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Freetaxusa2010 2. Freetaxusa2010   Entertainment Table of Contents Directly-Related Test Associated TestMeetings at conventions. Freetaxusa2010 50% LimitExceptions to the 50% Limit What Entertainment Expenses Are Deductible?A meal as a form of entertainment. Freetaxusa2010 Deduction may depend on your type of business. Freetaxusa2010 Exception for events that benefit charitable organizations. Freetaxusa2010 Food and beverages in skybox seats. Freetaxusa2010 What Entertainment Expenses Are Not Deductible?Out-of-pocket expenses. Freetaxusa2010 You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. Freetaxusa2010 The rules and definitions are summarized in Table 2-1 . Freetaxusa2010 You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests. Freetaxusa2010 Directly-related test. Freetaxusa2010 Associated test. Freetaxusa2010 Both of these tests are explained later. Freetaxusa2010 An ordinary expense is one that is common and accepted in your trade or business. Freetaxusa2010 A necessary expense is one that is helpful and appropriate for your business. Freetaxusa2010 An expense does not have to be required to be considered necessary. Freetaxusa2010 The amount you can deduct for entertainment expenses may be limited. Freetaxusa2010 Generally, you can deduct only 50% of your unreimbursed entertainment expenses. Freetaxusa2010 This limit is discussed later under 50% Limit. Freetaxusa2010 Directly-Related Test To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that: The main purpose of the combined business and entertainment was the active conduct of business, You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit at some future time. Freetaxusa2010 Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats. Freetaxusa2010 Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility. Freetaxusa2010 See Entertainment facilities under What Entertainment Expenses Are Not Deductible? later in this chapter. Freetaxusa2010 You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during the entertainment. Freetaxusa2010 It is not necessary to devote more time to business than to entertainment. Freetaxusa2010 However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test. Freetaxusa2010 Table 2-1. Freetaxusa2010 When Are Entertainment Expenses Deductible? General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. Freetaxusa2010 Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. Freetaxusa2010 An ordinary expense is one that is common and accepted in your trade or business. Freetaxusa2010 A necessary expense is one that is helpful and appropriate. Freetaxusa2010 Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. Freetaxusa2010   Associated test Entertainment is associated with your trade or business, and Entertainment is directly before or after a substantial business discussion. Freetaxusa2010 Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. Freetaxusa2010 You cannot deduct expenses that are lavish or extravagant under the circumstances. Freetaxusa2010 You generally can deduct only 50% of your unreimbursed entertainment expenses (see 50% Limit ). Freetaxusa2010 You do not have to show that business income or other business benefit actually resulted from each entertainment expense. Freetaxusa2010 Clear business setting. Freetaxusa2010   If the entertainment takes place in a clear business setting and is for your business or work, the expenses are considered directly related to your business or work. Freetaxusa2010 The following situations are examples of entertainment in a clear business setting. Freetaxusa2010 Entertainment in a hospitality room at a convention where business goodwill is created through the display or discussion of business products. Freetaxusa2010 Entertainment that is mainly a price rebate on the sale of your products (such as a restaurant owner providing an occasional free meal to a loyal customer). Freetaxusa2010 Entertainment of a clear business nature occurring under circumstances where there is no meaningful personal or social relationship between you and the persons entertained. Freetaxusa2010 An example is entertainment of business and civic leaders at the opening of a new hotel or play when the purpose is to get business publicity rather than to create or maintain the goodwill of the persons entertained. Freetaxusa2010 Expenses not considered directly related. Freetaxusa2010   Entertainment expenses generally are not considered directly related if you are not there or in situations where there are substantial distractions that generally prevent you from actively conducting business. Freetaxusa2010 The following are examples of situations where there are substantial distractions. Freetaxusa2010 A meeting or discussion at a nightclub, theater, or sporting event. Freetaxusa2010 A meeting or discussion during what is essentially a social gathering, such as a cocktail party. Freetaxusa2010 A meeting with a group that includes persons who are not business associates at places such as cocktail lounges, country clubs, golf clubs, athletic clubs, or vacation resorts. Freetaxusa2010 Associated Test Even if your expenses do not meet the directly-related test, they may meet the associated test. Freetaxusa2010 To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment is: Associated with the active conduct of your trade or business, and Directly before or after a substantial business discussion (defined later). Freetaxusa2010 Associated with trade or business. Freetaxusa2010   Generally, an expense is associated with the active conduct of your trade or business if you can show that you had a clear business purpose for having the expense. Freetaxusa2010 The purpose may be to get new business or to encourage the continuation of an existing business relationship. Freetaxusa2010 Substantial business discussion. Freetaxusa2010   Whether a business discussion is substantial depends on the facts of each case. Freetaxusa2010 A business discussion will not be considered substantial unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business transaction to get income or some other specific business benefit. Freetaxusa2010   The meeting does not have to be for any specified length of time, but you must show that the business discussion was substantial in relation to the meal or entertainment. Freetaxusa2010 It is not necessary that you devote more time to business than to entertainment. Freetaxusa2010 You do not have to discuss business during the meal or entertainment. Freetaxusa2010 Meetings at conventions. Freetaxusa2010   You are considered to have a substantial business discussion if you attend meetings at a convention or similar event, or at a trade or business meeting sponsored and conducted by a business or professional organization. Freetaxusa2010 However, your reason for attending the convention or meeting must be to further your trade or business. Freetaxusa2010 The organization that sponsors the convention or meeting must schedule a program of business activities that is the main activity of the convention or meeting. Freetaxusa2010 Directly before or after business discussion. Freetaxusa2010   If the entertainment is held on the same day as the business discussion, it is considered to be held directly before or after the business discussion. Freetaxusa2010   If the entertainment and the business discussion are not held on the same day, you must consider the facts of each case to see if the associated test is met. Freetaxusa2010 Among the facts to consider are the place, date, and duration of the business discussion. Freetaxusa2010 If you or your business associates are from out of town, you must also consider the dates of arrival and departure, and the reasons the entertainment and the discussion did not take place on the same day. Freetaxusa2010 Example. Freetaxusa2010 A group of business associates comes from out of town to your place of business to hold a substantial business discussion. Freetaxusa2010 If you entertain those business guests on the evening before the business discussion, or on the evening of the day following the business discussion, the entertainment generally is considered to be held directly before or after the discussion. Freetaxusa2010 The expense meets the associated test. Freetaxusa2010 50% Limit In general, you can deduct only 50% of your business-related meal and entertainment expenses. Freetaxusa2010 (If you are subject to the Department of Transportation's “hours of service” limits, you can deduct 80% of your business-related meal and entertainment expenses. Freetaxusa2010 See Individuals subject to “hours of service” limits , later. Freetaxusa2010 ) The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed. Freetaxusa2010 Figure A summarizes the general rules explained in this section. Freetaxusa2010 The 50% limit applies to business meals or entertainment expenses you have while: Traveling away from home (whether eating alone or with others) on business, Entertaining customers at your place of business, a restaurant, or other location, or Attending a business convention or reception, business meeting, or business luncheon at a club. Freetaxusa2010 Included expenses. Freetaxusa2010   Expenses subject to the 50% limit include: Taxes and tips relating to a business meal or entertainment activity, Cover charges for admission to a nightclub, Rent paid for a room in which you hold a dinner or cocktail party, and Amounts paid for parking at a sports arena. Freetaxusa2010 However, the cost of transportation to and from a business meal or a business-related entertainment activity is not subject to the 50% limit. Freetaxusa2010 Figure A. Freetaxusa2010 Does the 50% Limit Apply to Your Expenses? There are exceptions to these rules. Freetaxusa2010 See Exceptions to the 50% Limit . Freetaxusa2010 Please click here for the text description of the image. Freetaxusa2010 Figure A. Freetaxusa2010 Does the 50% limit apply to Your Expenses?TAs for Figure A are: Notice 87-23; Form 2106 instructions Application of 50% limit. Freetaxusa2010   The 50% limit on meal and entertainment expenses applies if the expense is otherwise deductible and is not covered by one of the exceptions discussed later. Freetaxusa2010   The 50% limit also applies to certain meal and entertainment expenses that are not business related. Freetaxusa2010 It applies to meal and entertainment expenses you have for the production of income, including rental or royalty income. Freetaxusa2010 It also applies to the cost of meals included in deductible educational expenses. Freetaxusa2010 When to apply the 50% limit. Freetaxusa2010   You apply the 50% limit after determining the amount that would otherwise qualify for a deduction. Freetaxusa2010 You first have to determine the amount of meal and entertainment expenses that would be deductible under the other rules discussed in this publication. Freetaxusa2010 Example 1. Freetaxusa2010 You spend $200 for a business-related meal. Freetaxusa2010 If $110 of that amount is not allowable because it is lavish and extravagant, the remaining $90 is subject to the 50% limit. Freetaxusa2010 Your deduction cannot be more than $45 (50% × $90). Freetaxusa2010 Example 2. Freetaxusa2010 You purchase two tickets to a concert and give them to a client. Freetaxusa2010 You purchased the tickets through a ticket agent. Freetaxusa2010 You paid $200 for the two tickets, which had a face value of $80 each ($160 total). Freetaxusa2010 Your deduction cannot be more than $80 (50% × $160). Freetaxusa2010 Exceptions to the 50% Limit Generally, business-related meal and entertainment expenses are subject to the 50% limit. Freetaxusa2010 Figure A can help you determine if the 50% limit applies to you. Freetaxusa2010 Expenses not subject to 50% limit. Freetaxusa2010   Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions. Freetaxusa2010 1 - Employee's reimbursed expenses. Freetaxusa2010   If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan. Freetaxusa2010 Accountable plans are discussed in chapter 6. Freetaxusa2010 2 - Self-employed. Freetaxusa2010   If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if