| Publication 463 |
2003 Tax Year |
Transportation
This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
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.
-
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.
-
Visiting clients or customers.
-
Going to a business meeting away from your regular workplace.
-
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.
Illustration of transportation expenses.
Figure B illustrates the rules that apply for deducting transportation expenses when you have a regular or main job away from your
home.
You may want to refer to it when deciding whether you can deduct your transportation expenses.
Temporary work location.
If you have one or more regular work locations away from your home and you commute to a temporary work location in
the same trade or business, you
can deduct the expenses of the daily round-trip transportation between your home and the temporary location, regardless of
distance.
If your employment at a work location is realistically expected to last (and does in fact last) for 1 year or less,
the employment is temporary
unless there are facts and circumstances that would indicate otherwise.
If your employment at a work location is realistically expected to last for more than 1 year or if there is no realistic
expectation that the
employment will last for 1 year or less, the employment is not temporary, regardless of whether it actually lasts for more
than 1 year. If employment
at a work location initially is realistically expected to last for 1 year or less, but at some later date the employment is
realistically expected to
last more than 1 year, that employment will be treated as temporary (unless there are facts and circumstances that would indicate
otherwise) until
your expectation changes. It will not be treated as temporary after the date you determine it will last more than 1 year.
If the temporary work location is beyond the general area of your regular place of work and you stay overnight, you
are traveling away from home.
You may have deductible travel expenses as discussed in chapter 1.
No regular place of work.
If you have no regular place of work but ordinarily work in the metropolitan area where you live, you can deduct daily
transportation costs between
home and a temporary work site outside that metropolitan area.
Generally, a metropolitan area includes the area within the city limits and the suburbs that are considered part of
that metropolitan area.
You cannot deduct daily transportation costs between your home and temporary work sites within your metropolitan area. These are
nondeductible commuting expenses.
Two places of work.
If you work at two places in one day, whether or not for the same employer, you can deduct the expense of getting
from one workplace to the other.
However, if for some personal reason you do not go directly from one location to the other, you cannot deduct more than the
amount it would have cost
you to go directly from the first location to the second.
Transportation expenses you have in going between home and a part-time job on a day off from your main job are commuting
expenses. You cannot
deduct them.
Armed Forces reservists.
A meeting of an Armed Forces reserve unit is a second place of business if the meeting is held on a day on which you
work at your regular job. You
can deduct the expense of getting from one workplace to the other as just discussed under Two places of work.
You usually cannot deduct the expense if the reserve meeting is held on a day on which you do not work at your regular
job. In this case, your
transportation generally is a nondeductible commuting expense. However, you can deduct your transportation expenses if the
location of the meeting is
temporary and you have one or more regular places of work.
If you ordinarily work in a particular metropolitan area but not at any specific location and the reserve meeting
is held at a temporary location
outside that metropolitan area, you can deduct your transportation expenses.
If you travel away from home overnight to attend a guard or reserve meeting, you can deduct your travel expenses.
These expenses are discussed in
chapter 1.
If you travel more than 100 miles away from home in connection with your performance of services as a member of the
reserves, you may be able to
deduct some of your reserve-related travel costs as an adjustment to gross income rather than as an itemized deduction. For
more information, see
Armed Forces Reservists Traveling More Than 100 Miles From Home under Special Rules, in chapter 6.
Commuting expenses.
You cannot deduct the costs of taking a bus, trolley, subway, or taxi, or of driving a car between your home and your
main or regular place of
work. These costs are personal commuting expenses. You cannot deduct commuting expenses no matter how far your home is from
your regular place of
work. You cannot deduct commuting expenses even if you work during the commuting trip.
Example.
You had a telephone installed in your car. You sometimes use that telephone 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.
Parking fees.
Fees you pay to park your car at your place of business are nondeductible commuting expenses. You can, however, deduct
business-related parking
fees when visiting a customer or client.
Advertising display on car.
Putting display material that advertises your business on your car does not change the use of your car from personal
use to business use. If you
use this car for commuting or other personal uses, you still cannot deduct your expenses for those uses.
