Calculating Car Depreciation

Most people know that once you drive your car off a lot, it loses between 15-20% of its value.

But beyond this, how much does it depreciate? This information is important, because you can actually deduct part of your vehicle purchase price from your taxes every year if you use it for your business!

Has this grabbed your attention? Then you’ll want to know how to calculate depreciation on a car. Read on to find out all about this topic and how you can save some money.

What is Depreciation?

First things first: What is depreciation, anyway?

Depreciation simply is how much your car goes down in value every single year. This is important because this determines what you can get when you go to sell or trade in your vehicle.

In addition, this can help you make a decision when you’re in the market for a new car. While it may look nice and have all the features you want, if its car depreciation rate is very steep and you plan on selling or trading it in later, then it may not be the best choice for you.

How to Calculate Depreciation of a Car

It may sound straightforward at first, but there are actually three car depreciation formulas: modified accelerated cost recovery system (MACRS) depreciation, special depreciation allowance, and Section 179 deduction. Find out more about each below.

Modified Accelerated Cost Recovery System (MACRS) Depreciation

This is most likely what you’ll use to calculate car depreciation, as it’s the standard that’s recognized by the IRS. For this, you can use it for up to five years.

To take advantage of this deduction, the mileage on your car must be over 50% for business purposes. In general, you’ll get significantly larger deductions in the first two years, and then smaller ones for the next three. In the first year of claiming this deduction, you can only claim to $10,000.

To figure out how much you can deduct, you can use a handy depreciation calculator.

If you’d rather figure out things by hand, use this equation: basis of your car multiplied by the business use percentage. This will give you the depreciable basis.

Then, multiple the depreciable basis by the MACRS depreciation rate. This will give you the depreciation for the year.

Special Depreciation Allowance

This is a calculation you can only use in the first year you use your car for business purposes. This is an optional calculation also known as “bonus depreciation.”

With this allowance, you can get a deduction of up to $18,000, which is much higher than the MACRS depreciation. You can claim this allowance on top of the MACRS depreciation too.

Prior to 2018, this allowance was only available for new cars. However, since then, you can use it for both new and old vehicles, which is a plus if you’re looking into purchasing a used car.

You already know that you can only get the special depreciation allowance for the first year. In addition, another restriction is over 50% of the mileage of the car must have been used for business purposes as well. This is similar to the requirement for MACRS depreciation.

To claim the special depreciation allowance, you have to use Form 4562. To calculate this amount, take the depreciable basis of your car and multiply it by the business use percentage. You can get the depreciable basis by subtracting any of your credits and deductions allocable to your car from the business or investment portion of the cost.

Section 179 Deduction

Like with the special depreciation allowance, the Section 179 deduction can only be used for the first year that you use your vehicle for business purposes. It’s also optional and like the other two deductions, over 50% of your car’s mileage must be for business purposes.

This deduction will get you up to $10,000 for regular cars and trucks. Otherwise, it’s $25,000 for SUVs and heavier trucks and vans that have a gross weight rating of over 6,000 pounds.

You’ll be pleased to know that like with the special depreciation allowance, you’re allowed to use the Section 179 deduction for both new and used vehicles.

There are two steps to calculate this deduction. In the first step, you need to calculate the potential Section 179 deduction. You can get this amount by calculating for the depreciable basis; do this by multiplying the basis of your car with the business use percentage.

If this amount is over $10,000 (or $25,000) for certain vehicles, then you can’t use that amount, as those are the maximum possible deductions. Otherwise, the result of your calculation is what you can get for the Section 179 deduction.

Do note that this section doesn’t just include cars; you can deduct costs for other things like machinery and equipment. However, the limit for everything is $1 million total, so if your expenses are over that amount, then you won’t be able to claim everything.

Limitations on Car Depreciation Deductions

The limitations aren’t the same across all years.

For example, if you first put your vehicle into service in 2018, you can claim up to $18,000 with the special depreciation allowance, or $10,000 without. But if you first put it into service anywhere between 2012 to 2017, then that value drops to $11,160 or $3,160.

Then, you have to look at how much you can get for the following years. If we’re looking at 2018 as the start year for a regular vehicle, then it’ll be $16,000 for the second year, $9,600 for the third, and $5,760 for the fourth and fifth years.

Know How to Calculate Depreciation on a Car

By knowing how to calculate depreciation on a car, you’ll be able to put more deductions down on your taxes every year. You already have enough overhead as a business owner or entrepreneur, so help yourself out with these handy calculations.

For more helpful information on cars, check out our other blog posts now.