all of the following requirements are met. Freetaxusa2010 You have these expenses as an independent contractor. Freetaxusa2010 Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform. Freetaxusa2010 You provide adequate records of these expenses to your customer or client. Freetaxusa2010 (See chapter 5 . Freetaxusa2010 )   In this case, your client or customer is subject to the 50% limit on the expenses. Freetaxusa2010 Example. Freetaxusa2010 You are a self-employed attorney who adequately accounts for meal and entertainment expenses to a client who reimburses you for these expenses. Freetaxusa2010 You are not subject to the directly-related or associated test, nor are you subject to the 50% limit. Freetaxusa2010 If the client can deduct the expenses, the client is subject to the 50% limit. Freetaxusa2010 If you (as an independent contractor) have expenses for meals and entertainment related to providing services for a client but do not adequately account for and seek reimbursement from the client for those expenses, you are subject to the directly-related or associated test and to the 50% limit. Freetaxusa2010 3 - Advertising expenses. Freetaxusa2010   You are not subject to the 50% limit if you provide meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. Freetaxusa2010 For example, neither the expense of sponsoring a television or radio show nor the expense of distributing free food and beverages to the general public is subject to the 50% limit. Freetaxusa2010 4 - Sale of meals or entertainment. Freetaxusa2010   You are not subject to the 50% limit if you actually sell meals, entertainment, goods and services, or use of facilities to the public. Freetaxusa2010 For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is not subject to the 50% limit. Freetaxusa2010 5 - Charitable sports event. Freetaxusa2010   You are not subject to the 50% limit if you pay for a package deal that includes a ticket to a qualified charitable sports event. Freetaxusa2010 For the conditions the sports event must meet, see Exception for events that benefit charitable organizations under What Entertainment Expenses Are Deductible?, later. Freetaxusa2010 Individuals subject to “hours of service” limits. Freetaxusa2010   You can deduct a higher percentage of your meal expenses while traveling away from your tax home if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. Freetaxusa2010 The percentage is 80%. Freetaxusa2010   Individuals subject to the Department of Transportation's “hours of service” limits include the following persons. Freetaxusa2010 Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations. Freetaxusa2010 Interstate truck operators and bus drivers who are under Department of Transportation regulations. Freetaxusa2010 Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations. Freetaxusa2010 Certain merchant mariners who are under Coast Guard regulations. Freetaxusa2010 What Entertainment Expenses Are Deductible? This section explains different types of entertainment expenses you may be able to deduct. Freetaxusa2010 Entertainment. Freetaxusa2010   Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Freetaxusa2010 Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips. Freetaxusa2010   Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals, a hotel suite, or a car to customers or their families. Freetaxusa2010 A meal as a form of entertainment. Freetaxusa2010   Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. Freetaxusa2010 A meal expense includes the cost of food, beverages, taxes, and tips for the meal. Freetaxusa2010 To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided. Freetaxusa2010    You cannot claim the cost of your meal both as an entertainment expense and as a travel expense. Freetaxusa2010    Meals sold in the normal course of your business are not considered entertainment. Freetaxusa2010 Deduction may depend on your type of business. Freetaxusa2010   Your kind of business may determine if a particular activity is considered entertainment. Freetaxusa2010 For example, if you are a dress designer and have a fashion show to introduce your new designs to store buyers, the show generally is not considered entertainment. Freetaxusa2010 This is because fashion shows are typical in your business. Freetaxusa2010 But, if you are an appliance distributor and hold a fashion show for the spouses of your retailers, the show generally is considered entertainment. Freetaxusa2010 Separating costs. Freetaxusa2010   If you have one expense that includes the costs of entertainment and other services (such as lodging or transportation), you must allocate that expense between the cost of entertainment and the cost of other services. Freetaxusa2010 You must have a reasonable basis for making this allocation. Freetaxusa2010 For example, you must allocate your expenses if a hotel includes entertainment in its lounge on the same bill with your room charge. Freetaxusa2010 Taking turns paying for meals or entertainment. Freetaxusa2010   If a group of business acquaintances takes turns picking up each others' meal or entertainment checks primarily for personal reasons, without regard to whether any business purposes are served, no member of the group can deduct any part of the expense. Freetaxusa2010 Lavish or extravagant expenses. Freetaxusa2010   You cannot deduct expenses for entertainment that are lavish or extravagant. Freetaxusa2010 An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. Freetaxusa2010 Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. Freetaxusa2010 Allocating between business and nonbusiness. Freetaxusa2010   If you entertain business and nonbusiness individuals at the same event, you must divide your entertainment expenses between business and nonbusiness. Freetaxusa2010 You can deduct only the business part. Freetaxusa2010 If you cannot establish the part of the expense for each person participating, allocate the expense to each participant on a pro rata basis. Freetaxusa2010 Example. Freetaxusa2010 You entertain a group of individuals that includes yourself, three business prospects, and seven social guests. Freetaxusa2010 Only 4/11 of the expense qualifies as a business entertainment expense. Freetaxusa2010 You cannot deduct the expenses for the seven social guests because those costs are nonbusiness expenses. Freetaxusa2010 Trade association meetings. Freetaxusa2010   You can deduct entertainment expenses that are directly related to and necessary for attending business meetings or conventions of certain exempt organizations if the expenses of your attendance are related to your active trade or business. Freetaxusa2010 These organizations include business leagues, chambers of commerce, real estate boards, trade associations, and professional associations. Freetaxusa2010 Entertainment tickets. Freetaxusa2010   Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. Freetaxusa2010 For example, you cannot deduct service fees you pay to ticket agencies or brokers or any amount over the face value of the tickets you pay to scalpers. Freetaxusa2010 Exception for events that benefit charitable organizations. Freetaxusa2010   Different rules apply when the cost of a ticket to a sports event benefits a charitable organization. Freetaxusa2010 You can take into account the full cost you pay for the ticket, even if it is more than the face value, if all of the following conditions apply. Freetaxusa2010 The event's main purpose is to benefit a qualified charitable organization. Freetaxusa2010 The entire net proceeds go to the charity. Freetaxusa2010 The event uses volunteers to perform substantially all the event's work. Freetaxusa2010    The 50% limit on entertainment does not apply to any expense for a package deal that includes a ticket to such a charitable sports event. Freetaxusa2010 Example 1. Freetaxusa2010 You purchase tickets to a golf tournament organized by the local volunteer fire company. Freetaxusa2010 All net proceeds will be used to buy new fire equipment. Freetaxusa2010 The volunteers will run the tournament. Freetaxusa2010 You can deduct the entire cost of the tickets as a business expense if they otherwise qualify as an entertainment expense. Freetaxusa2010 Example 2. Freetaxusa2010 You purchase tickets to a college football game through a ticket broker. Freetaxusa2010 After having a business discussion, you take a client to the game. Freetaxusa2010 Net proceeds from the game go to colleges that qualify as charitable organizations. Freetaxusa2010 However, since the colleges also pay individuals to perform services, such as coaching and recruiting, you can only use the face value of the tickets in determining your business deduction. Freetaxusa2010 Skyboxes and other private luxury boxes. Freetaxusa2010   If you rent a skybox or other private luxury box for more than one event at the same sports arena, you generally cannot deduct more than the price of a nonluxury box seat ticket. Freetaxusa2010   To determine whether a skybox has been rented for more than one event, count each game or other performance as one event. Freetaxusa2010 For example, renting a skybox for a series of playoff games is considered renting it for more than one event. Freetaxusa2010 All skyboxes you rent in the same arena, along with any rentals by related parties, are considered in making this determination. Freetaxusa2010   Related parties include: Family members (spouses, ancestors, and lineal descendants), Parties who have made a reciprocal arrangement involving the sharing of skyboxes, Related corporations, A partnership and its principal partners, and A corporation and a partnership with common ownership. Freetaxusa2010 Example. Freetaxusa2010 You pay $3,000 to rent a 10-seat skybox at Team Stadium for three baseball games. Freetaxusa2010 The cost of regular nonluxury box seats at each event is $30 a seat. Freetaxusa2010 You can deduct (subject to the 50% limit) $900 ((10 seats × $30 each) × 3 events). Freetaxusa2010 Food and beverages in skybox seats. Freetaxusa2010   If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. Freetaxusa2010 The amounts separately stated for food and beverages must be reasonable. Freetaxusa2010 You cannot inflate the charges for food and beverages to avoid the limited deduction for skybox rentals. Freetaxusa2010 What Entertainment Expenses Are Not Deductible? This section explains different types of entertainment expenses you generally may not be able to deduct. Freetaxusa2010 Club dues and membership fees. Freetaxusa2010   You cannot deduct dues (including initiation fees) for membership in any club organized for: Business, Pleasure, Recreation, or Other social purpose. Freetaxusa2010 This rule applies to any membership organization if one of its principal purposes is either: To conduct entertainment activities for members or their guests, or To provide members or their guests with access to entertainment facilities, discussed later. Freetaxusa2010   The purposes and activities of a club, not its name, will determine whether or not you can deduct the dues. Freetaxusa2010 You cannot deduct dues paid to: Country clubs, Golf and athletic clubs, Airline clubs, Hotel clubs, and Clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Freetaxusa2010 Entertainment facilities. Freetaxusa2010   Generally, you cannot deduct any expense for the use of an entertainment facility. Freetaxusa2010 This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. Freetaxusa2010   An entertainment facility is any property you own, rent, or use for entertainment. Freetaxusa2010 Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort. Freetaxusa2010 Out-of-pocket expenses. Freetaxusa2010   You can deduct out-of-pocket expenses, such as for food and beverages, catering, gas, and fishing bait, that you provided during entertainment at a facility. Freetaxusa2010 These are not expenses for the use of an entertainment facility. Freetaxusa2010 However, these expenses are subject to the directly-related and associated tests and to the 50% limit , all discussed earlier. Freetaxusa2010 Expenses for spouses. Freetaxusa2010   You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. Freetaxusa2010 However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment. Freetaxusa2010 Example. Freetaxusa2010 You entertain a customer. Freetaxusa2010 The cost is an ordinary and necessary business expense and is allowed under the entertainment rules. Freetaxusa2010 The customer's spouse joins you because it is impractical to entertain the customer without the spouse. Freetaxusa2010 You can deduct the cost of entertaining the customer's spouse. Freetaxusa2010 If your spouse joins the party because the customer's spouse is present, the cost of the entertainment for your spouse is also deductible. Freetaxusa2010 Gift or entertainment. Freetaxusa2010   Any item that might be considered either a gift or entertainment generally will be considered entertainment. Freetaxusa2010 However, if you give a customer packaged food or beverages that you intend the customer to use at a later date, treat it as a gift. Freetaxusa2010   If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, you have a choice. Freetaxusa2010 You can treat the tickets as either a gift or entertainment, whichever is to your advantage. Freetaxusa2010   You can change your treatment of the tickets at a later date by filing an amended return. Freetaxusa2010 Generally, an amended return must be filed within 3 years from the date the original return was filed or within 2 years from the time the tax was paid, whichever is later. Freetaxusa2010   If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. Freetaxusa2010 You cannot choose, in this case, to treat the tickets as a gift. Freetaxusa2010 Prev  Up  Next   Home   More Online Publications