Car pools.
You cannot deduct the cost of using your car in a nonprofit car pool. Do not include payments you receive from the
passengers in your income. These
payments are considered reimbursements of your expenses. However, if you operate a car pool for a profit, you must include
payments from passengers in
your income. You can then deduct your car expenses (using the rules in this publication).
Hauling tools or instruments.
Hauling tools or instruments in your car while commuting to and from work does not make your car expenses deductible.
However, you can deduct any
additional costs you have for hauling tools or instruments (such as for renting a trailer you tow with your car).
Union members' trips from a union hall.
If you get your work assignments at a union hall and then go to your place of work, the costs of getting from the
union hall to your place of work
are nondeductible commuting expenses. Although you need the union to get your work assignments, you are employed where you
work, not where the union
hall is located.
Office in the home.
If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation
costs between your
home and another work location in the same trade or business. (See Publication 587, Business Use of Your Home, for information on
determining if your home office qualifies as a principal place of business.)
Examples of deductible transportation.
The following examples show when you can deduct transportation expenses based on the location of your work and your
home.
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.
Car Expenses
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.
-
Standard mileage rate.
-
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.
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 qualified reimbursement you received as your allowable
expense. Because the qualified
reimbursement is treated as paid under an accountable plan, your employer should not include the 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 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 2003, the standard
mileage rate is 36 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. You cannot deduct the special
depreciation allowance (and you do not need to make the election not to claim the allowance), 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 1997.
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),
-
Use two or more cars at the same time (as in fleet operations),
-
Claimed a depreciation deduction for the car using any method other than straight line, for example, MACRS (as discussed later
under
Methods of depreciation under Depreciation Deduction),
-
Claimed a section 179 deduction (discussed later) on the car,
-
Claimed the special depreciation allowance (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 under Car Expenses,
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, later,
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 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.
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 your
expense 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 ÷ 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 sales taxes, even if you use your car 100% for business. Sales taxes are part of your car's basis
and are recovered through
depreciation. See Special Depreciation Allowance and 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, for information on deducting a loss on your car.
Depreciation and section 179 deductions.
Generally, the cost of a car, plus sales 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 through the section 179 deduction (the deduction allowed
by section 179 of the
Internal Revenue Code), the special depreciation allowance, and depreciation deductions. Depreciation allows you to recover
the cost over more than
one year by deducting part of it each year. The section 179 deduction, special depreciation allowance, and the depreciation
deduction are discussed
later.
Generally, there are limits on 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, the special depreciation allowance, 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, the special depreciation allowance, 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.
-
A truck or van that is a qualified nonpersonal use vehicle.
Trucks and vans.
For purposes of depreciation, the term “ trucks and vans” refers to passenger automobiles that are built on a truck chassis, including minivans
and sport utility vehicles (SUVs) that are built on a truck chassis.
Electric car.
For purposes of depreciation, the term “ electric car” refers to passenger automobiles designed to be propelled primarily by electricity and
built by an original equipment manufacturer.
More information.
See Special Depreciation Allowance, later, for more information on how to depreciate your vehicle.
Qualified nonpersonal use vehicles.
These are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes.
They include trucks and vans
that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes,
such as by installation of
permanent shelving and painting the vehicle to display advertising or the company's name.
Section 179 Deduction
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 2002 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.
More than 50% business use requirement.
You must use the property more than 50% for business to claim any section 179 deduction. If you used the property more than 50% for
business, multiply the cost of the property by the percentage of business use. The result is the cost of the property that
can qualify for the section
179 deduction.
Example.
Peter purchased a car in April 2003 for $19,500 and he used it 60% for business. The total cost of Peter's car that qualifies
for the section 179
deduction is $11,700 ($19,500 cost × 60% business use). But see Limit on total section 179 and depreciation deductions, discussed
later.
Limits.
There are limits on:
-
The total cost of qualifying property you can choose to treat as a section 179 deduction, and
-
The total amount of the section 179 deduction plus the depreciation deduction (discussed later) you can claim for a qualifying
property.
Limit on cost of qualifying property.
