CHAPTER 43
Deducting Car and Truck Expenses
The costs of buying and operating a car, truck, or van for business are deductible under rules hedged with restrictions. Depreciation deductions for most cars, trucks, and vans are subject to annual ceilings, but for vehicles placed in service in 2020 and used 100% for business, bonus depreciation allows a first-year depreciation limit of $18,100 (43.5). The cost of heavy SUVs used 100% for business that are placed in service in 2020 can be fully deducted in 2020.
To avoid accounting for actual vehicle expenses and depreciation, you may claim an IRS mileage allowance. The allowance for 2020 is 57.5 cents per mile. Keep a record of business trip mileage.
If you are self-employed, you deduct your vehicle expenses on Schedule C (40.6). Use Form 4562 to compute depreciation if you claim actual operating costs instead of the IRS mileage allowance. If you are an employee, you cannot deduct your unreimbursed vehicle expenses because of the suspension of miscellaneous itemized deductions subject to the 2% of adjusted gross income floor through 2025 (19.2).
If you bought an electric vehicle in 2020 for business and/or personal use, you may be eligible for a tax credit, depending on the manufacturer (25.16).
43.1 Standard Mileage Rate
If you start to use your car for business in 2020, you have a choice of either deducting the actual operating costs of your car during business trips or deducting a flat IRS allowance. The allowance is 57.5 cents per mile for 2020. The mileage allowance also applies to business trips in a van or pickup or panel truck as if it were a car.
If you placed a car, van, pick-up, or panel truck in service before 2020 and have always used the IRS mileage allowance, you may apply the 57.5 cents-per-mile rate to your 2020 business mileage or deduct your actual operating costs plus straight line depreciation over the remaining estimated useful life of the vehicle (assuming the vehicle is not considered fully depreciated).
The rate may not be used to deduct the costs of a vehicle used for nonbusiness income-producing activities such as looking after investment property.
Allowance must be elected for the first year. The choice of the allowance must be made in the first year you place the vehicle in service for business travel. If you do not use the allowance in the year you first use the vehicle for business, you may not use the allowance for that vehicle in any other year. Thus, if you bought a car for business in 2019 and on your 2019 return you deducted actual operating costs plus depreciation, you may not use the mileage allowance on your 2020 return or in any later year. Allowance takes the place of fixed operating costs plus depreciation. If you claim the allowance, you cannot deduct your actual outlays for expenses such as gasoline (including state and local taxes), oil, repairs, license tags, or insurance, nor can you deduct depreciation (if you own the vehicle) or lease payments. Parking fees and tolls during business trips are deductible in addition to the mileage allowance. The IRS will not disallow a deduction based on the allowance even though it exceeds your actual vehicle costs. If you use more than one automobile in your business travel and elect the allowance, total the business mileage traveled in both cars.
Planning Reminder
First-Year Election Affects Later Years
In deciding whether to elect the allowance in the first year, consider not only whether you will get a bigger first-year deduction using the allowance, or deducting actual operating costs plus depreciation, but also project your mileage, operating expenses, and depreciation expenses over the years you expect to use the vehicle. If in the first year you elect to deduct actual costs, including MACRS or straight line MACRS depreciation, you may not use the IRS auto allowance for that vehicle in a later year. On the other hand, claiming the IRS allowance in the first year you put a vehicle in service forfeits your privilege to use MACRS and first-year expensing. If you switch from the allowance to deducting actual expenses in later years, you may claim straight line depreciation over the remaining estimated useful life of the vehicle if the vehicle is not considered fully depreciated.
Caution
No Standard Mileage Rate for Fleets
IRS policy has not allowed use of the standard mileage rate if you use five or more automobiles simultaneously (such as in fleet operations), whether you own or lease the vehicles. You must use the actual expense method for all the vehicles (i.e., deduct the actual operating costs of the vehicles).If you alternate use among five (or more) vehicles, so they are not used in your business at the same time, you may use the standard mileage rate for all the vehicles.
Records. You may decide to use the allowance if you do not keep accurate records of operating costs. However, you must keep a record of your business trips, dates, customers or clients visited, business purpose of the trips, your total mileage during the year, and the number of miles traveled on business. An IRS agent may attempt to verify mileage by asking for repair bills near the beginning and end of the year if the bills note mileage readings.
Mileage allowance for leased vehicle. The IRS mileage allowance is also available for leased cars, vans, and pick-up or panel trucks, but it must be used for the entire lease period or not at all. For example, if in 2020 you leased a car for business purposes and you claim the cents-per-mile allowance, you will also have to use it for the remainder of the lease period, including renewals.
Interest on a vehicle loan and taxes. The deduction rules are discussed in the following section (43.2).
Mileage allowance disallowed. You may not claim the cents-per-mile allowance if:
- You have claimed depreciation, first-year expensing, or first-year bonus depreciation in the year the vehicle was placed in service.
- You use in your business five or more vehicles simultaneously, such as in a fleet operation.
