
classified as 5-year property. You actually depreciate the cost of a
car, truck, or van over a period of 6 calendar years. This is because
your car is generally treated as placed in service in the middle of
the year and you claim depreciation for one-half of both the first
year and the sixth year.
Depreciation deduction for certain Indian reservation
property.
Shorter recovery periods are provided under MACRS for qualified
Indian reservation property placed in service on Indian reservations
after 1993 and before 2004. The recovery period that applies for a
business-use car is 3 years instead of 5 years. However, the
depreciation limits, discussed later, will still apply.
For more information on the qualifications for this shorter
recovery period and the percentages to use in figuring the
depreciation deduction, see chapter 3 of Publication 946.
Depreciation methods.
You can use one of the following three methods to depreciate your
car.
- The 200% declining balance method (200% DB) over a 5-year
recovery period that switches to the straight line method when that
method provides a greater deduction.
- The 150% declining balance method (150% DB) over a 5-year
recovery period that switches to the straight line method when that
method provides a greater deduction.
- The straight line method (SL) over a 5-year recovery
period.
If you use Table 3 (discussed later under MACRS
depreciation chart) to determine your depreciation rate for
2000, you do not need to determine in what year your deduction is
greater using the straight line method. This is because the chart has
the switch to the straight line method built into its rates.
Before choosing a method, you may wish to consider the following
facts.
- Using the straight line method provides equal yearly
deductions throughout the recovery period.
- Using the declining balance methods provides greater
deductions during the earlier recovery years with the deductions
generally getting smaller each year.
MACRS depreciation chart.
A 2000 MACRS Depreciation Chart and instructions are
included in this chapter as Table 3. Using this table will
make it easy for you to figure the 2000 depreciation deduction for
your car. A similar chart appears in the Instructions for Form
2106.
You may have to use the tables in Publication 946
instead of using
this MACRS Depreciation Chart.
You must use the Depreciation Tables in Publication 946
rather than the 2000 MACRS Depreciation Chart in this
publication if any one of the following three conditions applies to
you.
- You file your return on a fiscal year basis.
- You file your return for a short tax year (less than 12
months).
- During the year, all of the following conditions apply to
you.
- You placed some property in service from January through
September.
- You placed some property in service from October through
December.
- Your basis in the property you placed in service from
October through December was more than 40% of your total bases in all
property you placed in service during the year.
Depreciation in future years.
If you use the percentages from the chart, you must continue to use
them for the entire recovery period of your car. However, you cannot
continue to use the chart if your basis in your car is adjusted
because of a casualty. In that case, for the year of adjustment and
the remaining recovery period, figure the depreciation without the
chart using your adjusted basis in the car at the end of the year of
adjustment and over the remaining recovery period. See How To
Figure the Deduction Without Using the Tables in chapter 3 of
Publication 946.
In future years, do not use the chart from this publication.
Instead, use the chart in the publication or the form instructions for
those future years.
Disposition of car during recovery period.
If you dispose of the car before the end of the recovery period,
you are generally allowed a half year of depreciation in the year of
disposition unless you purchased the car during the last quarter of a
year. See Depreciation deduction for the year of disposition
under Disposition of a Car, later, for information on
how to figure the depreciation allowed in the year of disposition.
How to use the 2000 chart.
To figure your depreciation deduction for 2000, find the percentage
in the column of the chart based on the date that you first placed the
car in service and the depreciation method that you are using.
Multiply the unadjusted basis of your car (defined earlier) by that
percentage to determine the amount of your depreciation deduction. If
you prefer to figure your depreciation deduction without the help of
the chart, see Publication 946.
Table 3. 2000 MACRS Depreciation Chart
Your deduction cannot be more than the maximum depreciation limit
for cars. See Depreciation Limits, later.
Example.
Phil bought a used truck in February 1999 to use exclusively in his
landscape business. He paid $6,200 for the truck with no trade-in.
Phil did not claim any section 179 deduction 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 1999 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, $6,200, by the percentage that applied, 20%, to
figure his 1999 depreciation deduction of $1,240.
In 2000, 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 2000. Phil used Table 3 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, $5,580 ($6,200
cost x 90% business use), by 32% to figure his 2000 depreciation
deduction of $1,786.
Depreciation Limits
There are limits on the amount you can deduct for depreciation of
your car. (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 table.