Generally, you can choose to treat up to $100,000 of the cost of qualifying property as a section 179 deduction in
2003.
Limit on total section 179 and depreciation deductions.
Generally, the total amount of section 179 and depreciation deductions that you can claim for a qualified car that
you acquired after December 31,
2002, and before May 6, 2003, cannot be more than $7,660. If you acquired a qualified car after May 5, 2003, the limit is
$10,710. The limit is $3,060
if you elect not to claim the special depreciation allowance for the car or the car is not qualified property as explained
later under Special
Depreciation Allowance. The limit is reduced if your business use of the car is less than 100%. See Depreciation Limits, later, for
more information.
Example.
In the earlier example under More than 50% business use requirement, Peter had a car with a qualifying cost (for purposes of the section
179 deduction) of $11,700. However, Peter's total section 179 and depreciation deduction is limited. If Peter claims the special
depreciation
deduction (discussed later), the total of the two deductions cannot be more than $4,596 ($7,660 limit x 60% business use).
If Peter had purchased the car after May 5, 2003, then the total section 179 and depreciation deduction could not be more
than $6,426 ($10,710
limit × 60% business use). If Peter's car does not qualify for the special depreciation allowance or Peter elects not to claim
the allowance,
the total of the two deductions cannot be more than $1,836 ($3,060 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. Your cost
includes only the cash
you paid.
Basis of car for depreciation.
The amount of the section 179 deduction reduces your basis in your car. If you choose the section 179 deduction, you
must subtract the amount of
the deduction from the cost of your car. The resulting amount is the basis in your car that you use to figure your depreciation
deduction.
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.
How to choose.
Employees use Form 2106 to make this choice and report the section 179 deduction. All others use Form 4562.
File the appropriate form with either of the following.
-
Your original tax return filed for the year the property was placed in service (whether or not you file it timely).
-
An amended return filed no later than the due date (including extensions) for your return for the year the property was placed
in
service.
If you timely filed your return for the year without making the election, you still can make the election by filing
an amended return within six
months of the due date of the return (excluding extensions). Attach the appropriate election form (2106 or 4562) to it and
print “ Filed pursuant to
section 301.9100–2” on the amended return. 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 recapture (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
allowable depreciation (unless you establish the amount actually allowed). For information on the disposition of a car, see
Disposition of a
Car, later.
Special Depreciation Allowance
The special depreciation allowance is a deduction equal to 30% (or 50%, depending on when you acquired the property) of the
depreciable basis of
qualified property. If your car qualifies for this deduction, you must reduce the car's adjusted basis by the amount of the
allowance, unless you
elect not to claim the allowance, as discussed later. You figure the amount of the special depreciation allowance after any
section 179 deduction you
choose to claim, but before figuring your regular depreciation deduction under MACRS.
For a car that is qualified property purchased before May 6, 2003, the allowance is a deduction equal to 30% of the car's depreciable
basis. For a car that is qualified property purchased after May 5, 2003, the allowance is a deduction equal to 50% of the car's depreciable
basis.
You can claim the special depreciation allowance only for the year the qualified property is placed in service.
Qualified property.
Qualified property includes a car (See Car defined earlier, under Actual Car Expenses.) that meets all of the following
requirements.
-
You bought the car new after September 10, 2001 (after May 5, 2003, to be eligible for the 50% special depreciation allowance).
-
You placed the car in service for business in 2003, and
-
You used the car more than 50% in a qualified business use.
For more information on other depreciable property that may qualify for the special depreciation allowance, see Publication
946.
Example.
Bob bought a new car in June 2003 for $20,000 and placed it in service immediately, using it 75% for business. Bob's car is
qualified property.
Bob chooses not to take a section 179 deduction for the car. Bob first must figure the car's depreciable basis, which is $15,000
($20,000 ×
75%). He then figures the special depreciation allowance of $7,500 ($15,000 × 50%).
The remaining depreciable basis of $7,500 ($15,000 - $7,500) is depreciated using MACRS (200% declining balance method, half-year
convention)
and results in a deduction of $1,500 ($7,500 × 20%), for a total depreciation deduction for 2003 of $9,000 ($7,500 + $1,500).