IRS allowance includes depreciation. When you use the IRS mileage allowance, you may not claim a separate depreciation deduction. The IRS mileage allowance includes an estimate for depreciation. For purposes of figuring gain or loss on a disposition, you must reduce the basis of the vehicle by the following depreciation amounts: 23 cents per mile in 2012 and 2013, 22 cents per mile in 2014, 24 cents per mile in 2015 and 2016, 25 cents per mile in 2017 and 2018, 26 cents per mile in 2019, and 27 cents per mile in 2020.
Depreciation when switching from allowance to actual costs. If you use the IRS mileage allowance in the first year, you may switch to the actual-cost method in a later year, but depreciation must be based on the straight line method over the remaining estimated useful life. However, no depreciation may be claimed if basis has been reduced to zero under the annual cents-per-mile reduction rule in the preceding paragraph.
43.2 Expense Allocations
If you do not claim the IRS mileage allowance, you may deduct car, truck, or van expenses on business trips such as the cost of gas and oil (including state and local taxes), repairs and maintenance (including car washes), parking, and tolls, in addition to depreciation for your car (43.3– 43.5).
If you use your vehicle exclusively for business, all of your operating expenses are deductible.
Apportioning vehicle expenses between business and personal use. For a vehicle used for business and personal purposes, deduct only the expenses and depreciation allocated to your business use of the vehicle.
The business portion of vehicle expenses is determined by the percentage of mileage driven on business trips during the year.
| Item— | Tax Rule— |
|---|---|
| IRS mileage allowance | You may avoid the trouble of keeping a record of actual vehicle expenses and calculating depreciation by electing the IRS mileage allowance for a car, van, or pick-up or panel truck. However, to claim the allowance, you must be ready to prove business use of the vehicle and keep a record of your mileage. The allowance may give you a larger deduction than your actual outlays plus depreciation. You must elect the allowance in the first year you use the vehicle for business. If you do not, you may not use the allowance for that vehicle in any other year If your actual operating costs plus depreciation exceed the allowance for the first year you place the vehicle in business service, you may claim your actual operating expenses and depreciation, but doing so will forfeit your right to elect the allowance for that vehicle in any later year. |
| Depreciation | If you claim actual operating expenses, such as gasoline, repairs, and insurance costs, you may also claim depreciation. There is a cap on the annual depreciation deduction. For a car placed in service in 2020, the first-year depreciation limit is $18,100 ($10,100, if bonus depreciation is not used). These limits must be reduced for personal use (43.4). Electing first-year expensing or depreciation for a car, truck, or van placed in service in 2020 prevents you from using the IRS mileage allowance (43.1) for that car in later years. For cars, trucks, and vans placed in business service in 2020 that are used 50% or less for business, you must use straight line depreciation subject to the dollar limits (43.6). If business use is initially over 50% but declines to 50% or less in a later year, prior year depreciation deductions, including bonus depreciation and first-year expensing, must be recaptured as income to the extent they exceeded straight line deductions (43.10). For a vehicle placed in service before 2020, see Tables 43-2 and 43-3 for the maximum depreciation you can claim for 2020. |
| Vehicle used for business and personal driving | You may deduct only the amount allocated to business mileage. For example, total mileage is 20,000 in 2020 and your business mileage is 15,000. You may claim only 75% of your deductible costs (15,000 ÷ 20,000). |
| Tax return reporting | As a self-employed individual, you deduct business costs on Schedule C and use Form 4562 to compute depreciation if you claim actual operating costs. Employees cannot take a deduction for business driving as a miscellaneous itemized deduction; this deduction is suspended for 2018 through 2025 (19.2). |
Interest on vehicle loan. If you are self-employed, the allocated business percentage of the interest is fully deductible on Schedule C; the personal percentage is not deductible. If you are an employee, all of the interest is considered personal interest and is not deductible even if you use the vehicle 100% of the time for your job.
Taxes paid on your car. The business portion of sales taxes paid on your vehicle is not deductible whether you are an employee or self-employed; the tax is added to the basis of the vehicle for depreciation purposes (43.3).
If you are an employee, state and local vehicle registration and license fees may be deducted as personal property taxes if you itemize deductions on Schedule A, but only if they are based on the value of the vehicle (16.8) (and subject to the $10,000 cap on state and local taxes (16.1)). If you are self-employed, deduct the business portion of the personal property taxes on Schedule C and the personal percentage on Schedule A if you itemize (subject to the $10,000 cap on state and local taxes).
Leased vehicle. If you lease a car, truck, or van for business use and do not claim the IRS mileage allowance (43.1), you deduct the lease payments plus other costs of operating the vehicle. If the vehicle is also used for personal driving, the lease payments must be allocated between business and personal mileage. The rules requiring a reduction in the deduction for lease payments are discussed later in this chapter (43.12).
