How to Deduct Business-Vehicle Depreciation

Business-vehicle depreciation can leave owners with a deficit in their car's value. Luckily, depreciation deductions can help recover this loss.

Elliot Rieth | 

Dec 1, 2023 | 3 min read

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While business vehicles can be essential, their value will inevitably depreciate over time. Recovering business-vehicle value through depreciation deduction is one way to get the most out of your vehicle assets.

You may be able to deduct a certain amount of your business vehicle's value from your taxes each year, depending on your vehicle's deduction limits, qualifications, and your chosen tax-deduction method. However, the process can be complex and may require outside help to ensure the accuracy of your tax benefits.

Understanding Business-Vehicle Depreciation

Business-vehicle depreciation deductions can help you recover the value your vehicle loses over time. To qualify for these deductions, however, you must meet several conditions. For example, vehicles must be used for business purposes more than 50% of the time every year.

According to the IRS, business vehicles are expected to depreciate over five years after being put into service. The business-vehicle depreciation deduction you could benefit from during those five years will depend on which depreciation method you use, as well as what depreciation limits apply to your vehicle.

IRS Vehicle-Depreciation Methods

Under IRS vehicle-depreciation rules, there are two key methods of depreciation: the Modified Accelerated Cost Recovery System (MACRS) and straight line depreciation. The method of depreciation you use is determined by your other business vehicle tax deductions.

Straight line depreciation is typically used if you choose the standard mileage rate as your preferred overall business-vehicle tax deduction. The standard mileage rate offers you a set deduction per mile driven over the course of the tax year. For example, in 2022 the standard milage rate was 62.5 cents per mile. So, if you drove your business vehicle 1,000 miles that year, you would hypothetically be able to deduct $625 from your taxes.

Even if you change your deduction method to actual expenses in later tax years, you would still have to use straight line depreciation for the rest of your five-year depreciation schedule.

If you choose the actual expense method to calculate the true amounts spent per year, then you would use MACRS. Actual expense requires you to keep close track of your yearly expenses, collecting all receipts and logging expenses accordingly.

There are two ways to calculate MACRS depreciation, according to the IRS website:

• The first is the 200% declining balance method over a five-year recovery period that switches to straight line when it provides an equal or greater deduction.
• The second is the 150% declining balance method over a five-year recovery period that switches to straight line when it provides an equal or greater deduction. The method you choose will determine which you follow on the depreciation chart provided by the IRS.

Before selecting a style of depreciation, you should consider that both MACRS declining balance methods offer higher deductions in the first few years than in the last couple of years in your five-year recovery period. Straight line depreciation, on the other hand, will give you the same depreciation deduction each year across those five years.

Calculating Business Vehicle Depreciation

Before calculating your business vehicle's depreciation, you need to know the exact date your vehicle was placed into service, the method of depreciation and recovery period you'll be using, and the basis of your car (the original cost of your vehicle, adjusted for any modifications or additional deductions applied to it before depreciation). Once you've gathered this information, you can use the depreciation chart provided by the IRS in Publication 463 to fill out Form 4562 when filing your taxes.

Keep in mind that calculating business-vehicle depreciation can be complex. You should consider consulting with a tax professional to determine whether your vehicle qualifies for business-vehicle depreciation, which method is best, and to help with calculation.. There are several potential exceptions and special depreciation deductions that may or may not apply to one or more of your vehicles, which could potentially lead you to over- or underestimate your actual deduction.

Elliot Rieth

Born and raised in Michigan — the center of the American automotive industry — Elliot's fate of becoming a writer in the automotive space was seemingly predetermined. In addition to covering cars and personal finance for Capital One, he's worked directly with dealers and OEMs to create digital content meant to educate consumers. He's also passionate about music and has written for outlets like In Review Online. When he isn't writing about the latest financial, automotive, and insurance trends, he can be found enjoying a new book or record alongside his two greyhounds.