However, Bob's
depreciation deduction is limited to $8,033 ($10,710 × 75%), as discussed next.
Depreciation limit.
The general limit on your depreciation deduction for a car purchased after May 5, 2003, is $10,710. It is $11,010
for a truck or van and $32,030
for an electric car.
However, if you use a car less than 100% in your business or work, the general limit must be reduced by multiplying
the limit by the percentage of
business and investment use during the year.
For cars that do not qualify for (or for which you choose not to claim) the special depreciation allowance, the limit
is $3,060 ($3,360 for trucks
and vans, $9,080 for electric cars). See Depreciation Limits later.
Election not to claim the special depreciation allowance.
You can elect not to claim the special depreciation allowance for a car that is qualified property. For a car purchased after May 5,
2003, you can elect to claim the 30% allowance instead of the 50% allowance, or not to deduct any special depreciation allowance
at all.
To make an election, attach a statement to your timely filed return (including extensions) indicating the class of
property for which you are
making the election and that, for such class:
-
You are electing not to claim the 30% special allowance for qualified property acquired before May 6, 2003,
-
You are electing to claim the 30% special allowance instead of the 50% special allowance for qualified property acquired after
May 5, 2003,
or
-
You are electing not to claim any special allowance for qualified property acquired after May 5, 2003.
If you elect not to claim the special depreciation allowance or to claim the 30% allowance, rather than the 50% allowance,
for a car that is
qualified property, the election also applies to any other 5-year property placed in service during the same year.
Unless you elect not to claim the special depreciation allowance, you must reduce the car's adjusted basis by the
amount of the allowance, even if
the allowance was not claimed.
When to make election.
Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you
place the property in service.
However, 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 6 months of the due date of the original return (not including extensions). Attach the election statement to the amended
return. On the amended
return, write “ Filed pursuant to section 301.9100-2.”
Depreciation Deduction
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 cannot use the standard
mileage rate if you
decide to take a depreciation deduction in the year you first place the car in service.
In addition, you may be able to claim the special depreciation allowance for new cars purchased and placed in service in 2003.
See Special
Depreciation Allowance earlier.
You generally need to know the following 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 and recovery period you will use.
Basis.
Your basis in a car for figuring depreciation is generally its cost. This includes any amount you borrow or pay in
cash, other property, or
services.
Generally, you figure depreciation using your basis. However, in some situations (such as use of the straight line
method) you will use your
adjusted basis (your basis reduced by depreciation allowed or allowable in earlier years). For one of these situations see
Exception under
Methods of depreciation, later.
If you change the use of a car from personal to business, your basis for depreciation is the lesser of the fair market
value or your adjusted basis
in the car on the date of conversion. 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 an income-producing
activity, or in a personal
activity. Depreciation begins when the car is placed in service 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.
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, you figure depreciation on cars using the Modified Accelerated Cost Recovery System (MACRS). MACRS is 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 946.
More-than-50%-use test.
Generally, you must use your car more than 50% for qualified business use (defined next) during the year to use MACRS.
You must meet this
more-than-50%-use test each year of the recovery period (6 years under MACRS) for your car.
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 Qualified business use 50% or less in a later year
under Car Used 50% or Less for Business, later.
Property does not cease to be used more than 50% in qualified business use by reason of a transfer at death.
Use for more than one purpose.
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.
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 ÷ 15,000) for
that period. Your
business use for the year is 40% (80% × 6/12).
Limits.
The amount you can claim for section 179 and depreciation deductions may be limited. The maximum amount you can claim
depends on the year in which
you placed your car in service. You have to reduce the maximum amount if you did not use the car exclusively for business.
See Depreciation
Limits, later.
Unadjusted basis.
You use your unadjusted basis (often referred to as your basis or your basis for depreciation) 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 car's original basis, which generally is its cost. Cost includes
sales 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, special depreciation allowance, 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 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.