43.3 Depreciation Restrictions on Cars, Trucks, and Vans
The law contains restrictions on so-called “listed property” that limit and, in some cases, deny depreciation deductions for a business car, truck, or van. Self-employed individuals must determine if they can use accelerated MACRS rates or must use straight line rates. Finally, regardless of which depreciation method is used, the annual deduction may not exceed a ceiling set by law for passenger cars and certain light trucks and vans; details on the annual ceilings are in 43.4.
More-than-50%-business-use test for claiming expensing, bonus depreciation, or accelerated MACRS depreciation. Automobiles and other vehicles used to transport persons or goods are considered “listed property” (42.10), but there are exceptions for ambulances, hearses, and trucks or vans that are qualified non-personal-use vehicles (43.4). Unless the vehicle is excepted from the listed property rules, you must use the vehicle more than 50% of the time for business in the year you place it in service in order to claim bonus depreciation, first-year expensing or accelerated MACRS (43.5). The annual ceiling, if applicable (43.4), applies to the total of any bonus allowance, first-year expensing and MACRS depreciation.
If you meet the more-than-50%-business-use test in the year you place the vehicle in service but in a later year within the recovery period your business use falls to 50% or less, you must use straight line depreciation and recapture “excess” deductions for prior years; see the Caution on this page and 43.10.
If business use is 50% or less in the year the vehicle is placed in service, bonus depreciation, first-year expensing and accelerated MACRS are barred; depreciation must be claimed over a six-year period under the straight line method. Technically, the recovery period is five years, but the period is extended to six years because, in the first year, a convention rule limits the deductible percentage. See Table 43-6 and Table 43-7 (43.6). The straight line method must be used for the entire recovery period, even if business use in the years after the first year exceeds 50%.
Recapture of MACRS Deductions
If you meet the more-than-50% test in the year the car or other vehicle is placed in service, which entitles you to claim bonus depreciation, first-year expensing, or accelerated MACRS, but business use falls to 50% or less in a later year within the recovery period, you become subject to straight line depreciation and recapture rules (43.10) apply.
If a vehicle is used for both business and investment purposes, only business use is considered in determining whether you meet the more-than-50%-business-use test and therefore qualify for MACRS. However, investment use is added to business use in determining your actual deduction.
Do your employees use the vehicle? In certain cases, an employer who provides a vehicle to employees as part of their compensation may be unable to count the employee’s use as qualified business use, thereby preventing the employer from meeting the more-than-50%-business-use test for claiming MACRS. An employer is allowed to treat the employee’s use as qualified business use only if: (1) the employee is not a relative and does not own more than 5% of the business and (2) the employer treats the fair market value of the employee’s personal use of the vehicle as wage income and withholds tax on that amount. If such income is reported, all of the employee’s use, including personal use, may be counted by an employer as qualified business use.
If an employee owning more than a 5% interest is allowed use of a company-owned vehicle as part of his or her compensation, the employer may not count that use as qualified business use, even if the personal use is reported as income. The same strict rule applies if the vehicle is provided to a person who is related to the employer.
Filing Tip
Claiming First-Year Expensing, Bonus Depreciation, or MACRS Depreciation for Your Car
First-year expensing or MACRS depreciation (under the 200% or 150% declining balance method, or the straight line method) is claimed on Form 4562 and then entered on Schedule C (Form 1040 or 1040-SR) if you are self employed.
43.4 Annual Ceilings on Depreciation
Annual ceilings limit the amount of depreciation you may deduct for passenger cars, light trucks, and vans; see below for affected vehicles and exceptions. The annual ceiling, if applicable, applies to the total of any bonus allowance, first-year expensing and MACRS depreciation. As a result of the ceilings, the actual write-off period for your car may be several years longer than the MACRS recovery period of six years (43.5).
Year-by-year limits for vehicles placed in service in 2020 and prior years can be found in Table 43-2 (cars) and Table 43-3 (trucks and vans).
Annual ceilings generally apply to vehicles weighing 6,000 pounds or less (cars, trucks, or vans). The ceiling on depreciation for a vehicle placed in service in 2020 and used 50% or less for business is $10,100, reduced by personal use. If the vehicle is used more than 50% for business in 2020, the first-year dollar limit is increased by the bonus depreciation allowance to $18,100, reduced by personal use, unless you elect not to claim bonus depreciation for 2020 (see “election out,” in 42.18), in which case the limit is $10,100, reduced by personal use.
The law applies the annual depreciation ceilings to a “passenger automobile,” but this is defined as any four-wheeled vehicle that is manufactured primarily for use on public thoroughfares and that is weight-rated by the manufacturer at 6,000 pounds or less when unloaded (without passengers or cargo), or, in the case of trucks or vans, 6,000 pounds or less gross vehicle weight. However, the following vehicles are not treated as passenger automobiles and are exempt from the annual depreciation limits: (1) an ambulance, hearse, or combination ambulance-hearse used directly in a business; (2) a vehicle such as a taxi cab used directly in the business of transporting persons or property for compensation or hire; and (3) qualified non-personal-use vehicles discussed below.