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Freetaxusa2010 4. Freetaxusa2010   Transportation Table of Contents Parking fees. Freetaxusa2010 Advertising display on car. Freetaxusa2010 Car pools. Freetaxusa2010 Hauling tools or instruments. Freetaxusa2010 Union members' trips from a union hall. Freetaxusa2010 Car ExpensesStandard Mileage Rate Actual Car Expenses Leasing a Car Disposition of a Car This chapter discusses expenses you can deduct for business transportation when you are not traveling away from home as defined in chapter 1. Freetaxusa2010 These expenses include the cost of transportation by air, rail, bus, taxi, etc. Freetaxusa2010 , and the cost of driving and maintaining your car. Freetaxusa2010 Transportation expenses include the ordinary and necessary costs of all of the following. Freetaxusa2010 Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. Freetaxusa2010 Tax home is defined in chapter 1. Freetaxusa2010 Visiting clients or customers. Freetaxusa2010 Going to a business meeting away from your regular workplace. Freetaxusa2010 Getting from your home to a temporary workplace when you have one or more regular places of work. Freetaxusa2010 These temporary workplaces can be either within the area of your tax home or outside that area. Freetaxusa2010 Transportation expenses do not include expenses you have while traveling away from home overnight. Freetaxusa2010 Those expenses are travel expenses discussed in chapter 1 . Freetaxusa2010 However, if you use your car while traveling away from home overnight, use the rules in this chapter to figure your car expense deduction. Freetaxusa2010 See Car Expenses , later. Freetaxusa2010 Daily transportation expenses you incur while traveling from home to one or more regular places of business are generally nondeductible commuting expenses. Freetaxusa2010 However, there may be exceptions to this general rule. Freetaxusa2010 You can deduct daily transportation expenses incurred going between your residence and a temporary work station outside the metropolitan area where you live. Freetaxusa2010 Also, daily transportation expenses can be deducted if: (1) you have one or more regular work locations away from your residence or (2) your residence is your principal place of business and you incur expenses going between the residence and another work location in the same trade or business, regardless of whether the work is temporary or permanent and regardless of the distance. Freetaxusa2010 Illustration of transportation expenses. Freetaxusa2010    Figure B , earlier, illustrates the rules that apply for deducting transportation expenses when you have a regular or main job away from your home. Freetaxusa2010 You may want to refer to it when deciding whether you can deduct your transportation expenses. Freetaxusa2010 Temporary work location. Freetaxusa2010   If you have one or more regular work locations away from your home and you commute to a temporary work location in the same trade or business, you can deduct the expenses of the daily round-trip transportation between your home and the temporary location, regardless of distance. Freetaxusa2010   If your employment at a work location is realistically expected to last (and does in fact last) for 1 year or less, the employment is temporary unless there are facts and circumstances that would indicate otherwise. Freetaxusa2010   If your employment at a work location is realistically expected to last for more than 1 year or if there is no realistic expectation that the employment will last for 1 year or less, the employment is not temporary, regardless of whether it actually lasts for more than 1 year. Freetaxusa2010   If employment at a work location initially is realistically expected to last for 1 year or less, but at some later date the employment is realistically expected to last more than 1 year, that employment will be treated as temporary (unless there are facts and circumstances that would indicate otherwise) until your expectation changes. Freetaxusa2010 It will not be treated as temporary after the date you determine it will last more than 1 year. Freetaxusa2010   If the temporary work location is beyond the general area of your regular place of work and you stay overnight, you are traveling away from home. Freetaxusa2010 You may have deductible travel expenses as discussed in chapter 1 . Freetaxusa2010 No regular place of work. Freetaxusa2010   If you have no regular place of work but ordinarily work in the metropolitan area where you live, you can deduct daily transportation costs between home and a temporary work site outside that metropolitan area. Freetaxusa2010   Generally, a metropolitan area includes the area within the city limits and the suburbs that are considered part of that metropolitan area. Freetaxusa2010   You cannot deduct daily transportation costs between your home and temporary work sites within your metropolitan area. Freetaxusa2010 These are nondeductible commuting expenses. Freetaxusa2010 Two places of work. Freetaxusa2010   If you work at two places in one day, whether or not for the same employer, you can deduct the expense of getting from one workplace to the other. Freetaxusa2010 However, if for some personal reason you do not go directly from one location to the other, you cannot deduct more than the amount it would have cost you to go directly from the first location to the second. Freetaxusa2010   Transportation expenses you have in going between home and a part-time job on a day off from your main job are commuting expenses. Freetaxusa2010 You cannot deduct them. Freetaxusa2010 Armed Forces reservists. Freetaxusa2010   A meeting of an Armed Forces reserve unit is a second place of business if the meeting is held on a day on which you work at your regular job. Freetaxusa2010 You can deduct the expense of getting from one workplace to the other as just discussed under Two places of work . Freetaxusa2010   You usually cannot deduct the expense if the reserve meeting is held on a day on which you do not work at your regular job. Freetaxusa2010 In this case, your transportation generally is a nondeductible commuting expense. Freetaxusa2010 However, you can deduct your transportation expenses if the location of the meeting is temporary and you have one or more regular places of work. Freetaxusa2010   If you ordinarily work in a particular metropolitan area but not at any specific location and the reserve meeting is held at a temporary location outside that metropolitan area, you can deduct your transportation expenses. Freetaxusa2010   If you travel away from home overnight to attend a guard or reserve meeting, you can deduct your travel expenses. Freetaxusa2010 These expenses are discussed in chapter 1 . Freetaxusa2010   If you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you may be able to deduct some of your reserve-related travel costs as an adjustment to gross income rather than as an itemized deduction. Freetaxusa2010 For more information, see Armed Forces Reservists Traveling More Than 100 Miles From Home under Special Rules, in chapter 6. Freetaxusa2010 Commuting expenses. Freetaxusa2010   You cannot deduct the costs of taking a bus, trolley, subway, or taxi, or of driving a car between your home and your main or regular place of work. Freetaxusa2010 These costs are personal commuting expenses. Freetaxusa2010 You cannot deduct commuting expenses no matter how far your home is from your regular place of work. Freetaxusa2010 You cannot deduct commuting expenses even if you work during the commuting trip. Freetaxusa2010 Example. Freetaxusa2010 You sometimes use your cell phone to make business calls while commuting to and from work. Freetaxusa2010 Sometimes business associates ride with you to and from work, and you have a business discussion in the car. Freetaxusa2010 These activities do not change the trip from personal to business. Freetaxusa2010 You cannot deduct your commuting expenses. Freetaxusa2010 Parking fees. Freetaxusa2010    Fees you pay to park your car at your place of business are nondeductible commuting expenses. Freetaxusa2010 You can, however, deduct business-related parking fees when visiting a customer or client. Freetaxusa2010 Advertising display on car. Freetaxusa2010   Putting display material that advertises your business on your car does not change the use of your car from personal use to business use. Freetaxusa2010 If you use this car for commuting or other personal uses, you still cannot deduct your expenses for those uses. Freetaxusa2010 Car pools. Freetaxusa2010   You cannot deduct the cost of using your car in a nonprofit car pool. Freetaxusa2010 Do not include payments you receive from the passengers in your income. Freetaxusa2010 These payments are considered reimbursements of your expenses. Freetaxusa2010 However, if you operate a car pool for a profit, you must include payments from passengers in your income. Freetaxusa2010 You can then deduct your car expenses (using the rules in this publication). Freetaxusa2010 Hauling tools or instruments. Freetaxusa2010   Hauling tools or instruments in your car while commuting to and from work does not make your car expenses deductible. Freetaxusa2010 However, you can deduct any additional costs you have for hauling tools or instruments (such as for renting a trailer you tow with your car). Freetaxusa2010 Union members' trips from a union hall. Freetaxusa2010   If you get your work assignments at a union hall and then go to your place of work, the costs of getting from the union hall to your place of work are nondeductible commuting expenses. Freetaxusa2010 Although you need the union to get your work assignments, you are employed where you work, not where the union hall is located. Freetaxusa2010 Office in the home. Freetaxusa2010   If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. Freetaxusa2010 (See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Freetaxusa2010 ) Examples of deductible transportation. Freetaxusa2010   The following examples show when you can deduct transportation expenses based on the location of your work and your home. Freetaxusa2010 Example 1. Freetaxusa2010 You regularly work in an office in the city where you live. Freetaxusa2010 Your employer sends you to a 1-week training session at a different office in the same city. Freetaxusa2010 You travel directly from your home to the training location and return each day. Freetaxusa2010 You can deduct the cost of your daily round-trip transportation