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 any section 179 deduction, special depreciation allowance,
and 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 $17,000 for the new
car. His original basis
of the new car is $20,000 (his $3,000 adjusted basis in the old car plus the $17,000 cash paid). Paul's unadjusted basis would
be the same unless he
claims the section 179 deduction, special depreciation allowance, or has other increases or decreases to his original basis.
Example 2.
In July 2000, 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 2000 through 2002, Marcia figured her depreciation deduction using
the MACRS depreciation chart
for those years.
In September 2003, 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 2003 for her old car. (See Disposition of a Car, later.) Marcia does not claim either the special
depreciation allowance or the section 179 deduction.
Marcia figures her basis in the new car as follows.
| Cost of old car |
$26,000 |
Less: Total depreciation allowed
from 2000 through 2003
|
- 12,408 |
| |
|
| Adjusted basis of old car and basis of part of new car that must be depreciated over the remaining recovery period using the
same depreciation method
|
$13,592 |
| |
|
| Additional basis (cash paid) for new car that is treated as newly purchased MACRS property |
+ 14,200 |
| |
|
| Total 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, Sales and Other Dispositions of Assets, 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 1999 van (placed in service in 1999) for a new 2003 model. He used the old van 75% for business
and he used the new van
75% for business in 2003. Mark claimed actual expenses (including $8,494 depreciation expense) for the business use of the
old van since 1999. He did
not claim a section 179 deduction for the old or the new van.
Mark paid $12,800 for the 1999 van in June 1999. He paid an additional $9,800 when he acquired the 2003 van. Mark was allowed
½ of
the depreciation deduction amount (which is included in the $8,494 depreciation expense total) for his old van for 2003, the
year of disposition, as
explained later under Disposition of a Car. Mark does not claim the special depreciation allowance.
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 × 75%), from 1999–2003
|
- 8,494 |
| Adjusted basis of old van before trade-in adjustment |
$ 4,306 |
| |
|
|
| Trade-in adjustment: |
|
|
| Depreciation at 100% business use: |
|
| 2003—($12,800 × .1152) × ½ |
$ 737 |
| (Limit: $1,775) |
|
|
| 2002—12,800 × .1152 |
1,475 |
| (Limit: $1,775) |
|
|
| 2001—12,800 × .192 |
2,458 |
| (Limit: $2,950) |
|
|
| 2000—12,800 × .32 |
4,096 |
| (Limit: $5,000) |
|
|
| 1999—12,800 × .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 part of new van
that must be depreciated over the
remaining recovery period using
the same depreciation method
|
$1,474 |
| |
|
|
Additional basis (cash paid) for new van
that is treated as newly purchased
MACRS property
|
$9,800 |
| |
|
|
Example 2.
Rob paid $15,000 for a new car that he placed in service in 2000. He used it partly for business in 2000 (9,600 business miles
of 15,000 total
miles), 2001 (12,000 business miles of 16,000 total miles), and 2002 (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, 2003, 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: |
|
|
| 2002—14,400 mi. × .15 |
$2,160 |
|
|
| 2001—12,000 mi. × .15 |
1,800 |
|
|
| 2000—9,600 mi. × .14 |
1,344 |
|
- 5,304 |
| Adjusted basis of old car before trade-in adjustment |
|
|
$9,696 |
| |
|
|
|
| Trade-in adjustment: |
|
|
|
| Depreciation at 100% business use: |
|
|
| 2002—18,000 mi. × .15 |
$2,700 |
|
|
| 2001—16,000 mi. × .15 |
2,400 |
|
|
| 2000—15,000 mi. × .14 |
2,100 |
|
|
| Total |
$7,200 |
|
|
Less: Actual depreciation
allowed
|
- 5,304 |
|
|
| Excess of 100% over actual |
$1,896 |
|
|
| Less: Lesser of excess amount |
|
|
($1,896) or adjusted basis
of old car ($9,696)
|
|
- 1,896 |
| |
|
|
|
Unadjusted basis of part of new car
that must be depreciated over the
remaining recovery period using
the same depreciation method
|
|
$7,800 |
| |
|
|
|
Additional basis (cash paid) for new
car that is treated as newly
purchased MACRS property
|
|
$6,000 |
| |
|
|
|
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 2005. 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 4 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 an equal or 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 an equal or 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 2003,
you do not
need to determine in what year using the straight line method provides an equal or greater deduction. 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 2003 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 2003 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 2003 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.