Qualified non-personal-use vehicles. The depreciation limits do not apply to trucks and vans that are qualified non-personal-use vehicles. These include moving vans, flatbed trucks, and delivery trucks with seating only for the driver (or driver seat plus folding jump seat). Also included are specially modified trucks and vans that are unlikely to be used more than a minimal amount for personal purposes. An example would be a van that has been painted to display advertising or the company’s name and which has permanent shelving for carrying merchandise or equipment.
Heavy trucks, vans, and SUVs. Trucks, vans, and SUVs built on a truck chassis that are weight-rated by the manufacturer at more than 6,000 pounds gross vehicle weight are not subject to the annual depreciation ceilings. However, first-year expensing (42.3) for the vehicle may be limited to $25,900 rather than the general expensing limit, which for 2020 is $1,040,000 (42.3). The vehicle must be used more than 50% for business to qualify for first-year expensing. If first-year expensing is not or cannot be elected (42.3), a full depreciation deduction using the MACRS rate (43.5) is allowed with no dollar limit.
Further, if bought and placed in service in 2020 and used over 50% for business, bonus depreciation (42.18) of up to 100% can be used, thereby avoiding the $25,900 limit on first-year expensing. In effect, the cost of a heavy SUV bought and placed in service in 2020 can be fully deducted using bonus depreciation, assuming business use is 100%.
The $25,900 limit on first-year expensing applies to SUVs rated at more than 6,000 pounds but not more than 14,000 pounds gross vehicle weight. For purposes of the $25,900 expensing limit, an SUV means any four-wheeled vehicle primarily designed or which can be used to carry passengers over public thoroughfares. Trucks and vans as well as SUVs can be covered by this definition, but the law allows certain exceptions.The $25,900 limit does not apply for vehicles with seating for more than nine passengers behind the driver, for pickup trucks with an interior cargo bed at least six feet long that is an open area or is enclosed by a cap and not readily accessible to passengers, and cargo vans without rear seating and with no body sections protruding more than 30 inches ahead of the windshield. For these excepted vehicles, the $25,900 limit on first-year expensing does not apply.
Capital Improvements
A capital improvement to a business vehicle is depreciable under MACRS in the year the improvement is made. The MACRS deductions for the improvement and the vehicle are considered as a unit for purposes of applying the limits on the annual MACRS depreciation deduction.
43.5 MACRS Rates for Cars, Trucks, and Vans
Business autos, trucks, and vans are technically in a five-year MACRS class (42.4), but because of the half-year or mid-quarter convention, the MACRS recovery period for five-year property is six years, and because of the annual deduction ceilings (43.4, and Table 43-2 and Table 43-3 below), the actual write-off period may be years longer.
First-year business use must exceed 50% to claim bonus depreciation or accelerated MACRS rates. To use accelerated MACRS rates, you must meet the more-than-50%-business-use test (43.3) in the year the vehicle is placed in business service. Generally, the accelerated MACRS rate is based on the 200% declining balance method, but as shown on Table 43-4 (half-year convention) or Table 43-5 (mid-quarter convention), a 150% declining balance rate may be elected, which may be advantageous when you are subject to the alternative minimum tax (23.2).
If you do not meet the more-than-50%-business-use test in the year the vehicle is placed in service, you must compute your depreciation deductions using the straight line rates shown in 43.6, subject to the first-year depreciation limit for vehicles that do not qualify for bonus depreciation.
Assuming business use of the vehicle exceeds 50% in the year it is placed in service, bonus depreciation increases the first-year depreciation ceiling, above what would be allowed using the accelerated MACRS rates, unless you elect on your return not to claim bonus depreciation (see “election out,” in 42.18). For example, for a vehicle placed in service in 2020, the maximum depreciation deduction taking bonus depreciation into account is $18,100; see Table 43-2 and Table 43-3. The $18,100 limit is the combined limit for first-year expensing, bonus depreciation, and regular MACRS depreciation. The maximum $18,100 deduction ceiling assumes 100% business use and must be reduced for personal use.
If business use for a vehicle placed in service in 2020 exceeds 50% but you elect out of bonus depreciation (see “election out,” in 42.18), the maximum depreciation deduction is $10,100, as shown in Table 43-2 and Table 43-3, and the $10,100 limit must be reduced if business use is under 100%. However, your depreciation deduction for 2020 is limited to the lesser of the deduction figured using the first-year MACRS rate shown in Table 43-4 or Table 43-5, or the $10,100 ceiling, as reduced for personal use.
Deductions for later years in the recovery period. For years two through six of the recovery period, the MACRS rate from Table 43-4 or Table 43-5 is used unless business use for a year falls to 50% or less (43.10). However, the deduction figured under the MACRS table for years two through six is allowed only if it does not exceed the annual depreciation ceiling (43.4) shown in Table 43-2 or Table 43-3; see the Bill Johnston Example on page 755. See below for details on using the MACRS tables.