between your home and the training location. Freetaxusa2010 Example 2. Freetaxusa2010 Your principal place of business is in your home. Freetaxusa2010 You can deduct the cost of round-trip transportation between your qualifying home office and your client's or customer's place of business. Freetaxusa2010 Example 3. Freetaxusa2010 You have no regular office, and you do not have an office in your home. Freetaxusa2010 In this case, the location of your first business contact inside the metropolitan area is considered your office. Freetaxusa2010 Transportation expenses between your home and this first contact are nondeductible commuting expenses. Freetaxusa2010 Transportation expenses between your last business contact and your home are also nondeductible commuting expenses. Freetaxusa2010 While you cannot deduct the costs of these trips, you can deduct the costs of going from one client or customer to another. Freetaxusa2010 Car Expenses If you use your car for business purposes, you ordinarily can deduct car expenses. Freetaxusa2010 You generally can use one of the two following methods to figure your deductible expenses. Freetaxusa2010 Standard mileage rate. Freetaxusa2010 Actual car expenses. Freetaxusa2010 If you use actual expenses to figure your deduction for a car you lease, there are rules that affect the amount of your lease payments you can deduct. Freetaxusa2010 See Leasing a Car , later. Freetaxusa2010 In this publication, “car” includes a van, pickup, or panel truck. Freetaxusa2010 For the definition of “car” for depreciation purposes, see Car defined under Actual Car Expenses, later. Freetaxusa2010 Rural mail carriers. Freetaxusa2010   If you are a rural mail carrier, you may be able to treat the qualified reimbursement you received as your allowable expense. Freetaxusa2010 Because the qualified reimbursement is treated as paid under an accountable plan, your employer should not include the reimbursement in your income. Freetaxusa2010   If your vehicle expenses are more than the amount of your reimbursement, you can deduct the unreimbursed expenses as an itemized deduction on Schedule A (Form 1040). Freetaxusa2010 You must complete Form 2106 and attach it to your Form 1040, U. Freetaxusa2010 S. Freetaxusa2010 Individual Income Tax Return. Freetaxusa2010   A “qualified reimbursement” is the reimbursement you receive that meets both of the following conditions. Freetaxusa2010 It is given as an equipment maintenance allowance (EMA) to employees of the U. Freetaxusa2010 S. Freetaxusa2010 Postal Service. Freetaxusa2010 It is at the rate contained in the 1991 collective bargaining agreement. Freetaxusa2010 Any later agreement cannot increase the qualified reimbursement amount by more than the rate of inflation. Freetaxusa2010 See your employer for information on your reimbursement. Freetaxusa2010    If you are a rural mail carrier and received a qualified reimbursement, you cannot use the standard mileage rate. Freetaxusa2010 Standard Mileage Rate You may be able to use the standard mileage rate to figure the deductible costs of operating your car for business purposes. Freetaxusa2010 For 2013, the standard mileage rate for the cost of operating your car for business use is 56½ cents per mile. Freetaxusa2010 If you use the standard mileage rate for a year, you cannot deduct your actual car expenses for that year. Freetaxusa2010 You cannot deduct depreciation, lease payments, maintenance and repairs, gasoline (including gasoline taxes), oil, insurance, or vehicle registration fees. Freetaxusa2010 See Choosing the standard mileage rate and Standard mileage rate not allowed, later. Freetaxusa2010 You generally can use the standard mileage rate whether or not you are reimbursed and whether or not any reimbursement is more or less than the amount figured using the standard mileage rate. Freetaxusa2010 See chapter 6 for more information on reimbursements . Freetaxusa2010 Choosing the standard mileage rate. Freetaxusa2010   If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Freetaxusa2010 Then, in later years, you can choose to use either the standard mileage rate or actual expenses. Freetaxusa2010   If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period. Freetaxusa2010 For leases that began on or before December 31, 1997, the standard mileage rate must be used for the entire portion of the lease period (including renewals) that is after 1997. Freetaxusa2010   You must make the choice to use the standard mileage rate by the due date (including extensions) of your return. Freetaxusa2010 You cannot revoke the choice. Freetaxusa2010 However, in later years, you can switch from the standard mileage rate to the actual expenses method. Freetaxusa2010 If you change to the actual expenses method in a later year, but before your car is fully depreciated, you have to estimate the remaining useful life of the car and use straight line depreciation. Freetaxusa2010 Example. Freetaxusa2010 Larry is an employee who occasionally uses his own car for business purposes. Freetaxusa2010 He purchased the car in 2011, but he did not claim any unreimbursed employee expenses on his 2011 tax return. Freetaxusa2010 Because Larry did not use the standard mileage rate the first year the car was available for business use, he cannot use the standard mileage rate in 2013 to claim unreimbursed employee business expenses. Freetaxusa2010   For more information about depreciation included in the standard mileage rate, see Exception under Methods of depreciation, later. Freetaxusa2010 Standard mileage rate not allowed. Freetaxusa2010   You cannot use the standard mileage rate if you: Use five or more cars at the same time (such as in fleet operations), Claimed a depreciation deduction for the car using any method other than straight line, for example, MACRS (as discussed later under Depreciation Deduction), Claimed a section 179 deduction (discussed later) on the car, Claimed the special depreciation allowance on the car, Claimed actual car expenses after 1997 for a car you leased, or Are a rural mail carrier who received a qualified reimbursement. Freetaxusa2010 (See Rural mail carriers , earlier. Freetaxusa2010 ) Note. Freetaxusa2010 You can elect to use the standard mileage rate if you used a car for hire (such as a taxi) unless the standard mileage rate is otherwise not allowed, as discussed above. Freetaxusa2010 Five or more cars. Freetaxusa2010   If you own or lease five or more cars that are used for business at the same time, you cannot use the standard mileage rate for the business use of any car. Freetaxusa2010 However, you may be able to deduct your actual expenses for operating each of the cars in your business. Freetaxusa2010 See Actual Car Expenses , later, for information on how to figure your deduction. Freetaxusa2010   You are not using five or more cars for business at the same time if you alternate using (use at different times) the cars for business. Freetaxusa2010   The following examples illustrate the rules for when you can and cannot use the standard mileage rate for five or more cars. Freetaxusa2010 Example 1. Freetaxusa2010 Marcia, a salesperson, owns three cars and two vans that she alternates using for calling on her customers. Freetaxusa2010 She can use the standard mileage rate for the business mileage of the three cars and the two vans because she does not use them at the same time. Freetaxusa2010 Example 2. Freetaxusa2010 Tony and his employees use his four pickup trucks in his landscaping business. Freetaxusa2010 During the year, he traded in two of his old trucks for two newer ones. Freetaxusa2010 Tony can use the standard mileage rate for the business mileage of all six of the trucks he owned during the year. Freetaxusa2010 Example 3. Freetaxusa2010 Chris owns a repair shop and an insurance business. Freetaxusa2010 He and his employees use his two pickup trucks and van for the repair shop. Freetaxusa2010 Chris alternates using his two cars for the insurance business. Freetaxusa2010 No one else uses the cars for business purposes. Freetaxusa2010 Chris can use the standard mileage rate for the business use of the pickup trucks, van, and the cars because he never has more than four vehicles used for business at the same time. Freetaxusa2010 Example 4. Freetaxusa2010 Maureen owns a car and four vans that are used in her housecleaning business. Freetaxusa2010 Her employees use the vans, and she uses the car to travel to various customers. Freetaxusa2010 Maureen cannot use the standard mileage rate for the car or the vans. Freetaxusa2010 This is because all five vehicles are used in Maureen's business at the same time. Freetaxusa2010 She must use actual expenses for all vehicles. Freetaxusa2010 Interest. Freetaxusa2010   If you are an employee, you cannot deduct any interest paid on a car loan. Freetaxusa2010 This applies even if you use the car 100% for business as an employee. Freetaxusa2010   However, if you are self-employed and use your car in your business, you can deduct that part of the interest expense that represents your business use of the car. Freetaxusa2010 For example, if you use your car 60% for business, you can deduct 60% of the interest on Schedule C (Form 1040). Freetaxusa2010 You cannot deduct the part of the interest expense that represents your personal use of the car. Freetaxusa2010    If you use a home equity loan to purchase your car, you may be able to deduct the interest. Freetaxusa2010 See Publication 936, Home Mortgage Interest Deduction, for more information. Freetaxusa2010 Personal property taxes. Freetaxusa2010   If you itemize your deductions on Schedule A (Form 1040), you can deduct on line 7 state and local personal property taxes on motor vehicles. Freetaxusa2010 You can take this deduction even if you use the standard mileage rate or if you do not use the car for business. Freetaxusa2010   If you are self-employed and use your car in your business, you can deduct the business part of state and local personal property taxes on motor vehicles on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040). Freetaxusa2010 If you itemize your deductions, you can include the remainder of your state and local personal property taxes on the car on Schedule A (Form 1040). Freetaxusa2010 Parking fees and tolls. Freetaxusa2010   In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. Freetaxusa2010 (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses. Freetaxusa2010 ) Sale, trade-in, or other disposition. Freetaxusa2010   If you sell, trade in, or otherwise dispose of your car, you may have a gain or loss on the transaction or an adjustment to the basis of your new car. Freetaxusa2010 See Disposition of a Car , later. Freetaxusa2010 Actual Car Expenses If you do not use the standard mileage rate, you may be able to deduct your actual car expenses. Freetaxusa2010 If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction. Freetaxusa2010 Actual car expenses include: Depreciation Licenses Lease  payments Registration  fees Gas Insurance Repairs Oil Garage rent Tires Tolls Parking fees   If you have fully depreciated a car that you still use in your business, you can continue to claim your other actual car expenses. Freetaxusa2010 Continue to keep records, as explained later in chapter 5 . Freetaxusa2010 Business and personal use. Freetaxusa2010   If you use your car for both business and personal purposes, you must divide your expenses between business and personal use. Freetaxusa2010 You can divide your expense based on the miles driven for each purpose. Freetaxusa2010 Example. Freetaxusa2010 You are a sales representative for a clothing firm and drive your car 20,000 miles during the year: 12,000 miles for business and 8,000 miles for personal use. Freetaxusa2010 You can claim only 60% (12,000 ÷ 20,000) of the cost of operating your car as a business expense. Freetaxusa2010 Employer-provided vehicle. Freetaxusa2010   If you use a vehicle provided by your employer for business purposes, you can deduct your actual unreimbursed car expenses. Freetaxusa2010 You cannot use the standard mileage rate. Freetaxusa2010 See Vehicle Provided by Your Employer