If you purchased a vehicle in 2014 that you used for business, you get to deduct your business driving expenses for the year. There are two ways to do this: (1) you can use the standard mileage rate, which permits you to take a mileage deduction for a specified sum for each business mile you drive (56 cents per mile for 2014), or (2) you can deduct the actual expenses you incurred when you drove for business, including gas, repairs, and maintenance costs.
When you use the actual expense method you also get to deduct an amount each year to account for depreciation (you get no separate depreciation deduction when you use the standard mileage rate because it is included in the per mile rate).
Under the regular accelerated depreciation rules, you can deduct as much as 32% of the cost of business property in a single year. Thus, you might think that the actual expense method could often provide a larger total annual deduction than the standard mileage rate because of the large depreciation deductions than could be obtained for expensive cars.
Unfortunately, this is usually not the case because special limits apply to depreciation deductions for “passenger automobiles,” defined as four-wheeled vehicles made primarily for use on public streets and highways with an unloaded gross weight of 6,000 pounds or less. The annual limits apply to all passenger vehicles, no matter how much they cost.
The IRS has established two different sets of depreciation limits: one for passenger automobiles other than trucks and vans, and slightly higher limits for trucks and vans that qualify as passenger automobiles. This includes any vehicle that is:
- Classified as a truck or van by the manufacturer
- Has a gross loaded weight of 6,000 pounds or less
The charts below show the maximum annual depreciation deduction allowed for passenger automobiles and trucks and vans first placed in service in 2014. The second chart shows the limits for passenger automobiles that are trucks and vans as defined above. Both charts assume 100% business use of the vehicle. If you use a vehicle less than 100% for business, you must reduce your deduction by the percentage of nonbusiness use.
Depreciation Limits for Passenger Automobiles Placed in Service During 2014
|1st tax year||$3,160|
|2nd tax year||$5,100|
|3rd tax year||$3,050|
|Each succeeding year||$1,875|
Depreciation Limits for Trucks and Vans Qualifying as Passenger Automobiles—2014
|1st tax year||$3,460|
|2nd tax year||$5,500|
|3rd tax year||$3,350|
|Each succeeding year||$1,975|
Fortunately for those who wish to use the actual expense method, late in 2014 Congress retroactively extended 50% bonus depreciation for 2014. “Bonus depreciation” is a special deduction first enacted several years ago to help jump-start the faltering U.S. economy. It permits business owners to deduct 50% of the cost of qualifying property the first year it is purchased and placed in service in the business.
Bonus depreciation had expired at the end of 2013 but has now been revived for 2014. (It expired again at the of 2014, and it is unclear whether it will be extended for 2015.)
With property other than passenger automobiles, 50% bonus deprecation permits you to deduct half the cost in a single year, no matter how much the property costs. However, you can’t do this with passenger automobiles.
Instead, because of 50% bonus depreciation, the first year depreciation limit for cars first placed in service in 2014 has been increased by $8,000. Thus, first-year depreciation for a passenger automobile placed in service during 2014 is $8,160, instead of $3,160; and the limit for trucks and vans is $8,460.
Again, this assumes that you used the vehicle 100% of the time for business. You must reduce your deduction by the percentage of any nonbusiness use.
However, you may take advantage of the $8,000 bonus depreciation increase in the annual limit only if you purchased a new car and used it over 50% of the time for business during 2014.
Example 1: In February 2014, Mario bought a new $40,000 car, which he used 100% of the time for his business. Since the purchase qualifies for bonus depreciation, he may take a maximum depreciation deduction of $11,160 for 2014. This leaves him with a depreciable basis of $8,840 to depreciate in future years subject to the annual limits noted above.
Example 2: Assume that Mario used his new car only 60% of the time for business during 2014. His first-year depreciation deduction is limited to $6,696 (60% × $11,160 = $6,696).
The ability to deduct up to $11,160 in depreciation for 2014 could help make the actual expense more advantageous than the standard mileage rate. But this depends on various factors, inducing the cost of your car, the gas mileage it receives, and how much you drove for business during 2014. The only way to know for sure which method results in a larger deduction is to figure your deduction using both methods.
However, be aware that if you use the actual expense method the first year you place in service you can switch over to the standard mileage rate in later years. Also, when you claim bonus depreciation for a vehicle, you must use the vehicle at least 50% of the time for business during its entire six-year recovery period.
If your business use of a vehicle falls below 50% in the second through sixth years, you’ll be subject to recapture. This requires you effectively pay back the increased deductions you took in the prior year or years. This is not required if you use the standard mileage rate.
Note that the depreciation limits discussed above apply only to passenger automobiles—that is, passenger vehicles with a gross unloaded weight (curb weight) of less than 6,000 pounds. Vehicles that weigh more than this are not subject to the limits. If a more than 6,000-pound vehicle was placed in service during 2014, it will qualify for the full 50% first-year bonus depreciation. This means you can deduct 50% of the cost in if you used the vehicle 100% for business.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.