Caution: If you used the 100% bonus depreciation rule for vehicles placed in service in 2019 to increase your first-year depreciation deduction, you must use an IRS safe harbor to figure your deductions starting in 2020 (the second recovery year), as explained in Revenue Procedure 2019-13. Under the safe harbor, depreciation for years two through six is the lesser of (1) the MACRS rate from Table 43-4 or Table 43-5, whichever applies, multiplied by the basis that remains after the first year, or (2) the annual depreciation ceiling for the year from Table 43-2 or Table 43-3. No special form or election statement is required to use this safe harbor, which applies to vehicles placed in service through 2022. Simply figure the appropriate safe harbor depreciation on your tax return for the first year following the year in which the vehicle is placed in service. See Revenue Procedure 2019-13 for safe harbor details.
Deduction for year of disposition. If you dispose of your vehicle before the end of the six-year MACRS recovery period, a partial-year deduction is allowed for the year of disposition under the half-year or mid-quarter convention (43.7).
Use of vehicle after end of recovery period. If you continue to use the vehicle for business after the end of the recovery period, and the annual deduction ceilings prevented you from deducting your full unadjusted basis during the recovery period, you generally may deduct depreciation in the succeeding years up to the annual ceiling (43.8).
Business use falls to 50% or less after the first year. What if business use exceeds 50% in the year the vehicle is placed in service but in a later year within the recovery period business use drops to 50% or lower? In that case, the right to use accelerated MACRS (200% or 150% declining balance method) terminates. You must use the straight line method and recapture the benefit of the accelerated deductions claimed for the prior years (43.10).
Straight line election for vehicle if business use exceeds 50%. If business use of your vehicle exceeds 50% in the year you place it in service, you may elect to write off your cost under the straight line method (43.6) instead of using the regular MACRS 200% declining balance method. The straight line deduction (43.6) is limited by the annual depreciation ceilings shown in Table 43-2 and Table 43-3. By electing straight line depreciation, you avoid the recapture of excess MACRS deductions if business use drops to 50% or less in a later year (43.10). If the election is made, you must also use the straight line method for all other five-year property placed in service during the same year as the vehicle.
Electing 150% declining balance method. Depreciation rates under the half-year and mid-quarter conventions are generally based on the 200% declining balance method. You may instead make an irrevocable election to apply the 150% declining balance method. The 150% method may be advantageous when you are subject to the alternative minimum tax. For alternative minimum tax (AMT) purposes (23.2), vehicle depreciation is based on the 150% declining balance method unless you use the straight line method for regular tax purposes. If you are subject to AMT and use the 150% declining balance method instead of the 200% declining balance method for regular tax purposes, you do not have to report an AMT adjustment on Form 6251.
An election to use the 150% declining balance method is irrevocable and must be applied to all depreciable assets placed in service in the same year, except for nonresidential real and residential rental property.
MACRS Tables Applying the Half-Year Convention or Mid-Quarter Convention if Business Use Exceeds 50%
For the year you place the vehicle in service and the year (within the recovery period) you dispose of the property, you may not claim a full year’s worth of MACRS depreciation. The deduction is limited by either the half-year convention or the mid-quarter convention, depending on the month in which the vehicle was placed in service and the other business assets, if any, placed in service during that year.
The applicable convention determines the rate table you will use to figure your depreciation deduction for the entire six-year recovery period, assuming that your business use each year exceeds 50%. The half-year and mid-quarter convention rates shown in Table 43-4 or Table 43-5 reflect the 200% or 150% declining balance method, with a switch to the straight line method when that method provides a larger deduction; the switch to straight line is built into the tables.
Rate applied to unadjusted basis. For each year in the recovery period, the rate from MACRS Table 43-4 or Table 43-5 is applied against the business use percentage of your unadjusted basis for the vehicle. The deduction figured using the table rate may be claimed to the extent that it does not exceed the annual depreciation ceiling (Table 43-2 or Table 43-3); see the Bill Johnston Example on the next page. Investment use may be added to the business use percentage, but keep in mind that the MACRS table may be used only if business use by itself exceeds 50% (43.3).
Unadjusted basis is your cost minus any first-year expensing deduction as well as any special first-year bonus depreciation. The basis reduction for bonus depreciation applies if you were eligible for the special allowance , even if you did not claim it, unless on your return you “elected out” of the special allowance for the vehicle and all other five-year property placed in service during the same year (42.18).
Basis for vehicle converted from personal to business use. The basis for depreciation is the lower of the fair market value of the vehicle at the time of conversion or its adjusted basis, which is your original cost plus any substantial improvements and minus any deductible casualty losses or diesel fuel tax credit claimed for the vehicle. In most cases, the value of the vehicle will be lower than adjusted basis, and thus the value will be your depreciable basis. For a vehicle converted to business use in 2020, the MACRS rate is applied to basis allocated to business travel. Unless you have mileage records for the entire year, you should base your business-use percentage on driving after the conversion. For example, in April 2020, you started to use your car for business and in the last nine months of the year you drove 10,000 miles, 8,000 of which were for business. This business percentage of 80% is multiplied by the fraction 9/12 (months used for business divided by 12) to give you a business-use percentage for the year of 60% (9/12 of 80%).