-
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 (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.
Depreciation in future years.
If you use the percentages from the chart, you generally 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 the 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
the adjustment and over the
remaining recovery period. See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946.
In future years, do not use the chart in this edition of the 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 2003 chart.
To figure your depreciation deduction for 2003, 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.
Your deduction cannot be more than the maximum depreciation limit for cars. See Depreciation Limits, later.
Example.
Phil bought a used truck in February 2002 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 2002 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 2002
depreciation deduction of $1,240.
In 2003, 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 2003. 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 × 90% business
use), by 32% to
figure his 2003 depreciation deduction of $1,786.
Depreciation Limits
There are limits on the amount you can deduct for depreciation of your car, truck or van, or electric 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 tables.
Maximum
Depreciation Deduction
for Cars
| Date |
|
|
|
4th & |
| Placed |
1st |
2nd |
3rd |
Later |
| In Service |
Year |
Year |
Year |
Years |
5/06/2003–
12/31/2003
|
$10,710
1 |
$4,900 |
$2,950 |
$1,775 |
1/01/2003–
5/05/2003
|
7,660
2 |
4,900 |
2,950 |
1,775 |
| 2002 |
7,660
2 |
4,900 |
2,950 |
1,775 |
| 2001 |
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 |
| 1996 |
3,060 |
4,900 |
2,950 |
1,775 |
| 1995 |
3,060 |
4,900 |
2,950 |
1,775 |
| 1$7,660 if you acquire 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.
|
| 2$3,060 if the car is not qualified property or if you elect not to claim the special depreciation allowance.
|
| 3$3,060 if you acquired the car before 9/11/2003, the car is not qualified property, or you elect not to claim the special
depreciation
allowance.
|
Trucks and vans.
For 2003, the maximum depreciation deductions for trucks and vans and passenger vehicles such as minivans and sport
utility vehicles that are built
on a truck chassis are generally higher than those for cars. For trucks and vans placed in service before 2003, use the Maximum Depreciation
Deduction for Cars table.
Maximum
Depreciation Deduction
for Trucks and Vans
| Date |
|
|
|
4th & |
| Placed |
1st |
2nd |
3rd |
Later |
| In Service |
Year |
Year |
Year |
Years |
| 2003 |
$11,010
*† |
$5,400 |
$3,250 |
$1,975 |
| *If 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.
|
| †If the truck or van is 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.
|
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 tables.
<emphasis role="bold">Maximum <?Pub _newline>Depreciation Deduction for <?Pub _newline>Electric Cars Placed in Service <?Pub _newline>After August 5, 1997</emphasis>
| Date |
|
|
|
4th & |
| Placed |
1st |
2nd |
3rd |
Later |
| In Service |
Year |
Year |
Year |
Years |
5/06/2003–
12/31/2003
|
$32,030
1 |
$14,600 |
$8,750 |
$5,225 |
1/01/2003–
5/05/2003
|
22,880
2 |
14,600 |
8,750 |
5,225 |
| 2002 |
22,980
2 |
14,700 |
8,750 |
5,325 |
| 2001 |
23,080
3 |
14,800 |
8,850 |
5,325 |
| 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 |
| 1$22,880 if you acquired the car before 5/6/2003. $9,080 if the car is not qualified property or if you elect not to claim
any special
depreciation allowance.
|
| 2$9,180 if the car is not qualified property or if you elect not to claim the special depreciation allowance.
|
| 3$9,280 if you acquire the car before 9/11/2001, the car is not qualified property, or you elect not to claim the special depreciation
allowance.
|
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 2003 for $20,000 to use exclusively in her business. She does not claim the section 179 deduction,
but she does claim
the special depreciation allowance, and she chooses the 200% DB method of depreciation.