in chapter 6. Freetaxusa2010 Interest on car loans. Freetaxusa2010   If you are an employee, you cannot deduct any interest paid on a car loan. Freetaxusa2010 This interest is treated as personal interest and is not deductible. Freetaxusa2010 If you are self-employed and use your car in that business, see Interest , earlier, under Standard Mileage Rate. Freetaxusa2010 Taxes paid on your car. Freetaxusa2010   If you are an employee, you can deduct personal property taxes paid on your car if you itemize deductions. Freetaxusa2010 Enter the amount paid on line 7 of Schedule A (Form 1040). Freetaxusa2010 Sales taxes. Freetaxusa2010   Generally, sales taxes on your car are part of your car's basis and are recovered through depreciation, discussed later. Freetaxusa2010 Fines and collateral. Freetaxusa2010   You cannot deduct fines you pay or collateral you forfeit for traffic violations. Freetaxusa2010 Casualty and theft losses. Freetaxusa2010   If your car is damaged, destroyed, or stolen, you may be able to deduct part of the loss not covered by insurance. Freetaxusa2010 See Publication 547, Casualties, Disasters, and Thefts, for information on deducting a loss on your car. Freetaxusa2010 Depreciation and section 179 deductions. Freetaxusa2010   Generally, the cost of a car, plus sales tax and improvements, is a capital expense. Freetaxusa2010 Because the benefits last longer than 1 year, you generally cannot deduct a capital expense. Freetaxusa2010 However, you can recover this cost through the section 179 deduction (the deduction allowed by section 179 of the Internal Revenue Code), special depreciation allowance, and depreciation deductions. Freetaxusa2010 Depreciation allows you to recover the cost over more than 1 year by deducting part of it each year. Freetaxusa2010 The section 179 deduction , special depreciation allowance , and depreciation deductions are discussed later. Freetaxusa2010   Generally, there are limits on these deductions. Freetaxusa2010 Special rules apply if you use your car 50% or less in your work or business. Freetaxusa2010   You can claim a section 179 deduction and use a depreciation method other than straight line only if you do not use the standard mileage rate to figure your business-related car expenses in the year you first place a car in service. Freetaxusa2010   If, in the year you first place a car in service, you claim either a section 179 deduction or use a depreciation method other than straight line for its estimated useful life, you cannot use the standard mileage rate on that car in any future year. Freetaxusa2010 Car defined. Freetaxusa2010   For depreciation purposes, a car is any four-wheeled vehicle (including a truck or van) made primarily for use on public streets, roads, and highways. Freetaxusa2010 Its unloaded gross vehicle weight must not be more than 6,000 pounds. Freetaxusa2010 A car includes any part, component, or other item physically attached to it or usually included in the purchase price. Freetaxusa2010   A car does not include: An ambulance, hearse, or combination ambulance-hearse used directly in a business, A vehicle used directly in the business of transporting persons or property for pay or hire, or A truck or van that is a qualified nonpersonal use vehicle. Freetaxusa2010 Qualified nonpersonal use vehicles. Freetaxusa2010   These are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. Freetaxusa2010 They include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by installation of permanent shelving and painting the vehicle to display advertising or the company's name. Freetaxusa2010 Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat, are qualified nonpersonal use vehicles. Freetaxusa2010 More information. Freetaxusa2010   See Depreciation Deduction , later, for more information on how to depreciate your vehicle. Freetaxusa2010 Section 179 Deduction The section 179 deduction allows you to treat a portion or all of the cost of a car as a current expense. Freetaxusa2010 If you choose to deduct all or part of the cost as a current expense, you must reduce your depreciable basis in the car by the amount of the section 179 deduction. Freetaxusa2010 There is a limit on the total section 179 deduction, special depreciation allowance, and depreciation deduction for cars, trucks, and vans that may reduce or eliminate any benefit from claiming the section 179 deduction. Freetaxusa2010 See Depreciation Limits, later. Freetaxusa2010 You can claim the section 179 deduction only in the year you place the car in service. Freetaxusa2010 For this purpose, a car is placed in service when it is ready and available for a specifically assigned use, whether in a trade or business, a tax-exempt activity, a personal activity, or for the production of income. Freetaxusa2010 Even if you are not using the property, it is in service when it is ready and available for its specifically assigned use. Freetaxusa2010 A car first used for personal purposes cannot qualify for the deduction in a later year when its use changes to business. Freetaxusa2010 Example. Freetaxusa2010 In 2012, you bought a new car and used it for personal purposes. Freetaxusa2010 In 2013, you began to use it for business. Freetaxusa2010 Changing its use to business use does not qualify the cost of your car for a section 179 deduction in 2013. Freetaxusa2010 However, you can claim a depreciation deduction for the business use of the car starting in 2013. Freetaxusa2010 See Depreciation Deduction , later. Freetaxusa2010 More than 50% business use requirement. Freetaxusa2010   You must use the property more than 50% for business to claim any section 179 deduction. Freetaxusa2010 If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Freetaxusa2010 The result is the cost of the property that can qualify for the section 179 deduction. Freetaxusa2010 Example. Freetaxusa2010 Peter purchased a car in April 2013 for $24,500 and used it 60% for business. Freetaxusa2010 Based on his business usage, the total cost of Peter's car that qualifies for the section 179 deduction is $14,700 ($24,500 cost × 60% business use). Freetaxusa2010 But see Limit on total section 179, special depreciation allowance, and depreciation deduction , discussed later. Freetaxusa2010 Limits. Freetaxusa2010   There are limits on: The amount of the section 179 deduction, The section 179 deduction for sport utility and certain other vehicles, and The total amount of the section 179 deduction, special depreciation allowance, and depreciation deduction (discussed later ) you can claim for a qualified property. Freetaxusa2010 Limit on the amount of the section 179 deduction. Freetaxusa2010   For 2013, the total amount you can choose to deduct under section 179 generally cannot be more than $500,000. Freetaxusa2010   If the cost of your section 179 property placed in service in 2013 is over $2,000,000, you must reduce the $500,000 dollar limit (but not below zero) by the amount of cost over $2,000,000. Freetaxusa2010 If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 deduction. Freetaxusa2010   The total amount you can deduct under section 179 each year after you apply the limits listed above cannot be more than the taxable income from the active conduct of any trade or business during the year. Freetaxusa2010   If you are married and file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. Freetaxusa2010   If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit. Freetaxusa2010 You must allocate the dollar limit (after any reduction) between you. Freetaxusa2010   For more information on the above section 179 deduction limits, see Publication 946. Freetaxusa2010 Limit for sport utility and certain other vehicles. Freetaxusa2010   For sport utility and certain other vehicles placed in service in 2013, the portion of the vehicle's cost taken into account in figuring your section 179 deduction is limited to $25,000. Freetaxusa2010 This rule applies to any four-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is not subject to any of the passenger automobile limits explained under Depreciation Limits , later, and that is rated at no more than 14,000 pounds gross vehicle weight. Freetaxusa2010 However, the $25,000 limit does not apply to any vehicle: Designed to have a seating capacity of more than nine persons behind the driver's seat, Equipped with a cargo area of at least 6 feet in interior length that is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment, or That has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield. Freetaxusa2010    Limit on total section 179, special depreciation allowance, and depreciation deduction. Freetaxusa2010   Generally, the total amount of section 179, special depreciation allowance, and depreciation deduction you can claim for a car that is qualified property and that you placed in service in 2013 is $11,160. Freetaxusa2010 The limit is reduced if your business use of the car is less than 100%. Freetaxusa2010 See Depreciation Limits , later, for more information. Freetaxusa2010 Example. Freetaxusa2010 In the earlier example under More than 50% business use requirement, Peter had a car with a cost (for purposes of the section 179 deduction) of $14,700. Freetaxusa2010 However, based on Peter's business usage of his car, the total of his section 179, special depreciation allowance, and depreciation deductions is limited to $6,696 ($11,160 limit x 60% business use). Freetaxusa2010 Cost of car. Freetaxusa2010   For purposes of the section 179 deduction, the cost of the car does not include any amount figured by reference to any other property held by you at any time. Freetaxusa2010 For example, if you buy (for cash and a trade-in) a new car to use in your business, your cost for purposes of the section 179 deduction does not include your adjusted basis in the car you trade in for the new car. Freetaxusa2010 Your cost includes only the cash you paid. Freetaxusa2010 Basis of car for depreciation. Freetaxusa2010   The amount of the section 179 deduction reduces your basis in your car. Freetaxusa2010 If you choose the section 179 deduction, you must subtract the amount of the deduction from the cost of your car. Freetaxusa2010 The resulting amount is the basis in your car you use to figure your depreciation deduction. Freetaxusa2010 When to choose. Freetaxusa2010   If you want to take the section 179 deduction, you must make the choice in the tax year you place the car in service for business or work. Freetaxusa2010 How to choose. Freetaxusa2010    Employees use Form 2106 to make this choice and report the section 179 deduction. Freetaxusa2010 All others use Form 4562. Freetaxusa2010   File the appropriate form with either of the following. Freetaxusa2010 Your original tax return filed for the year the property was placed in service (whether or not you file it timely). Freetaxusa2010 An amended return filed within the time prescribed by law. Freetaxusa2010 An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. Freetaxusa2010 The amended return must also include any resulting adjustments to taxable income. Freetaxusa2010    You must keep records that show the specific identification of each piece of qualifying section 179 property. Freetaxusa2010 These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. Freetaxusa2010 Revoking an election. Freetaxusa2010   An election (or any specification made in the election) to take a section 179 deduction for 2013 can only be revoked with the Commissioner's approval. Freetaxusa2010 Recapture of section 179 deduction. Freetaxusa2010   To be eligible to claim the section 179 deduction, you must use your car more than 50% for business or work in the year you acquired it. Freetaxusa2010 If your business use of the car is 50% or less in a later tax year during the recovery period, you have to recapture (include in income) in that later year any excess depreciation. Freetaxusa2010 Any section 179 deduction claimed on the car is included in calculating the excess depreciation. Freetaxusa2010 For information on this calculation, see Excess depreciation , later in this chapter under Car Used 50% or Less for Business. Freetaxusa2010 