Depreciation 101: Vehicle Depreciation

if you use a vehicle for business it's eventually going to wear out or lose usefulness over time which is why we claim depreciation expense when claiming actual operating expenses for a vehicle but for many vehicles there are limits as to how much depreciation you can claim in a given year in this video I'm going to look at all that goes into claiming depreciation expense for a passenger vehicle used in business I'm the task geek and here is vehicle depreciation oversimplified tomorrow [Music] all types of vehicles are used in business from ordinary Passenger cars and SUVs to service fans to large semi trucks and different rules for claiming depreciation apply to different Vehicles depending on the size of the vehicle and how it's equipped this video specifically covers depreciation of ordinary passenger vehicles SUVs small trucks and vans these vehicles have a high likelihood of both personal and business use so there are limits as to how much depreciation you can claim on these vehicles in a given year vehicles that fall into this category are a type of listed property the category of listed property also includes other assets that have the potential for both business and personal use such as photographic equipment or video or audio recording equipment if you're claiming the standard mileage rate rather than actual expenses depreciation and thus depreciation limits does not apply to you depreciation is built into the standard mileage rate Vehicles like all other long-lived business assets are depreciated using makers if you're wondering what makers is there's a video specifically for that click the card above or the link in the description to be taken to that video under makers a five-year recovery period applies to all vehicles except for semi trucks which have a recovery period of three years special depreciation and the Section 179 deduction can be taken on vehicles as well ordinary passenger vehicles trucks and vans with a gross vehicle weight of less than six thousand pounds are subject to limitations on annual depreciation however not all vehicles under six thousand pounds are subject to these limitations ambulances hearses and taxi cabs but not Rideshare Vehicles aren't subject to limitations on depreciation if a vehicle under six thousand pounds gross vehicle weight is specially kitted out and made unsuitable for personal use it is also not subject to depreciation limitations so how do vehicle depreciation limits work vehicle depreciation is limited to the amount shown in this table based on year of ownership these amounts are different whether special or regular depreciation is taken in the first year these limits also increase annually in line with inflation but for any given vehicle the limits stay the same for its entire recovery period to start with the amount of business use of the vehicle must be determined this is done by keeping track of the mileage driven for both business and personal purposes the procedure is the same as when claiming the standard mileage rate to learn how to properly track vehicle mileage click the card above or the link in the description to calculate the business use percentage for the vehicle divide the miles driven for business by the total miles the vehicle was driven during that year once the business use percentage of the vehicle has been determined that percentage is applied to the original cost or basis of the vehicle adjusting the depreciable basis then based on the year of ownership the appropriate makers depreciation percentage is applied to the adjusted basis this gives us a tentative Maker's depreciation amount the depreciation limit for that year of ownership is also multiplied by the business use percentage the tentative Maker's depreciation is then compared to the adjusted depreciation limit and the lower of the two is the amount of depreciation that can be deducted with an exception we'll look at later time for an example James is a self-employed real estate agent and this is his 2022 BMW he purchased new for 84 500 in 2022 during that year his mileage log shows he drove the BMW 75 for business let's calculate his depreciation expense for his first year of ownership he's going to claim special depreciation for the first year to figure his tentative special depreciation he multiplies the 84 500 basis of the vehicle by his business use percentage of 75 percent giving him a tentative special depreciation amount of 63 375 dollars however the vehicle depreciation limit for the first year of ownership when claiming special depreciation is nineteen thousand two hundred dollars James adjusts this limit by taking 75 percent of this amount which gives him an adjusted vehicle depreciation limit of fourteen thousand four hundred dollars since fourteen thousand four hundred dollars is less than 63 375 dollars fourteen thousand four hundred dollars is the amount of depreciation expense James can claim on the BMW for 2022. starting with the second year of ownership the depreciable basis of the BMW is reduced by the special depreciation James took in the first year this gives him a new basis of seventy thousand one hundred dollars let's move ahead to 2023. for this year and all subsequent years to keep it simple we're going to keep James's business use percentage of the BMW at 75 percent the revised basis is multiplied by the business use percentage and the result is multiplied by the 32 percent makers depreciation rate for year 2 giving a tentative depreciation amount of Sixteen thousand eight hundred twenty four dollars this is compared to 75 percent of the eighteen thousand dollar depreciation limit for the second year of ownership or thirteen thousand five hundred dollars again since thirteen thousand five hundred dollars is less than sixteen thousand eight hundred twenty four dollars thirteen thousand five hundred dollars is the maximum depreciation expense James is allowed to claim for 2023. this chart shows the depreciation for the entire six-year recovery period of the vehicle notice the depreciation in year six even though the regular Maker's depreciation was just three thousand twenty eight dollars he's still allowed to claim depreciation up to the annual limit which for this year is 75 percent of six thousand four hundred sixty dollars or four thousand eight hundred forty five dollars this is because he has 17 685 dollars in depreciation he was not allowed to claim in years one through five he is allowed to claim this disallowed depreciation up to the maximum allowed for that year so what happens to the remaining depreciation James was not allowed to take during the six-year recovery period James gets to take this depreciation up to the maximum allowed in the subsequent years until the entire cost of the car is recovered as you can see this happens in 2030. passenger car depreciation is claimed in part 5 of form 4562 in part 5 you'll see the special depreciation James took for the vehicle in 2022 online 25. we'll also find information on the type of miles driven plus additional information the IRS needs for vehicles being depreciated since James has no employees he does not need to fill out section c of part 5. moving ahead to 2023 and you can see the depreciation James took for that year on line 26. depreciation of vehicles is a complex subject and there are additional details I didn't cover in this video particularly concerning the Section 179 deduction you'll find links to additional resources and information in the video description if you found this video informative please give it a thumbs up and share it with anyone who would find it useful subscribing to the channel and clicking the Bell gives you immediate access to new videos and as always your questions comments and suggestions are always welcome in the comments space below thanks for watching and I'll be back soon with more of your taxes oversimplified foreign [Music]

Channel: The Tax Geek

Views: 22,156

Keywords: federal income taxes, depreciation, vehicle depreciation, special depreciation, MACRS, IRS Form 4562, vehicle depreciation limits

Id: HtD1Lj-hnuk

Length: 7min 47sec (467 seconds)

Published: Mon Jan 23 2023