Marie figures her special depreciation allowance of $10,000 (20,000 × 50%).
Marie's MACRS depreciation (using the rate from Table 3) is $2,000 (($20,000 - $10,000) × 20%) for a total depreciation
deduction of $12,000 ($2,000 + $10,000). However, the maximum amount she can deduct for depreciation is $10,710. (See Deductions in years after
the recovery period, later.)
Reduction for personal use.
The depreciation limits are 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 April 2003, 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 but, he does claim
the special depreciation
allowance, and he chooses the 200% DB method to figure his depreciation deduction.
In 2003, Karl figures his special depreciation allowance of $6,477 (($25,400 × 85%) × 30%). Karl then figures his MACRS deduction
by
first figuring his unadjusted basis of $15,113 (($25,400 × 85%) - $6,477), and then multiplying it by the MACRS rate from
Table
3 to get $3,023 ($15,113 × 20%). Karl's total depreciation for 2003 is $9,500 ($6,477 + $3,023). However, Karl's deduction
is limited to
$6,511. This is the depreciation limit ($7,660) 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 figures his
depreciation limits for those years as follows.
| Year |
Limit x Business Use |
Depreciation |
| 2004 |
$ 4,900 × 85% |
$4,165 |
| 2005 |
2,950 × 85% |
2,508 |
| 2006, 2007 |
1,775 × 85% |
1,509 |
In 2008, using the rate from Table 3, Karl's MACRS deduction is $871 ($15,113 × 5.76%). Since that amount is less than the
depreciation limit of $1,509 ($1,775 × 85%), Karl's depreciation deduction for 2008 is $871.
If Karl continues to use his car for business after 2008, 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 that is not a truck, van, or
electric vehicle in service in
2003, use it only for business, and choose the section 179 deduction, the combined section 179 and depreciation deduction
for that car for 2003 is
limited to $10,710 ($7,660 if you purchased the car before May 6, 2003, and $3,060 if you elect not to claim the special depreciation
allowance for
the car or the car is not qualified property).
Example.
On September 4, 2003, 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 $100,000 amount) multiplied by his business use ($10,000 × 80%).
Jack then figures that his section 179 deduction for 2003 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 2003, Jack
will use the
unadjusted basis to figure his depreciation deduction for 2004.
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.
Under MACRS, your recovery period is the same whether you use declining balance or straight line depreciation. 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 in
each succeeding tax year until
you recover your full basis in the car. The maximum amount you can deduct each year 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 1997, 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 (1997 through 2002).
For those years, Bob used
Table 3 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 |
| 1997 |
20.00 |
$5,720 |
$3,160 |
$ 3,160 |
| 1998 |
32.00 |
9,152 |
5,000 |
5,000 |
| 1999 |
19.20 |
5,491 |
3,050 |
3,050 |
| 2000 |
11.52 |
3,295 |
1,775 |
1,775 |
| 2001 |
11.52 |
3,295 |
1,775 |
1,775 |
| 2002 |
5.76 |
1,647 |
1,775 |
1,647 |
| Total |
|
$16,535 |
$16,407 |
At the end of 2002, Bob had an unrecovered basis in the car of $12,193. This was the $28,600 original basis of his car less
the $16,407
depreciation deductions allowed during the recovery period.
Bob continued to use the car 100% for business in 2003. 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 2004 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 $10,418 unrecovered basis ($12,193 - $1,775 claimed
in 2003).
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 2003 would be $12,065 ($28,600 – $16,535) 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 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 and electric cars.)
Qualified business use 50% or less in year placed in service.
If you use your car 50% or less for qualified business use (defined earlier under Depreciation Deduction) in the year the car is placed
in service, the following three special rules apply.
-
You cannot take the section 179 deduction.
-
You cannot take the special depreciation allowance.
-
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, 2003, 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 or the special depreciation allowance 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 2003. This is the lesser of:
-
$600 (($15,000 cost × 40% business use) × 10% recovery percentage (from column (c), Table 3)), or
-
$1,224 ($3,060 maximum limit × 40% business use).