Dispositions. Freetaxusa2010   If you dispose of a car on which you had claimed the section 179 deduction, the amount of that deduction is treated as a depreciation deduction for recapture purposes. Freetaxusa2010 You treat any gain on the disposition of the property as ordinary income up to the amount of the section 179 deduction and any allowable depreciation (unless you establish the amount actually allowed). Freetaxusa2010 For information on the disposition of a car, see Disposition of a Car , later. Freetaxusa2010 Special Depreciation Allowance You may be able to claim the special depreciation allowance for your car, truck, or van, if it is qualified property and was placed in service in 2013. Freetaxusa2010 The allowance is an additional depreciation deduction of 50% of the car's depreciable basis (after any section 179 deduction, but before figuring your regular depreciation deduction under MACRS). Freetaxusa2010 The special depreciation allowance applies only for the first year the car is placed in service. Freetaxusa2010 To qualify for the allowance more than 50% of the use of the car must be in a qualified business use (as defined under Depreciation Deduction, later). Freetaxusa2010 Combined depreciation. Freetaxusa2010   Your combined section 179 deduction, special depreciation allowance, and regular MACRS depreciation deduction is limited to the maximum allowable depreciation deduction for cars of $11,160 ($3,160 if you elect not to claim the special depreciation allowance). Freetaxusa2010 For trucks and vans, the first-year limit remains at $11,360 ($3,360 if you elect not to claim the special depreciation allowance). Freetaxusa2010 See Depreciation Limits , later in this chapter. Freetaxusa2010 Qualified car. Freetaxusa2010   To be a qualified car (including trucks and vans), the car must meet all of the following tests. Freetaxusa2010 You purchased the car new on or after January 1, 2008, but only if no binding written contract to acquire the car existed before January 1, 2008, You placed the car in service in your trade or business before January 1, 2014, You used the car more than 50% in a qualified business use. Freetaxusa2010 Election not to claim the special depreciation allowance. Freetaxusa2010   You can elect not to claim the special depreciation allowance for your car, truck, or van, that is qualified property. Freetaxusa2010 If you make this election, it applies to all 5-year property placed in service during the year. Freetaxusa2010   To make the election, attach a statement to your timely filed return (including extensions) indicating the class of property (5-year for cars) for which you are making the election and that you are electing not to claim the special depreciation allowance for qualified property acquired on or after January 1, 2008. Freetaxusa2010    Unless you elect not to claim the special depreciation allowance, you must reduce the car's adjusted basis by the amount of the allowance, even if the allowance was not claimed. Freetaxusa2010 Depreciation Deduction If you use actual car expenses to figure your deduction for a car you own and use in your business, you can claim a depreciation deduction. Freetaxusa2010 This means you can deduct a certain amount each year as a recovery of your cost or other basis in your car. Freetaxusa2010 You generally need to know the following things about the car you intend to depreciate. Freetaxusa2010 Your basis in the car. Freetaxusa2010 The date you place the car in service. Freetaxusa2010 The method of depreciation and recovery period you will use. Freetaxusa2010 Basis. Freetaxusa2010   Your basis in a car for figuring depreciation is generally its cost. Freetaxusa2010 This includes any amount you borrow or pay in cash, other property, or services. Freetaxusa2010   Generally, you figure depreciation on your car, truck, or van using your unadjusted basis (see Unadjusted basis , later). Freetaxusa2010 However, in some situations you will use your adjusted basis (your basis reduced by depreciation allowed or allowable in earlier years). Freetaxusa2010 For one of these situations see Exception under Methods of depreciation, later. Freetaxusa2010   If you change the use of a car from personal to business, your basis for depreciation is the lesser of the fair market value or your adjusted basis in the car on the date of conversion. Freetaxusa2010 Additional rules concerning basis are discussed later in this chapter under Unadjusted basis . Freetaxusa2010 Placed in service. Freetaxusa2010   You generally place a car in service when it is available for use in your work or business, in an income-producing activity, or in a personal activity. Freetaxusa2010 Depreciation begins when the car is placed in service for use in your work or business or for the production of income. Freetaxusa2010   For purposes of computing depreciation, if you first start using the car only for personal use and later convert it to business use, you place the car in service on the date of conversion. Freetaxusa2010 Car placed in service and disposed of in the same year. Freetaxusa2010   If you place a car in service and dispose of it in the same tax year, you cannot claim any depreciation deduction for that car. Freetaxusa2010 Methods of depreciation. Freetaxusa2010   Generally, you figure depreciation on cars using the Modified Accelerated Cost Recovery System (MACRS). Freetaxusa2010 MACRS is discussed later in this chapter. Freetaxusa2010 Exception. Freetaxusa2010   If you used the standard mileage rate in the first year of business use and change to the actual expenses method in a later year, you cannot depreciate your car under the MACRS rules. Freetaxusa2010 You must use straight line depreciation over the estimated remaining useful life of the car. Freetaxusa2010   To figure depreciation under the straight line method, you must reduce your basis in the car (but not below zero) by a set rate per mile for all miles for which you used the standard mileage rate. Freetaxusa2010 The rate per mile varies depending on the year(s) you used the standard mileage rate. Freetaxusa2010 For the rate(s) to use, see Depreciation adjustment when you used the standard mileage rate under Disposition of a Car, later. Freetaxusa2010   This reduction of basis is in addition to those basis adjustments described later under Unadjusted basis . Freetaxusa2010 You must use your adjusted basis in your car to figure your depreciation deduction. Freetaxusa2010 For additional information on the straight line method of depreciation, see Publication 946. Freetaxusa2010 More-than-50%-use test. Freetaxusa2010   Generally, you must use your car more than 50% for qualified business use (defined next) during the year to use MACRS. Freetaxusa2010 You must meet this more-than-50%-use test each year of the recovery period (6 years under MACRS) for your car. Freetaxusa2010   If your business use is 50% or less, you must use the straight line method to depreciate your car. Freetaxusa2010 This is explained later under Car Used 50% or Less for Business . Freetaxusa2010 Qualified business use. Freetaxusa2010   A qualified business use is any use in your trade or business. Freetaxusa2010 It does not include use for the production of income (investment use). Freetaxusa2010 However, you do combine your business and investment use to compute your depreciation deduction for the tax year. Freetaxusa2010 Use of your car by another person. Freetaxusa2010   Do not treat any use of your car by another person as use in your trade or business unless that use meets one of the following conditions. Freetaxusa2010 It is directly connected with your business. Freetaxusa2010 It is properly reported by you as income to the other person (and, if you have to, you withhold tax on the income). Freetaxusa2010 It results in a payment of fair market rent. Freetaxusa2010 This includes any payment to you for the use of your car. Freetaxusa2010 Business use changes. Freetaxusa2010   If you used your car more than 50% in qualified business use in the year you placed it in service, but 50% or less in a later year (including the year of disposition), you have to change to the straight line method of depreciation. Freetaxusa2010 See Qualified business use 50% or less in a later year under Car Used 50% or Less for Business, later. Freetaxusa2010    Property does not cease to be used more than 50% in qualified business use by reason of a transfer at death. Freetaxusa2010 Use for more than one purpose. Freetaxusa2010   If you use your car for more than one purpose during the tax year, you must allocate the use to the various purposes. Freetaxusa2010 You do this on the basis of mileage. Freetaxusa2010 Figure the percentage of qualified business use by dividing the number of miles you drive your car for business purposes during the year by the total number of miles you drive the car during the year for any purpose. Freetaxusa2010 Change from personal to business use. Freetaxusa2010   If you change the use of a car from 100% personal use to business use during the tax year, you may not have mileage records for the time before the change to business use. Freetaxusa2010 In this case, you figure the percentage of business use for the year as follows. Freetaxusa2010 Determine the percentage of business use for the period following the change. Freetaxusa2010 Do this by dividing business miles by total miles driven during that period. Freetaxusa2010 Multiply the percentage in (1) by a fraction. Freetaxusa2010 The numerator (top number) is the number of months the car is used for business and the denominator (bottom number) is 12. Freetaxusa2010 Example. Freetaxusa2010 You use a car only for personal purposes during the first 6 months of the year. Freetaxusa2010 During the last 6 months of the year, you drive the car a total of 15,000 miles of which 12,000 miles are for business. Freetaxusa2010 This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Freetaxusa2010 Your business use for the year is 40% (80% × 6/12). Freetaxusa2010 Limits. Freetaxusa2010   The amount you can claim for section 179, special depreciation allowance, and depreciation deductions may be limited. Freetaxusa2010 The maximum amount you can claim depends on the year in which you placed your car in service. Freetaxusa2010 You have to reduce the maximum amount if you did not use the car exclusively for business. Freetaxusa2010 See Depreciation Limits , later. Freetaxusa2010 Unadjusted basis. Freetaxusa2010   You use your unadjusted basis (often referred to as your basis or your basis for depreciation) to figure your depreciation using the MACRS depreciation chart, explained later under Modified Accelerated Cost Recovery System (MACRS) . Freetaxusa2010 Your unadjusted basis for figuring depreciation is your original basis increased or decreased by certain amounts. Freetaxusa2010   To figure your unadjusted basis, begin with your car's original basis, which generally is its cost. Freetaxusa2010 Cost includes sales taxes (see Sales taxes , earlier), destination charges, and dealer preparation. Freetaxusa2010 Increase your basis by any substantial improvements you make to your car, such as adding air conditioning or a new engine. Freetaxusa2010 Decrease your basis by any section 179 deduction, special depreciation allowance, gas guzzler tax, clean-fuel vehicle deduction (for vehicles placed in service before Jan. Freetaxusa2010 1, 2006), and alternative motor vehicle credit. Freetaxusa2010   See Form 8910 for information on the alternative motor vehicle credit. Freetaxusa2010 If your business use later falls to 50% or less, you may have to recapture (include in your income) any excess depreciation. Freetaxusa2010 See Car Used 50% or Less for Business, later, for more information. Freetaxusa2010 If you acquired the car by gift or inheritance, see Publication 551, Basis of Assets, for information on your basis in the car. Freetaxusa2010 Improvements. Freetaxusa2010   A major improvement to a car is treated as a new item of 5-year recovery property. Freetaxusa2010 It is treated as placed in service in the year the improvement is made. Freetaxusa2010 It does not matter how