Maximum Depreciation Limits for Cars
Year Placed
In Service |
1st Year | 2nd Year |
3rd Year |
4th & Later
Years |
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 |
1994 |
2,960 |
4,700 |
2,850 |
1,675 |
Exceptions for clean-fuel cars.
There are two exceptions to the depreciation limits for cars. They
are effective after August 5, 1997, for cars that run on clean fuel.
Clean-fuel cars are discussed in chapter 12 of Publication 535.
The
exceptions follow.
- Amounts you pay for retrofit parts and components to modify
a car to run on clean fuel are not subject to the depreciation limit
on cars. Only the cost of the car before modification is subject to
the limit.
- If you place a car in service after August 5, 1997, that was
produced to run on electricity, your depreciation limit is increased.
The amounts are shown in the following table.
Maximum Depreciation Limits For
Electric Cars Placed in Service
After August 5, 1997
Year Placed
In Service |
1st Year |
2nd Year |
3rd Year |
4th & Later
Years |
2000 |
$9,280 |
$14,800 |
$8,850 |
$5,325 |
1999 |
9,280 |
14,900 |
8,950 |
5,325 |
1998 |
9,380 |
15,000 |
8,950 |
5,425 |
1997 |
9,480 |
15,100 |
9,050 |
5,425 |
The examples throughout this chapter illustrate gas-fueled cars.
Car used less than full year.
The depreciation limits are not reduced if you use a car for less
than a full year. This means that you do not reduce the limit when you
either place a car in service or dispose of a car during the year.
However, the depreciation limits are reduced if you do not use the car
exclusively for business and investment purposes. See Reduction
for personal use, later.
Example.
Marie purchased a car in June 2000 for $16,000 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 depreciation (using the rate from Table 3) is
$3,200 ($16,000 x 20%). However, the maximum amount she can
deduct for depreciation (from the Maximum Depreciation Limits for
Cars table) is $3,060. (See Deductions in years after the
recovery period, later.)
Reduction for personal use.
The depreciation limits are
further reduced based on your percentage of personal use. If you use a
car less than 100% in your business or work, you must determine the
depreciation deduction limit by multiplying the limit amount by the
percentage of business and investment use during the tax year.
Example.
In June 2000, Karl, an outside dental supply salesman, purchased a
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 2000, Karl computes his MACRS 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 four years continues to be subject to deduction limits. Karl
computes his depreciation limits for those years as follows.
Year |
Limit x Business Use
|
|
Depreciation |
2001 |
$ 4,900 x 85% |
| $ 4,165 |
2002 |
2,950 x 85% |
| 2,508 |
2003, 2004 |
1,775 x 85% |
| 1,509 |
In 2005, using the rate from Table 3, Karl's MACRS
deduction is $1,244 [($25,400 x 85%) x 5.76%].
Since that amount is less than the depreciation limit of $1,509
($1,775 x 85%), Karl's depreciation deduction for 2005 is
$1,244.
If Karl continues to use his car for business after 2005, 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.
Section 179 deduction.
The section 179 deduction is treated as a depreciation deduction.
If you place a car in service in 2000, use it only for business, and
choose the section 179 deduction, the combined section 179 and
depreciation deduction for that car for 2000 is limited to $3,060.
Example.
On September 4, 2000, 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 $20,000 amount) multiplied by his business use
($10,000 x 80%).
Jack then figures that his section 179 deduction for 2000 is
limited to $2,448 (80% of $3,060). He then has an unadjusted basis of
$5,552 [($10,000 x 80%) - $2,448] for
determining his depreciation deduction. Since he has already reached
the maximum limit for 2000, Jack will use the unadjusted basis to
figure his depreciation deduction for 2001.
Deductions in years after the recovery period.
If the depreciation limits apply to your car, you may have
unrecovered basis in your car at the end of the recovery period. If
you continue to use your car for business, you can deduct that
unrecovered basis after the recovery period ends.
Unrecovered basis.
This is your cost or other basis in the car reduced by any
clean-fuel vehicle deduction, electric vehicle credit, and
depreciation and section 179 deductions that would have been allowable
if you had used the car 100% for business and investment use.
The recovery period.
For 5-year property, your
recovery period is 6 calendar years. A part year's depreciation is
allowed in the first calendar year, a full year's depreciation is
allowed in each of the next 4 calendar years, and a part year's
depreciation is allowed in the 6th calendar year.
