If you are in business, you probably use your car, truck or SUV for some business purpose. Indeed your business may have purchased a vehicle. How much of the purchase price you can deduct as a business expense during any given year is a complex calculation, called depreciation, which congress has further complicated with the addition of things like 100% Bonus Depreciation. This blog talks how you depreciate a new car placed in the service in 2011 including what to do about that pesky 100% Bonus Depreciation.
NOTE: What the IRS considers a passenger auto, usage limits on listed property, what you do when you dispose of an asset before it is fully depreciated and other detailed discussions of MACRS & IRS depreciation are beyond the scope of this blog. The are other rules that need to be applied and if you do not know what they are, consult a tax professional. That said…
When you purchase equipment for your business, and it has an expected lifetime of more than a year, you generally are NOT supposed to deduct the entire value of that purchase in the year you bought the equipment and placed it in service, but instead you are supposed to take the expense that purchase over the life-time of the equipment. As you “use up” your purchase, you depreciate it.
Although there are other ways of depreciating business assets, the IRS has its own rules about how long a piece of equipment is supposed to last, and how much depreciation you can take for various things. Cars and trucks are considered “machinery” by the IRS and machinery has a life-time of 5 years, which actually gets depreciated over 6 years. But unlike other equipment you purchase for your business, passenger automobiles are treated differently by the IRS-the IRS limits the amount of depreciation you can take when you purchase and use a passenger automobile for business.
2011 Passenger Auto Limits per IRS Revenue Procedure 2011–21
|5-year MACRS||IRS Limits — Cars||Light Trucks & Vans|
|Bonus Taken||No Bonus
|Bonus Taken||No Bonus
|Year 7 and beyond||1775||1775||1875||1875|
- For other types of machinery you would take a percentage of the full purchase cost per the table and depreciate it-meaning that is the amount of expense you would be allowed for the purchase of equipment with given life-time. For a piece of equipment with an life-time of 5 years you would be allowed to take 20% of the purchase price for depreciation of machinery in the year the equipment was placed in service.
- But with passenger autos the IRS says take a percentage, but if it is more than the limit, $11,060 for cars, $11,260 for trucks & vans, then maximum you depreciation you can take $11,060 for cars, $11,260 for trucks & vans.
- This amount you are allowed to depreciate is further reduced by the percentage of personal usage of the automobile-you apply the IRS limit then you apply your percentage of business use. The amount of depreciation attributable to personal use is not deductible and is lost.
- Finally, if your purchase price exceeds the maximum amount allowed by the IRS over the 6-year period, then you will continue to depreciate after 6 years still subject to the annual maximum until the car is completely depreciated or otherwise disposed of. Expensive luxury autos can take a long, long time to depreciate for tax purposes.
However, we have a wrinkle. For machinery including passenger cars, trucks and vans purchased after September 8, 2010 and before January 1, 2012 the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 increased first year bonus depreciation for NEW equipment purchased and placed in service to 100%.
- You are required to take the special 100% bonus depreciation for new purchases in 2011
- If you do not want to take the special 100% bonus depreciation, you have to OPT OUT of it by attaching a statement to your tax return.
- Technically, the law that established MACRS/IRS depreciation did not take into account future laws limiting passenger auto depreciation, nor bonus depreciation-therefore when 100% depreciation is taken, there is nothing left to depreciate subsequently…
IRS Safe Harbor for cars costing more than $18,433 & Light Trucks and Vans costing more than $18,765
- Year 1, compute the MACRS/IRS depreciation at 100% and since it is higher than the IRS limits, use the IRS limit for depreciation
- Year 2 and beyond create an artificial amount using the 50% bonus depreciation amount instead and depreciate that.
Example of a car purchased in 2011, used 100% for Business, and costing $20,000
- This calculation assumes 100% business use, if the vehicle is not used a 100% the calculation only yields the maximum that could be depreciated, and deduction for percentage of business use would be calculated from this maximum amount
- Year 1, the car costs 20,000, 100% depreciation is $20,000, you are limited to $11,060 so you take $11,060 depreciation
- Year 2, refigure amount depreciated under the 50% bonus depreciation rules. Year 1, 50% of 20,000 bonus depreciation is 10,000, so the amount for figuring MACRS depreciation is $10,000. When you add the bonus to depreciation to 20% regular depreciation allowed for year 1 under MACRS is $12,000 less the limit of $11,060 yields $940 of unused depreciation you will take in Year 7. You depreciate year 2–6 using the MACRS 5 year table on $10,000: $3,200, $1,920, $1152, $1152, $576 and in year 7, you take the remaining $940. All of these computed depreciation amounts are less than the IRS limits for each year.
NOTE: For cars costing $18,433 or less and for light trucks & vans costing $18765 or less, this method DOES NOT WORK because no part of the original cost remains to be recovered after Year 6. In this case the IRS requires a Double Declining Balance method for years 2–6 compared to the amount yielded by the Straight Line method, and depreciate using the higher amount. If the preceding sentence sounded like total gobbledegook, you probably want to use an accountant to figure your depreciation for tax purposes.
Call us before the IRS calls you. Small business services and taxation are our business. If you need help with this issue, or require other services, Please give Art & Business Consulting a call. We would love to engage you as a client.
The usual disclaimers: Although ABC has made every effort to insure the accuracy of Taxes, Tips and Tools, misinformation, disinformation, changes, mistakes, typos and hackers happen, therefore Art & Business Consulting LLC takes no responsibility for any action taken or results based on the information supplied here in. The content of this blog generally applies to business and individual taxation in the United States of America. Internal Revenue Service Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement address herein. Art & Business Consulting LLC currently does not have a certified public accountant, human resource specialist, certified financial planner or an attorney on staff; this information is purely for educational purposes and not to be construed as legal or financial advice. Art & Business Consulting LLC and its employees, members and associates are not engage to practice law; you always should discuss legal matters with your attorney before talking to anyone else.