old the car is when the improvement is added. Freetaxusa2010 Follow the same steps for depreciating the improvement as you would for depreciating the original cost of the car. Freetaxusa2010 However, you must treat the improvement and the car as a whole when applying the limits on the depreciation deductions. Freetaxusa2010 Your car's depreciation deduction for the year (plus any section 179 deduction, special depreciation allowance, and depreciation on any improvements) cannot be more than the depreciation limit that applies for that year. Freetaxusa2010 See Depreciation Limits , later. Freetaxusa2010 Car trade-in. Freetaxusa2010   If you traded one car (the “old car”) for another car (the “new car”) in 2013, there are two ways you can treat the transaction. Freetaxusa2010 You can elect to treat the transaction as a tax-free disposition of the old car and the purchase of the new car. Freetaxusa2010 If you make this election, you treat the old car as disposed of at the time of the trade-in. Freetaxusa2010 The depreciable basis of the new car is the adjusted basis of the old car (figured as if 100% of the car's use had been for business purposes) plus any additional amount you paid for the new car. Freetaxusa2010 You then figure your depreciation deduction for the new car beginning with the date you placed it in service. Freetaxusa2010 You make this election by completing Form 2106, Part II, Section D. Freetaxusa2010 This method is explained later, beginning at Effect of trade-in on basis . Freetaxusa2010 If you do not make the election described in (1), you must figure depreciation separately for the remaining basis of the old car and for any additional amount you paid for the new car. Freetaxusa2010 You must apply two depreciation limits (see Depreciation Limits , later). Freetaxusa2010 The limit that applies to the remaining basis of the old car generally is the amount that would have been allowed had you not traded in the old car. Freetaxusa2010 The limit that applies to the additional amount you paid for the new car generally is the limit that applies for the tax year, reduced by the depreciation allowance for the remaining basis of the old car. Freetaxusa2010 You must use Form 4562 to compute your depreciation deduction. Freetaxusa2010 You cannot use Form 2106, Part II, Section D. Freetaxusa2010 This method is explained in Publication 946. Freetaxusa2010   If you elect to use the method described in (1), you must do so on a timely filed tax return (including extensions). Freetaxusa2010 Otherwise, you must use the method described in (2). Freetaxusa2010 Effect of trade-in on basis. Freetaxusa2010   The discussion that follows applies to trade-ins of cars in 2013, where the election was made to treat the transaction as a tax-free disposition of the old car and the purchase of the new car. Freetaxusa2010 For information on how to figure depreciation for cars involved in a like-kind exchange (trade-in) in 2013, for which the election was not made, see Publication 946 and Regulations section 1. Freetaxusa2010 168(i)-6(d)(3). Freetaxusa2010 Traded car used only for business. Freetaxusa2010   If you trade in a car you used only in your business for another car that will be used only in your business, your original basis in the new car is your adjusted basis in the old car, plus any additional amount you pay for the new car. Freetaxusa2010 Example. Freetaxusa2010 Paul trades in a car that has an adjusted basis of $5,000 for a new car. Freetaxusa2010 In addition, he pays cash of $20,000 for the new car. Freetaxusa2010 His original basis of the new car is $25,000 (his $5,000 adjusted basis in the old car plus the $20,000 cash paid). Freetaxusa2010 Paul's unadjusted basis is $25,000 unless he claims the section 179 deduction, special depreciation allowance, or has other increases or decreases to his original basis, discussed under Unadjusted basis , earlier. Freetaxusa2010 Traded car used partly in business. Freetaxusa2010   If you trade in a car you used partly in your business for a new car you will use in your business, you must make a “trade-in” adjustment for the personal use of the old car. Freetaxusa2010 This adjustment has the effect of reducing your basis in your old car, but not below zero, for purposes of figuring your depreciation deduction for the new car. Freetaxusa2010 (This adjustment is not used, however, when you determine the gain or loss on the later disposition of the new car. Freetaxusa2010 See Publication 544, Sales and Other Dispositions of Assets, for information on how to report the disposition of your car. Freetaxusa2010 )   To figure the unadjusted basis of your new car for depreciation, first add to your adjusted basis in the old car any additional amount you pay for the new car. Freetaxusa2010 Then subtract from that total the excess, if any, of: The total of the amounts that would have been allowable as depreciation during the tax years before the trade if 100% of the use of the car had been business and investment use, over The total of the amounts actually allowed as depreciation during those years. Freetaxusa2010 For information about figuring depreciation, see Modified Accelerated Cost Recovery System (MACRS) , which follows Example 2, later. Freetaxusa2010 Modified Accelerated Cost Recovery System (MACRS). Freetaxusa2010   The Modified Accelerated Cost Recovery System (MACRS) is the name given to the tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income. Freetaxusa2010   The maximum amount you can deduct is limited, depending on the year you placed your car in service. Freetaxusa2010 See Depreciation Limits , later. Freetaxusa2010 Recovery period. Freetaxusa2010   Under MACRS, cars are classified as 5-year property. Freetaxusa2010 You actually depreciate the cost of a car, truck, or van over a period of 6 calendar years. Freetaxusa2010 This is because your car is generally treated as placed in service in the middle of the year, and you claim depreciation for one-half of both the first year and the sixth year. Freetaxusa2010 Depreciation deduction for certain Indian reservation property. Freetaxusa2010   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations after 1993 and before 2014. Freetaxusa2010 The recovery that applies for a business-use car is 3 years instead of 5 years. Freetaxusa2010 However, the depreciation limits, discussed later, will still apply. Freetaxusa2010   For more information on the qualifications for this shorter recovery period and the percentages to use in figuring the depreciation deduction, see chapter 4 of Publication 946. Freetaxusa2010 Depreciation methods. Freetaxusa2010   You can use one of the following methods to depreciate your car. Freetaxusa2010 The 200% declining balance method (200% DB) over a 5-year recovery period that switches to the straight line method when that method provides an equal or greater deduction. Freetaxusa2010 The 150% declining balance method (150% DB) over a 5-year recovery period that switches to the straight line method when that method provides an equal or greater deduction. Freetaxusa2010 The straight line method (SL) over a 5-year recovery period. Freetaxusa2010    If you use Table 4-1 (discussed later under MACRS depreciation chart) to determine your depreciation rate for 2013, you do not need to determine in what year using the straight line method provides an equal or greater deduction. Freetaxusa2010 This is because the chart has the switch to the straight line method built into its rates. Freetaxusa2010   Before choosing a method, you may wish to consider the following facts. Freetaxusa2010 Using the straight line method provides equal yearly deductions throughout the recovery period. Freetaxusa2010 Using the declining balance methods provides greater deductions during the earlier recovery years with the deductions generally getting smaller each year. Freetaxusa2010 MACRS depreciation chart. Freetaxusa2010   A 2013 MACRS Depreciation Chart and instructions are included in this chapter as Table 4-1 . Freetaxusa2010 Using this table will make it easy for you to figure the 2013 depreciation deduction for your car. Freetaxusa2010 A similar chart appears in the Instructions for Form 2106. Freetaxusa2010    You may have to use the tables in Publication 946 instead of using this MACRS Depreciation Chart. Freetaxusa2010   You must use the Depreciation Tables in Publication 946 rather than the 2013 MACRS Depreciation Chart in this publication if any one of the following four conditions applies to you. Freetaxusa2010 You file your return on a fiscal year basis. Freetaxusa2010 You file your return for a short tax year (less than 12 months). Freetaxusa2010 During the year, all of the following conditions apply. Freetaxusa2010 You placed some property in service from January through September. Freetaxusa2010 You placed some property in service from October through December. Freetaxusa2010 Your basis in the property you placed in service from October through December (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) was more than 40% of your total bases in all property you placed in service during the year. Freetaxusa2010   You placed qualified property in service on an Indian reservation. Freetaxusa2010 Depreciation in future years. Freetaxusa2010   If you use the percentages from the chart, you generally must continue to use them for the entire recovery period of your car. Freetaxusa2010 However, you cannot continue to use the chart if your basis in your car is adjusted because of a casualty. Freetaxusa2010 In that case, for the year of the adjustment and the remaining recovery period, figure the depreciation without the chart using your adjusted basis in the car at the end of the year of the adjustment and over the remaining recovery period. Freetaxusa2010 See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. Freetaxusa2010    In future years, do not use the chart in this edition of the publication. Freetaxusa2010 Instead, use the chart in the publication or the form instructions for those future years. Freetaxusa2010 Disposition of car during recovery period. Freetaxusa2010   If you dispose of the car before the end of the recovery period, you are generally allowed a half year of depreciation in the year of disposition unless you purchased the car during the last quarter of a year. Freetaxusa2010 See Depreciation deduction for the year of disposition under Disposition of a Car, later, for information on how to figure the depreciation allowed in the year of disposition. Freetaxusa2010 How to use the 2013 chart. Freetaxusa2010   To figure your depreciation deduction for 2013, find the percentage in the column of Table 4-1 based on the date that you first placed the car in service and the depreciation method that you are using. Freetaxusa2010 Multiply the unadjusted basis of your car (defined earlier) by that percentage to determine the amount of your depreciation deduction. Freetaxusa2010 If you prefer to figure your depreciation deduction without the help of the chart, see Publication 946. Freetaxusa2010    Your deduction cannot be more than the maximum depreciation limit for cars. Freetaxusa2010 See Depreciation Limits, later. Freetaxusa2010 Example. Freetaxusa2010 Phil bought a used truck in February 2012 to use exclusively in his landscape business. Freetaxusa2010 He paid $9,200 for the truck with no trade-in. Freetaxusa2010 Phil did not claim any section 179 deduction, the truck did not qualify for the special depreciation allowance, and he chose to use the 200% DB method to get the largest depreciation deduction in the early years. Freetaxusa2010 Phil used the MACRS depreciation chart in 2012 to find his percentage. Freetaxusa2010 The unadjusted basis of his truck equals its cost because Phil used it exclusively for business. Freetaxusa2010 He multiplied the unadjusted basis of his truck, $9,200, by the percentage that applied, 20%, to figure his 2012 depreciation deduction of $1,840. Freetaxusa2010 In 2013, Phil used the truck for personal purposes when he repaired his father's cabin. Freetaxusa2010 His records show that the business use of his truck was 90% in 