Your recovery period is the same whether you use MACRS, declining
balance, or straight line depreciation. Under MACRS, you determine
your unrecovered basis in the 7th year after you placed the car in
service.
How to treat unrecovered basis.
If you continue to use your car for business after the recovery
period, you can claim a depreciation deduction for that business use
in each succeeding tax year until you recover your full basis in the
car. The maximum amount you can deduct is determined by the date you
placed the car in service and your business-use percentage. For
example, no deduction is allowed for a year you use your car 100% for
personal purposes.
Example.
In May 1994, Bob bought and placed in service a car that he used
exclusively in his business. The car cost $28,600. 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 (1994 through 1999). For
those years, Bob used Table 3 and the Maximum
Depreciation Limits for Cars table (as explained earlier) to
compute his depreciation deductions as shown in the following table.
| MACRS |
MACRS |
Maximum |
Deprec. |
Year |
%
|
Amount
|
Limit
|
Allowed
|
'94 |
20.00 |
$5,720 |
$2,960 |
$ 2,960 |
'95 |
32.00 |
9,152 |
4,700 |
4,700 |
'96 |
19.20 |
5,491 |
2,850 |
2,850 |
'97 |
11.52 |
3,295 |
1,675 |
1,675 |
'98 |
11.52 |
3,295 |
1,675 |
1,675 |
'99 |
5.76 |
1,647 |
1,675 |
1,647 |
Total |
| $15,535 |
$15,507 |
At the end of 1999, Bob had an unrecovered basis in the car of
$13,093. This was the $28,600 original basis of his car less the
$15,507 depreciation deductions allowed during the recovery period.
Bob continued to use the car 100% for business in 2000. He can
claim a depreciation deduction of $1,675 (the maximum allowed for each
subsequent year) for the year. If he continues to use the car 100% for
business in 2001 and later years, Bob can deduct the lesser of $1,675
or his remaining unrecovered basis in each of those years until his
deductions total the $11,418 unrecovered basis ($13,093 - $1,675
claimed in 2000).
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 2000
would be $13,065 ($28,600 - $15,535) in this example. This is
true even if his actual depreciation deduction for any year was less
than the maximum amount shown.
Car Used 50% or Less
for Business
If you use your car 50% or less in qualified business use (defined
earlier under Depreciation Deduction), the following two
special rules apply. (For this purpose, "car" was defined earlier
under Actual Car Expenses.)
- You cannot take the section 179 deduction.
- 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.
Instead of making the computation yourself, you can use column (c)
of Table 3 to find the percentage to use.
Example.
On May 22, 2000, Dan bought a car for $15,000. 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 $600 in 2000. This is the lesser of:
- $600 [($15,000 cost x 40% business use) x
10% recovery percentage (from column (c), Table 3)],
or
- $1,224 ($3,060 maximum limit x 40% business
use).
Business use drops to 50% or less in a later year.
If you use your car more than 50% in qualified business use in the
tax year it is placed in service but the business use drops to 50% or
less in a later year, you can no longer use an accelerated
depreciation method for that car. For the year the business use drops
to 50% or less and all later years in the recovery period, you must
use the straight line depreciation method over a 5-year recovery
period. In addition, for the year your business use drops to 50% or
less, you must determine and include in your gross income any excess
depreciation (discussed later).
Example.
In June 1997, 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 (1997 through 1999) but failed to meet it in the
fourth year (2000). You determine your depreciation for 2000 using 20%
(from column (c) of Table 3). You also will have to
determine and include in your gross income any excess depreciation,
discussed next.
Excess depreciation.
You must include any excess depreciation in your gross income and
add it to your car's adjusted basis for the first tax year in which
you do not use the car more than 50% in qualified business use. Use
Form 4797, Sales of Business Property,
to report the excess depreciation in
your gross income.
Excess depreciation is:
- The amount of the depreciation deductions allowable for the
car (including any section 179 deduction claimed) for tax years in
which you used the car more than 50% in qualified business use,
minus
- 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 June 25, 1997, you bought a car for $11,000 and placed it in
service. You did not claim the section 179 deduction. You used the car
exclusively in qualified business use for 1997, 1998, and 1999. For
those years, you used the appropriate MACRS Depreciation Chart
to figure depreciation deductions totaling $7,832 ($2,200 for 1997,
$3,520 for 1998, and $2,112 for 1999) under the 200% DB method.