Qualified business use 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 recapture (include
in your gross income) any
excess depreciation (discussed later). You also increase the adjusted basis of your car by the same amount.
Example.
In June 2000, 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 (2000 through 2002) but failed to meet it in the fourth year (2003). You determine your depreciation for 2003 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 figure and 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 and any special
depreciation
allowance 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, 2000, 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 2000, 2001, and 2002. For those years, you used the appropriate MACRS Depreciation Chart to figure
depreciation deductions totaling $7,832 ($2,200 for 2000, $3,520 for 2001, and $2,112 for 2002) under the 200% DB method.
During 2003, 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 2003 your excess depreciation determined as follows.
Total depreciation claimed:
(MACRS 200% DB method)
|
|
$7,832 |
Minus total depreciation allowable:
(Straight line method)
|
|
|
| 2000—10% of $11,000 |
$1,100 |
|
| 2001—20% of $11,000 |
2,200 |
|
| 2002—20% of $11,000 |
2,200 |
5,500 |
| Excess depreciation |
|
$2,332 |
In 2003, using Form 4797, you figure and report the $2,332 excess depreciation you must include in your gross income. Your
adjusted basis in the
car is also increased by $2,332. Your 2003 depreciation deduction is $1,100 ($11,000 (unadjusted basis) × 50% (business use
percentage) ×
20% (from column (c) of Table 3 on the line for Jan. 1— Sept. 30, 2000)).
Leasing a Car
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.
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* |
|
| |
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 2003, the fair market value for trucks and vans is $18,500 and for electric cars it is
$53,000. |
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 A for cars, in Appendix B for trucks and vans, and in Appendix C for
electric cars leased after August 5, 1997. 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, 2002, 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–6 to arrive at the following inclusion amounts for each year of the lease:
Tax
year |
Dollar
amount |
Proration |
Business
use |
Inclusion
amount |
| 2002 |
$80 |
349/365 |
75% |
$76 |
| 2003 |
175 |
365/365 |
75% |
131 |
| 2004 |
260 |
366/366 |
75% |
195 |
| 2005 |
260 |
16/365 |
75% |
9 |
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, 2002, 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, 2003, 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–6, Will computed his inclusion amount for 2002 and 2003 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 |
| 2002 |
$59 |
138/365 |
100% |
$ 22 |
| 2003 |
128 |
309/365 |
100% |
108 |
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 2001, Janice leased a car for 4 years for personal use. On June 1, 2003, 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 2003, Janice obtained an appraisal from an independent car leasing company that showed the fair market
value of her 2001 car on
June 1, 2003, was $18,650. Using Appendix A–7, Janice computed her inclusion amount for 2003 as shown in the following table.
Tax
year |
Dollar
amount |
Proration |
Business
use |
Inclusion
amount |
| 2003 |
$ 12 |
214/365 |
60% |
$4 |
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).
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 |
| |
2003 |
$.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 |
|
| |
|
|
|
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 1998, you bought a car for exclusive use in your business. The car cost $18,000. From 1998 through 2003, you used the standard
mileage rate to
figure your car expense deduction. You drove your car 14,100 miles in 1998, 16,300 miles in 1999, 15,600 miles in 2000, 16,700
miles in 2001, 15,100
miles in 2002, and 14,900 miles in 2003. Your depreciation is figured as follows.
| Year |
Miles x Rate |
|
Depreciation |
| 1998 |
14,100 × .12 |
|
$1,692 |
| 1999 |
16,300 × .12 |
|
1,956 |
| 2000 |
15,600 × .14 |
|
2,184 |
| 2001 |
16,700 × .15 |
|
2,505 |
| 2002 |
15,100 × .15 |
|
2,265 |
| 2003 |
14,900 × .16 |
|
2,384 |
| Total depreciation |
|
$12,986 |
At the end of 2003, your adjusted basis in the car is $5,014 ($18,000 - $12,986).
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 2003, 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 depreciation amount
figured for the full year. 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 depreciation amount
figured for the full year. 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 Sale or Other Disposition Before the Recovery Period Ends
in chapter 4 of
Publication 946.
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