How To Claim Vehicle Depreciation from the IRS

With tax season almost here, it is time for every small business owner to begin preparing by finding every deduction they are entitled to. One key deduction that many small business owners are not even aware of is depreciation. This is the continual decline in the value of a property with a useful life of more than one year.

You can depreciate just about any vehicle you use for business using the Modified Accelerated Cost Recovery System (MACRS). Then, you can claim a tax deduction for the depreciation.

How to claim vehicle depreciation

There are actually two ways you can deduct your vehicle depreciation. You can use the standard mileage rate, which includes deprecation as part of the deduction. Or, you can use the actual expense method in which you calculate the deprecation and include it as part of your actual vehicle expenses.

Standard Mileage Rate

If you choose to use the standard mileage rate, you will keep track of the miles you used the vehicle for business purposes. This means that if you use the car for both business and personal purposes, you will need to be careful to make sure you only claim business miles. An easy way to keep track of this is to use an app like Driversnote. The app will track your miles and make it easy to designate a trip as business or personal.

When it comes time to file taxes, you simply multiply the IRS standard mileage rate by your business mileage. The new rate for 2023 is $0.665 per business mile. The business mileage rate for 2022 $0.585 for the first six months of 2022 and $0.625 for the second six months.

See the IRS rules on recording mileage and claiming mileage deductions in our IRS mileage guide.

Actual Expenses

If you use the actual expenses, you will keep track of all of the expenses of operating your vehicle for business use. This would include expenses such as repairs, oil, registration, gas, insurance, tires, license fees, and depreciation or lease payments.

Whichever method you use, make sure you keep careful records in case you are audited. Also, when you are deciding which method to use, remember that if you use the standard mileage method in the first year, you can change to the actual expenses method the next year. However, if you use the actual expenses method the first year, you cannot change to another method in future years.

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How to calculate car depreciation for tax claims

If you use the standard mileage method, deprecation is already included in the standard mileage deduction. However, if you use the actual expenses method and you own your car, you can claim your vehicle depreciation as part of your expenses. This is allowed even if you financed your vehicle.

You will likely be using the Modified Accelerated Cost Recovery System (MACRS). This is the required method for any vehicle placed in service after 1986 if the vehicle is used for business purposes over 50% of the time. You must meet the over 50% requirement each year you use the MARCS method. If the vehicle is used for business less than 50% of the time, you must use the straight-line depreciation method. Also, if you used the standard mileage rate in the first year you used the vehicle and then changed to the actual expenses method, you are required to use the straight-line depreciation method for the rest of the vehicle’s useful life.

To determine your depreciation, you must know the basis of your vehicle. This will be the amount you paid for the vehicle plus any fees, the cost of registration, and taxes. Then, you will multiply the basis by the percentage of the vehicle used for business. You’ll also need to know the date you placed the car in service. Once you have this information, you can use IRS Form 4562 to calculate your depreciation.

Example on calculating car depreciation

As an example, suppose you placed your car into service on January 1, 2022, and the basis of the vehicle is $30,000. You would multiply this number by the percentage it was used for business. In this case, that is 60%. So, the basis to be used for depreciation will be $18,000. According to Form 4562 instructions, automobiles are a 5-year property for MACRS depreciation, and the half-year convention is used for them. You would use the 200% declining balance rate for the vehicle.

Now, to obtain the depreciation rate, you divide the 2.00 for the 200% by 5 for the 5-year property and obtain a 40% depreciation rate. You will then take 40% of your $18,000 basis to obtain your deduction. The deduction will be $7,200. You will use this method until the first year that the straight line rate exceeds the declining balance rate.

To determine the straight-line rate, divide one by the remaining years in the recovery period as of the beginning of the year (this must be more than one). This is the rate you will use.

FAQ

Can I claim the IRS per-mile rate and vehicle depreciation?

No. If you use the standard mileage rate, you cannot claim other costs, including IRS vehicle depreciation. However, one of the advantages of using the per-mile rate is that it accounts for these other expenses. Also, it does not require separate documentation to prove each expense.

How is car depreciation calculated?

To calculate depreciation, you can multiply the standard mileage rate provided by the IRS by the miles driven for work in the year. The easiest way to do this is to track business mileage using a mileage logging app such as Driversnote and multiply this by the IRS standard mileage rate, which for January to June 2022 was $0.585 per mile and for July to December 31 was $0.625. Otherwise, actual expenses must be added together in order to reach a total sum.