During 2000, you used the car 50% for business and 50% for personal
purposes. Since you did not meet the more-than-50%-use test, you must
include in gross income for 2000 your excess depreciation determined
as follows.
Total depreciation claimed:
(MACRS 200% DB method) |
| $7,832 |
Total depreciation allowable:
(Straight line method) |
1997--10% of $11,000 |
$1,100 |
1998--20% of $11,000 |
2,200 |
1999--20% of $11,000 |
2,200 |
5,500 |
Excess depreciation |
| $2,332 |
In 2000, you must include $2,332 in your gross income using Form
4797. Your adjusted basis in the car is also increased by $2,332. Your
2000 depreciation deduction is $1,100 [$11,000 (unadjusted basis)
x 50% (business use percentage) x 20% (from column (c) of
Table 3 on the line for Jan. 1-- Sept. 30,
1997)].
Disposition of a Car
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 or clean-fuel vehicle deduction) 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.
Casualty or theft.
For a casualty or theft, a gain results when you receive insurance
or other reimbursement that is more than your adjusted basis in your
car. If you then spend all of the proceeds to acquire replacement
property (a new car or repairs to the old car) within a specified
period of time, you do not recognize any gain. Your basis in the
replacement property is its cost minus any gain that is not
recognized. See Publication 547
for more information.
Trade-in.
When you trade in an old car for
a new one, the transaction is considered a like-kind exchange.
Generally, no gain or loss is recognized. (For exceptions, see chapter 1 of Publication 544.)
In a trade-in situation, your basis in the new
property is generally your adjusted basis in the old property plus any
additional amount you pay. (See Unadjusted basis, earlier.)
Depreciation adjustment when you used the standard mileage
rate.
If you used the standard mileage rate for the business use of your
car, depreciation was included in that rate. The rate of depreciation
that was allowed in the standard mileage rate is shown in the chart
that follows. You must reduce your basis in your car (but not below
zero) by the amount of this depreciation.
These rates do not apply for any year in which the actual expenses
method was used.
| | | Depreciation |
|
Year(s) |
|
Rate per Mile |
| 2000 |
| $ .14 |
| 1994 - 1999 |
| .12 |
| 1992 - 1993 |
| .11 1/2 |
| 1989 - 1991 |
| .11 |
| 1988 |
| .10 1/2 |
| 1987 |
| .10 |
| 1986 |
| .09 |
| 1983 - 1985 |
| .08 |
| 1982 |
| .07 1/2 |
| 1980 - 1981 |
| .07 |
For tax years after 1989, the depreciation rates apply to all
business miles. For tax years before 1990, the depreciation rates
apply to the first 15,000 miles.
Example.
In 1995, you bought a car for exclusive use in your business. The
car cost $14,000. From 1995 through 2000, you used the standard
mileage rate to figure your car expense deduction. You drove your car
14,100 miles in 1995, 16,300 miles in 1996, 15,600 miles in 1997,
16,700 miles in 1998, 15,100 miles in 1999, and 14,900 miles in 2000.
Your depreciation is figured as follows.
Year |
Miles x Rate |
Depreciation
|
1995 |
14,100 x .12 |
$ 1,692 |
1996 |
16,300 x .12 |
1,956 |
1997 |
15,600 x .12 |
1,872 |
1998 |
16,700 x .12 |
2,004 |
1999 |
15,100 x .12 |
1,812 |
2000 |
14,900 x .14 |
2,086 |
Total depreciation |
$11,422 |
At the end of 2000, your adjusted basis in the car is $2,578
($14,000 - $11,422).
Depreciation deduction for the year of disposition.
If you deduct actual car expenses and you dispose of your car
before the end of its recovery period, you are allowed a reduced
depreciation deduction for the year of disposition.
To figure the reduced depreciation deduction for a car disposed of
in 2000, first determine the depreciation deduction for the full year
using Table 3.
If you used a Date Placed in Service line for Jan.
1--Sept. 30, you can deduct one-half of the regular
depreciation amount for the year of disposition. Figure your
depreciation deduction for the full year using the rules explained in
this chapter and deduct 50% of that amount with your other actual car
expenses.
If you used a Date Placed in Service line for Oct.
1--Dec. 31, you can deduct a percentage of the regular
depreciation amount. The percentage you use is determined by the month
you disposed of the car. Figure your depreciation deduction for the
full year using the rules explained in this chapter and multiply the
result by the percentage from the following table for the month that
you disposed of the car.