Determining whether the half-year convention or mid-quarter convention applies. If you bought a vehicle for use in your business in 2020, and it was the only business equipment placed in service during the year, then the half-year convention applies, unless you bought the vehicle in the last quarter of 2020 (October, November, or December). Under the half-year convention, the vehicle is treated as if it were placed in service in the middle of the year. Use Table 43-4 below to determine your deduction under the half-year convention.
If the only business equipment bought in 2020 was a vehicle bought in the last quarter (October, November, or December), the mid-quarter convention applies. Under Table 43-5 for the mid-quarter convention, a 5% rate applies under the 200% declining balance method for a vehicle purchased in the fourth quarter, subject to the deduction ceiling in 2020 (Table 43-2 or Table 43-3).
If you bought other business equipment in addition to the vehicle, you must consider the total cost basis of property placed in service during the last quarter of 2020. If the total bases of such acquisitions (other than realty) exceed 40% of the total bases of all property placed in service during the year, then a mid-quarter rate applies to all of the property (other than realty). The mid-quarter rate for each asset then depends on the quarter the asset was placed in service, and that quarter determines the mid-quarter rates for each year of the recovery period; see Table 43-5. If the 40% test is not met, then the half-year convention (Table 43-4) applies to all the property acquisitions.
Deduction from MACRS Tables Cannot Exceed Annual Ceiling
If the deduction figured under the half-year or mid-quarter convention MACRS table (Table 43-4 or Table 43-5), or the straight line table (Table 43-6 or Table 43-7), exceeds the annual deduction ceiling (Table 43-2 or Table 43-3), your deduction is limited to the annual ceiling, reduced by the percentage of your personal use; see the Bill Johnston Example below.
Keep in mind that if you were eligible for the special first-year depreciation allowance (bonus depreciation) for a vehicle placed in service after September 10, 2001, and before January 1, 2005 and during 2008 through September 27, 2017, basis for MACRS purposes is reduced by the special allowance unless you elected on your return not to claim it.
Caution: If you used bonus depreciation for a vehicle placed in service after September 27, 2017, you cannot claim any deduction in years two through six unless you use an IRS safe harbor explained in Revenue Procedure 2019-13; see the text “Caution” on page 753.
Table 43-2 Maximum Depreciation Deduction for Cars (The ceiling must be reduced for personal use.)
| Year Placed In Service | 1st Year | 2nd Year | 3rd Year | 4th and Later Years |
|---|---|---|---|---|
| 2019 and 2020 | $18,1001 | $16,100 | $9,700 | $5,760 |
| 2018 | 18,0002 | 16,000 | 9,600 | 5,760 |
| 2012 – 2017 | 11,1603 | 5,100 | 3,050 | 1,875 |
1$10,100 if the car does not qualify for the bonus allowance, or if you elect not to claim bonus depreciation.
2$10,000 if the car does not qualify for the bonus allowance, or if you elect not to claim bonus depreciation.
3$3,160 if the car does not qualify for the bonus allowance, or if you elect not to claim bonus depreciation.
Table 43-3 Maximum Depreciation Deduction for Trucks and Vans (The ceiling must be reduced for personal use.)
| Year Placed In Service | 1st Year | 2nd Year | 3rd Year | 4th and Later Years |
|---|---|---|---|---|
| 2019 and 2020 | $18,1001 | $16,100 | $9,700 | $5,760 |
| 2018 | 18,0002 | 16,000 | 9,600 | 5,760 |
| 2017 | 11,5603 | 5,700 | 3,450 | 2,075 |
| 2016 | 11,5603 | 5,700 | 3,350 | 2,075 |
| 2015 | 11,4604 | 5,600 | 3,350 | 1,975 |
| 2014 | 11,4604 | 5,500 | 3,350 | 1,975 |
| 2013 | 11,3605 | 5,400 | 3,250 | 1,975 |
| 2012 | 11,3605 | 5,300 | 3,150 | 1,875 |
1$10,100 if the vehicle does not qualify for the bonus allowance, or if you elect not to claim bonus depreciation.
2$10,000 if the vehicle does not qualify for the bonus allowance, or if you elect not to claim bonus depreciation.
3$3,560 if the vehicle does not qualify for the bonus allowance, or if you elect not to claim bonus depreciation.
4$3,460 if the vehicle does not qualify for the bonus allowance, or if you elect not to claim bonus depreciation.
5$3,360 if the vehicle does not qualify for the bonus allowance, or if you elect not to claim bonus depreciation.