2013. Freetaxusa2010 Phil used Table 4-1 to find his percentage. Freetaxusa2010 Reading down the first column for the date placed in service and across to the 200% DB column, he locates his percentage, 32%. Freetaxusa2010 He multiplies the unadjusted basis of his truck, $8,280 ($9,200 cost × 90% business use), by 32% to figure his 2013 depreciation deduction of $2,650. Freetaxusa2010 Depreciation Limits There are limits on the amount you can deduct for depreciation of your car, truck, or van. Freetaxusa2010 The section 179 deduction and special depreciation allowance are treated as depreciation for purposes of the limits. Freetaxusa2010 The maximum amount you can deduct each year depends on the year you place the car in service. Freetaxusa2010 These limits are shown in the following tables. Freetaxusa2010   Maximum Depreciation Deduction for Cars Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2012–2013 $11,1601 $5,100 $3,050 $1,875 2010–2011 11,0602 4,900 2,950 1,775 2008–2009 10,9603 4,800 2,850 1,775 2007 3,060 4,900 2,850 1,775 2006 2,960 4,800 2,850 1,775 2005 2,960 4,700 2,850 1,675 2004 10,6103 4,800 2,850 1,675 5/06/2003– 12/31/2003 10,7104 4,900 2,950 1,775 1/01/2003– 5/05/2003 7,6605 4,900 2,950 1,775 2001–2002 7,6605 4,900 2,950 1,775 2000 3,060 4,900 2,950 1,775 1$3,160 if the car is not qualified property or if you elect not to claim the special depreciation allowance. Freetaxusa2010 2$3,060 if the car is not qualified property or if you elect not to claim the special depreciation allowance. Freetaxusa2010 3$2,960 if the car is not qualified property or if you elect not to claim the special depreciation allowance. Freetaxusa2010 4$7,660 if you acquired the car before 5/6/2003. Freetaxusa2010 $3,060 if the car is not qualified property or if you elect not to claim any special depreciation allowance. Freetaxusa2010 5$3,060 if you acquired the car before 9/11/2001, the car is not qualified property, or you elect not to claim the special depreciation allowance. Freetaxusa2010 Trucks and vans. Freetaxusa2010   For 2013, the maximum depreciation deductions for trucks and vans are generally higher than those for cars. Freetaxusa2010 A truck or van is a passenger automobile that is classified by the manufacturer as a truck or van and rated at 6,000 pounds gross vehicle weight or less. Freetaxusa2010 For trucks and vans placed in service before 2003, use the Maximum Depreciation Deduction for Cars table. Freetaxusa2010 Maximum Depreciation Deduction for Trucks and Vans Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,3601 $5,400 $3,250 $1,975 2012 $11,3601 $5,300 $3,150 $1,875 2011 11,2601 5,200 3,150 1,875 2010 11,1601 5,100 3,050 1,875 2009 11,0601 4,900 2,950 1,775 2008 11,1601 5,100 3,050 1,875 2007 3,260 5,200 3,050 1,875 2005–2006 3,260 5,200 3,150 1,875 2004 10,9101 5,300 3,150 1,875 2003 11,0101,2 5,400 3,250 1,975 1If the special depreciation allowance does not apply or you make the election not to claim the special depreciation allowance, the first-year limit is $3,360 for 2012 and 2013, $3,260 for 2011, $3,160 for 2010, $3,060 for 2009, $3,160 for 2008, $3,260 for 2004, and $3,360 for 2003. Freetaxusa2010 2If the truck or van was acquired before 5/06/2003, the truck or van is qualified property, and you claim the special depreciation allowance for the truck or van, the maximum deduction is $7,960. Freetaxusa2010 Car used less than full year. Freetaxusa2010   The depreciation limits are not reduced if you use a car for less than a full year. Freetaxusa2010 This means that you do not reduce the limit when you either place a car in service or dispose of a car during the year. Freetaxusa2010 However, the depreciation limits are reduced if you do not use the car exclusively for business and investment purposes. Freetaxusa2010 See Reduction for personal use , next. Freetaxusa2010 Reduction for personal use. Freetaxusa2010   The depreciation limits are reduced based on your percentage of personal use. Freetaxusa2010 If you use a car less than 100% in your business or work, you must determine the depreciation deduction limit by multiplying the limit amount by the percentage of business and investment use during the tax year. Freetaxusa2010 Section 179 deduction. Freetaxusa2010   The section 179 deduction is treated as a depreciation deduction. Freetaxusa2010 If you place a car that is not a truck or van in service in 2013, use it only for business, and choose the section 179 deduction, the special depreciation allowance, and the depreciation deduction for that car for 2013 is limited to $11,160. Freetaxusa2010 Example. Freetaxusa2010 On September 4, 2013, Jack bought a used car for $10,000 and placed it in service. Freetaxusa2010 He used it 80% for his business, and he chooses to take a section 179 deduction for the car. Freetaxusa2010 The car is not qualified property for purposes of the special depreciation allowance. Freetaxusa2010 Before applying the limit, Jack figures his maximum section 179 deduction to be $8,000. Freetaxusa2010 This is the cost of his qualifying property (up to the maximum $500,000 amount) multiplied by his business use ($10,000 × 80%). Freetaxusa2010 Jack then figures that his section 179 deduction for 2013 is limited to $2,528 (80% of $3,160). Freetaxusa2010 He then figures his unadjusted basis of $5,472 (($10,000 × 80%) − $2,528) for determining his depreciation deduction. Freetaxusa2010 Jack has reached his maximum depreciation deduction for 2013. Freetaxusa2010 For 2014, Jack will use his unadjusted basis of $5,472 to figure his depreciation deduction. Freetaxusa2010 Deductions in years after the recovery period. Freetaxusa2010   If the depreciation deductions for your car are reduced under the passenger automobile limits (discussed earlier), you will have unrecovered basis in your car at the end of the recovery period. Freetaxusa2010 If you continue to use your car for business, you can deduct that unrecovered basis (subject to depreciation limits) after the recovery period ends. Freetaxusa2010 Unrecovered basis. Freetaxusa2010   This is your cost or other basis in the car reduced by any clean-fuel vehicle deduction (for vehicles placed in service before January 1, 2006), alternative motor vehicle credit, electric vehicle credit, gas guzzler tax, and depreciation (including any special depreciation allowance , discussed earlier, unless you elect not to claim it) and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use. Freetaxusa2010 The recovery period. Freetaxusa2010   For 5-year property, your recovery period is 6 calendar years. Freetaxusa2010 A part year's depreciation is allowed in the first calendar year, a full year's depreciation is allowed in each of the next 4 calendar years, and a part year's depreciation is allowed in the 6th calendar year. Freetaxusa2010   Under MACRS, your recovery period is the same whether you use declining balance or straight line depreciation. Freetaxusa2010 You determine your unrecovered basis in the 7th year after you placed the car in service. Freetaxusa2010 How to treat unrecovered basis. Freetaxusa2010   If you continue to use your car for business after the recovery period, you can claim a depreciation deduction in each succeeding tax year until you recover your basis in the car. Freetaxusa2010 The maximum amount you can deduct each year is determined by the date you placed the car in service and your business-use percentage. Freetaxusa2010 For example, no deduction is allowed for a year you use your car 100% for personal purposes. Freetaxusa2010 Example. Freetaxusa2010 In April 2007, Bob bought and placed in service a car he used exclusively in his business. Freetaxusa2010 The car cost $31,500. Freetaxusa2010 Bob did not claim a section 179 deduction or the special depreciation allowance for the car. Freetaxusa2010 He continued to use the car 100% in his business throughout the recovery period (2007 through 2012). Freetaxusa2010 For those years, Bob used the MACRS Depreciation Chart (200% declining balance method) and the Maximum Depreciation Deduction for Cars table, earlier, for the applicable tax year to compute his depreciation deductions during the recovery period. Freetaxusa2010 Bob's depreciation deductions were subject to the depreciation limits so he will have unrecovered basis at the end of the recovery period as shown in the following table. Freetaxusa2010      MACRS     Deprec. Freetaxusa2010 Year % Amount Limit Allowed 2007 20. Freetaxusa2010 00 $6,300 $3,060 $ 3,060 2008 32. Freetaxusa2010 00 10,080 4,900 4,900 2009 19. Freetaxusa2010 20 6,048 2,850 2,850 2010 11. Freetaxusa2010 52 3,629 1,775 1,775 2011 11. Freetaxusa2010 52 3,629 1,775 1,775 2012 5. Freetaxusa2010 76 1,814 1,775 1,775 Total $31,500   16,135 For the correct limit, see Maximum Depreciation Deduction for Cars under “Depreciation Limits,” earlier, for the maximum amount of depreciation allowed each year. Freetaxusa2010   At the end of 2012, Bob had an unrecovered basis in the car of $15,365 ($31,500 – $16,135). Freetaxusa2010 If Bob continued to use the car 100% for business in 2013 and later years, he can claim a depreciation deduction equal to the lesser of $1,775 or his remaining unrecovered basis. Freetaxusa2010   If Bob's business use of the car was less than 100% during any year, his depreciation deduction would be less than the maximum amount allowable for that year. Freetaxusa2010 However, in determining his unrecovered basis in the car, he would still reduce his original basis by the maximum amount allowable as if the business use had been 100%. Freetaxusa2010 For example, if Bob had used his car 60% for business instead of 100%, his allowable depreciation deductions would have been $9,681 ($16,135 × 60%), but he still would have to reduce his basis by $16,135 to determine his unrecovered basis. Freetaxusa2010 Table 4-1. Freetaxusa2010 2013 MACRS Depreciation Chart (Use to Figure Depreciation for 2013. Freetaxusa2010 ) If you claim actual expenses for your car, use the chart below to find the depreciation method and percentage to use for your 2013 return for cars placed in service in 2013. Freetaxusa2010   First, using the left column, find the date you first placed the car in service in 2013. Freetaxusa2010 Then select the depreciation method and percentage from column (a), (b), or (c) following the rules explained in this chapter. Freetaxusa2010 For cars placed in service before 2013, you must use the same method you used on last year's return unless a decline in your business use requires you to change to the straight line method. Freetaxusa2010 Refer back to the MACRS Depreciation Chart for the year you placed the car in service. Freetaxusa2010 (See Car Used 50% or Less for Business . Freetaxusa2010 )  Multiply the unadjusted basis of your car by your business use percentage. Freetaxusa2010 Multiply the result by the percentage you found in the chart to find the amount of your depreciation deduction for 2013. Freetaxusa2010 (Also see Depreciation Limits . Freetaxusa2010 )   If you placed your car in service after September of any year and you placed other business property in service during the same year, you may have to use the Jan. Freetaxusa2010 1—Sept. Freetaxusa2010 30 percentage instead of the Oct. Freetaxusa2010 1—Dec. Freetaxusa2010 31 percentage for your car. Freetaxusa2010               To find out if this applies to you, determine: 1) the basis of all business property you placed in service after September of that year and 2) the basis of all business property you placed in service during that entire year. Freetaxusa2010 If the basis of the property placed in service after September is not more than 40% of the basis of all property (certain property is excluded) placed in service for the entire year, use the percentage for Jan. Freetaxusa2010 1—Sept. Freetaxusa2010 30 for figuring depreciation for your car. Freetaxusa2010 See Which Convention Applies? in chapter 4 of Publication 946 for more details. Freetaxusa2010               Example. Freetaxusa2010 You buy machinery (basis of $32,000) in May 2013 and a new van (basis of $20,000) in October 2013, both used 100% in your business. Freetaxusa2010 You