Month |
Percentage
|
Jan., Feb., March |
12.5% |
April, May, June |
37.5% |
July, Aug., Sept. |
62.5% |
Oct., Nov., Dec. |
87.5% |
Do not use this table if you are a fiscal year filer. See
Dispositions in chapter 3 of Publication 946.
Leasing a Car
If you lease a car that you use in your business, you can use the
standard mileage rate or actual expenses to figure your deductible car
expense. This section explains how to figure actual expenses for a
leased car.
Deductible payments.
You can deduct the part of each lease payment that is for the use
of the car in your business. You cannot deduct any part of a lease
payment that is for personal use of the car, such as commuting.
You must spread any advance payments over the entire lease period.
You cannot deduct any payments you make to buy a car, even if the
payments are called lease payments.
If you lease a car for 30 days or more, you may have to reduce your
lease payment deduction by an "inclusion amount."
Inclusion Amounts
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* |
| 1999-2000 |
$ 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 |
*These amounts are higher for electric
cars. |
Fair market value.
Fair market value is the price at which the property would change
hands between a buyer and a seller, neither having to buy or sell, and
both having reasonable knowledge of all the necessary facts. Sales of
similar property around the same date may be helpful in figuring the
fair market value of the property.
Figure the fair market value on the first day of the lease term. If
the capitalized cost of a car is specified in the lease agreement, use
that amount as the fair market value.
Figuring the inclusion amount.
Inclusion amounts are listed in Appendix B and, for
electric cars leased after August 5, 1997, in Appendix C.
If the fair market value of the car is $100,000 or less, use the
appropriate appendix (depending on the year you first placed the car
in service) to determine the inclusion amount. If the fair market
value is more than $100,000, see the Revenue Procedure(s) identified
in the footnote of the appendices for the inclusion amount. Revenue
Procedures are available at most IRS offices and many local libraries.
For each tax year during which you lease the car for business,
determine your inclusion amount by following these three steps.
- Locate the appendix that applies to you. To find the
inclusion amount, do the following.
- Find the line that includes the fair market value of the car
on the first day of the lease term.
- 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.
Prorate the dollar amount from (1)(b) for the number of days
of the lease term included in the tax year.
- 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, 1998, 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 B-3 to arrive at the following inclusion
amounts for each year of the lease:
Tax
year |
Dollar
amount |
Proration |
Business
use |
Inclusion
amount |
1998 |
$137 |
349/365 |
75% |
$ 98 |
1999 |
301 |
365/365 |
75% |
226 |
2000 |
446 |
366/366 |
75% |
335 |
2001 |
536 |
16/365 |
75% |
18 |
For each year of the lease that you deduct lease payments, you
must reduce your deduction by the inclusion amount computed for that
year.
Leased car changed from business to personal use.
If you lease a car for
business use and, in a later year, change it to personal use, follow
the rules explained earlier under Figuring the inclusion amount.
For the tax year in which you stop using the car for business,
use the dollar amount for the previous tax year. Prorate the dollar
amount for the number of days in the lease term that fall within the
tax year.
Example.
On August 16, 1999, 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, 2000, 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-2, Will
computed his inclusion amount for 1999 and 2000 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 |
1999 |
$ 95 |
138/365 |
100% |
$ 36 |
2000 |
95 |
309/366 |
100% |
80 |
Leased car changed from personal to business use.
If you lease a car for personal use and, in a later year, change it
to business use, you must determine the car's fair market value on the
date of conversion. Then figure the inclusion amount using the rules
explained earlier under Figuring the inclusion amount. Use
the fair market value on the date of conversion.
Example.
In March 1998, Janice leased a car for 4 years for personal use. On
June 1, 2000, 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 2000, Janice obtained an
appraisal from an independent car leasing company that showed the fair
market value of her 1998 car on June 1, 2000, was $18,650. Using
Appendix B-1, Janice computed her inclusion amount
for 2000 as shown in the following table.
Tax
year |
Dollar
amount |
Proration |
Business
use |
Inclusion
amount |
2000 |
$ 22 |
214/366 |
60% |
$ 8 |
Reporting inclusion amounts.
For information on reporting inclusion amounts, employees should
see Car rentals under Completing Forms 2106 and
2106-EZ in chapter 6.
Sole proprietors should see the
instructions for Schedule C (Form 1040) and farmers should see the
instructions for Schedule F (Form 1040).
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