Dear Tax Talk,
How do I calculate the rate of depreciation for a $110,000 car?
Normally the cost of an asset used for business purposes is written off over its useful life. Depreciation is calculated on an accelerated basis for most personal property (as opposed to straight-line depreciation for real property).
Useful lives are assigned depending on the class of the asset. Cars and other vehicles are assigned a five-year class life. Recognizing that an economy car provides the same utility to a business as does a luxury car, the amount of depreciation on a business car is capped each year.
The depreciation cap depends on the year that the vehicle is purchased for business use and the percentage of business use. It is widely recognized that a car is used for business as well as personal purposes.
The depreciation cap is reduced by the percentage of personal use. If business use is less than 50 percent, a different set of rules apply. Depreciation also varies depending on the availability to the taxpayer of the Section 179 expense allowance and the 50-percent bonus depreciation.
Revenue Procedure 2009-24 sets forth the depreciation limits for automobiles for 2009. Because of all the variables, I can't tell you exactly what your depreciation deduction should be, so you need to review the revenue procedure in detail to determine your circumstances.
For example, the following table prescribes these limits.
Car depreciation limits
Depreciation limitations for passenger automobiles (that are not trucks or vans) placed in service by the taxpayer in calendar year 2009, for which the 50 percent additional first year depreciation deduction applies
|1st tax year||$10,960|
|2nd tax year||$4,800|
|3rd tax year||$2,850|
|Each succeeding year||$1,775|
Your maximum deduction under this table is $10,960, reduced by your personal use percentage. If the car is used 20 percent for personal purposes, then your maximum deduction for 2009 is $8,768 and in the first three years totals $14,888. Because the car's business basis at 20-percent personal use is $88,000, you can see that it will take several decades to recover the car's cost.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
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