Table 43-4 MACRS Deduction: Half-Year Convention
| Year | 200% Rate | 150% Rate |
|---|---|---|
| 1 | 20.00% | 15.00% |
| 2 | 32.00 | 25.50 |
| 3 | 19.20 | 17.85 |
| 4 | 11.52 | 16.66 |
| 5 | 11.52 | 16.66 |
| 6 | 5.76 | 8.33 |
Table 43-5 MACRS Deduction: Mid-Quarter Convention
| Placed in service in— | ||||||||
| Year | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||
| 200% Rate | 150% Rate | 200% Rate | 150% Rate | 200% Rate | 150% Rate | 200% Rate | 150% Rate | |
| 1 | 35.00% | 26.25% | 25.00% | 18.75% | 15.00% | 11.25% | 5.00% | 3.75% |
| 2 | 26.00 | 22.13 | 30.00 | 24.38 | 34.00 | 26.63 | 38.00 | 28.88 |
| 3 | 15.60 | 16.52 | 18.00 | 17.06 | 20.40 | 18.64 | 22.80 | 20.21 |
| 4 | 11.01 | 16.52 | 11.37 | 16.76 | 12.24 | 16.56 | 13.68 | 16.40 |
| 5 | 11.01 | 16.52 | 11.37 | 16.76 | 11.30 | 16.57 | 10.94 | 16.41 |
| 6 | 1.38 | 2.06 | 4.26 | 6.29 | 7.06 | 10.35 | 9.58 | 14.35 |
43.6 Straight Line Method
You may not use first-year expensing (Section 179 deduction), bonus depreciation, or accelerated MACRS (43.5) if your business use of your car, truck, or van is 50% or less in the year you place it in service; only business use is considered here, not investment use. Mandatory straight line recovery rates for business use of 50% or less using the half-year or mid-quarter convention are shown below. These straight line rates are also used if your business use exceeds 50% and you elect straight line recovery instead of the regular MACRS method. See the preceding section (43.5) for determining whether the half-year or mid-quarter convention applies.
For each year of the six-year recovery period, apply the straight line rate from the applicable table against your unadjusted basis, which is the business part of your cost minus any first-year expensing deduction or special bonus depreciation allowance (43.5). Investment use may be added to the business use part of cost when figuring the straight line deduction for each year. The deduction from the table is allowed only to the extent that it does not exceed the annual deduction ceiling (Table 43-2 or Table 43-3).
If business use initially exceeds 50% and accelerated MACRS is claimed but business use drops to 50% or less before the end of the six-year recovery period, a recapture rule applies a straight line computation retroactively (43.10).
Table 43-6 Straight Line Half-Year Convention*
| Straight line year— | Half-year convention rate— |
|---|---|
| 1 | 10% |
| 2 | 20 |
| 3 | 20 |
| 4 | 20 |
| 5 | 20 |
| 6 | 10 |
*The deduction may not exceed the annual deduction ceiling (Table 43-2 or 43-3).
Table 43-7 Straight Line Mid-Quarter Convention*
| Placed in service in— | ||||||
|---|---|---|---|---|---|---|
| Year | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||
| 1 | 17.50% | 12.50% | 7.50% | 2.50% | ||
| 2 | 20.00 | 20.00 | 20.00 | 20.00 | ||
| 3 | 20.00 | 20.00 | 20.00 | 20.00 | ||
| 4 | 20.00 | 20.00 | 20.00 | 20.00 | ||
| 5 | 20.00 | 20.00 | 20.00 | 20.00 | ||
| 6 | 2.50 | 7.50 | 12.50 | 17.50 |
*The deduction may not exceed the annual deduction ceiling (Table 43-2 or 43-3).
43.7 Depreciation for Year Vehicle Is Disposed Of
If you dispose of your car, truck, or van before the end of the six-year recovery period, you are allowed a partial depreciation deduction for the year of disposition. The deduction depends on the depreciation method and convention being used.
If you were depreciating the vehicle under the half-year convention (43.5), you may claim for the year of disposition 50% of the deduction that would be allowed for the full year under the 200% or 150% declining balance method (Table 43-4), or the straight line method (Table 43-6).
If you were depreciating the vehicle under the mid-quarter convention (43.5), your deduction for the year of disposition depends on the month of disposition. You deduct 87.5% of the full-year mid-quarter convention deduction (from Table 43-5 or Table 43-7) if the disposition occurred in October–December. If the disposition is in July–September, 62.5% of the full year’s deduction is allowed. Your deduction is 37.5% of the full-year deduction if the disposition is in April–June, or 12.5% of the full-year deduction if the disposition is in January–March.
43.8 Depreciation After Recovery Period Ends
If your business use of a car, truck, or van throughout the six-year recovery period is 100% and your deductions are limited by the annual ceilings (43.4 and Table 43-2 and Table 43-3), any remaining basis that was not deducted because of the ceilings, called “unrecovered basis,” may be depreciated in the years after the end of the recovery period. The maximum you can deduct each year will be the deduction ceiling for that year multiplied by your business use percentage.
If the vehicle was used less than 100% for business during the recovery period, your “unrecovered basis” is deductible in later years, but to determine unrecovered basis, original basis must be reduced by the depreciation that would have been allowed had the vehicle been used 100% for business.
Sell the vehicle rather than trade it in
You get the same tax treatment whether you sell the vehicle or trade it in. But you may be able to receive more through a sale to a third party than the trade-in allowance from a car dealer.
43.9 Trade-in of Business Vehicle
For trade-ins before 2018, you were able to avoid recognition of gain, but this rule no longer applies. If you trade in your business vehicle in 2020, you must figure gain on the trade-in. In effect, whether you sell or trade in your old vehicle, the tax result is the same. Gain is the difference between what you receive (an allowance toward the purchase of a new vehicle) and the adjusted basis of the vehicle you trade in.
43.10 Recapture of Deductions on Business Car, Truck, or Van
If you use your car, truck, or van more than 50% for business in the year you place it in service, you may use MACRS accelerated rates (43.5). If business use drops to 50% or less in the second, third, fourth, fifth, or sixth year, earlier MACRS deductions must be recaptured and reported as ordinary income. As “listed property” (42.10), cars, trucks, vans, and other vehicles used to transport persons or goods are subject to the more-than-50%-business-use test and recapture rule, but there are exceptions for ambulances, hearses, and other trucks and vans that are considered qualified non-personal-use vehicles (43.4).
The recapture rules do not apply if you elected straight line recovery instead of applying accelerated MACRS rates.
In the year in which business use drops to 50% or less, you must recapture excess depreciation for all prior years. Excess depreciation is the difference between: (1) the MACRS deductions allowed in previous years, including the first-year expensing deduction and bonus first-year depreciation allowance (43.4), if any, and (2) the amount of depreciation that would have been allowed if you claimed straight line depreciation (43.6) based on a six-year recovery period. See the Example below.
To compute depreciation for the year in which business use drops to 50% or less and for later years within the six-year, straight line recovery period, you apply the applicable straight line rate (43.6) to your original cost (unadjusted basis), multiplied by the business use percentage for that year, but the deduction may be limited by the annual ceiling for that year (Table 43-2 or Table 43-3); see the Example below.
Figuring and reporting recapture. Recapture is figured and reported on Part IV of Form 4797. The recaptured amount from Form 4797 is entered as other income on Schedule C, assuming the original deductions were claimed on Schedule C. Schedule C and Form 4797 must be attached to Schedule 1 (Form 1040 or 1040-SR).
Any recaptured amount increases the adjusted basis of the property for purposes of figuring gain or loss when you dispose of the vehicle.
43.11 Keeping Records of Business Use
Keep a log or diary or similar record of the business use of a car. You can also find an app for your smartphone or other mobile device to keep track of your business mileage. Record the purpose of the business trips and mileage covered for business travel. In the record book or electronic record, also note the odometer reading for the beginning and end of the taxable year. You need this data to prove business use. If you do not keep written records of business mileage and your return is examined, you will have to convince an IRS agent of your business mileage through oral testimony. Without written evidence, you may be unable to convince an IRS agent that you use the car for business travel or that you meet the business-use tests for claiming MACRS. You may also be subject to general negligence penalties for claiming deductions that you cannot prove you incurred.
Unless you are electing the standard mileage rate (43.1), mileage records are not required for vehicles that are unlikely to be used for personal purposes, such as delivery trucks with seating only for the driver.
Leased Vehicle
If in 2020 you leased a car, truck, or van for at least 30 days and you deduct the lease charges as a business expense (43.12), you generally must reduce the deduction by an “income inclusion amount” based on an IRS table. If you claim the standard mileage allowance (43.1), the income inclusion rule does not apply. See IRS Publication 463 for details.
43.12 Leased Business Vehicles: Deductions and Income
If you lease rather than purchase a car, truck, or van for business use, you may deduct the lease charges as a business expense deduction if you use the vehicle exclusively for business. If you also use the vehicle for personal driving, you may deduct only the lease payments allocated to business travel. Also keep a record of business use; see 43.11.
Inclusion amount. If in 2020 you lease a vehicle for 30 days or more, you may have to reduce the deduction for the lease payment based on an IRS table. This rule applies if you deduct the business portion of your lease payments plus other operating costs; it does not apply if you claim the standard mileage allowance (43.1). On Schedule C (if self-employed), the inclusion amount reduces your deduction for lease payments similar to the way your depreciation deductions would have been limited if you had bought the vehicle outright. The income amount is reduced where you leased the vehicle for less than the entire year or business use is less than 100%. For vehicles first leased in 2020, there’s no inclusion amount if the fair market value of the vehicle at the start of the lease is $50,000 or less.
The lease tables, which are in IRS Publication 463, show income amounts for each year of the lease. Publication 463 also has tables showing income amounts for vehicles leased before 2020. You can also see the inclusion amounts for vehicles first leased in 2020 in Rev. Proc. 2020-37.
Apps for Tracking Mileage
There are a number of free or low-cost apps for smartphones and tablets that can be used to record the necessary information for business driving.