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Www. Www.1040ez.com 1040ez. Www.1040ez.com com Car Expenses Table of Contents Introduction Depreciation of CarSpecial Depreciation Allowance Depreciation Limit Amended Return Election Not To Claim Special Allowance If you purchased a car after September 10, 2001, for use in your business (or as an employee) and figure your deductible expenses using the actual car expense method, new law contains provisions that may affect your depreciation deduction for that car. Www.1040ez.com Publication 463, Travel, Entertainment, Gift, and Car Expenses, contains information on figuring depreciation on your car. Www.1040ez.com However, Publication 463 does not contain the new provisions because it was printed before the law was enacted. Www.1040ez.com The new provisions are in the Supplement to Publication 463, which is reprinted below. Www.1040ez.com Supplement to Publication 463 Travel, Entertainment, Gift, and Car Expenses   Introduction This supplemental publication is for taxpayers who purchased a car for business purposes after September 10, 2001, and figure their deductible expenses, including a deduction for depreciation, using the actual car expense method. Www.1040ez.com After Publication 463 was printed, the Job Creation and Worker Assistance Act of 2002 was signed into law by the President. Www.1040ez.com Certain provisions of this new law may reduce your taxes for 2001. Www.1040ez.com The new law contains the following provisions. Www.1040ez.com A new depreciation deduction, the special depreciation allowance. Www.1040ez.com An increase in the limit on depreciation for any car for which you claim the new special depreciation allowance. Www.1040ez.com If you have already filed your 2001 return, you may wish to file an amended return to claim any of these benefits. Www.1040ez.com See Amended Return, later. Www.1040ez.com Depreciation of Car If you used the actual car expense method to figure your deduction for a car you own and use in your business (or as an employee), you generally can claim a depreciation deduction. Www.1040ez.com However, there is a limit on the depreciation deduction you can take for your car each year. Www.1040ez.com See Depreciation Limit later. Www.1040ez.com Special Depreciation Allowance The new law allows you to claim a special depreciation allowance. Www.1040ez.com This special allowance is a deduction equal to 30% of the depreciable basis of qualified property. Www.1040ez.com You figure the amount of the special depreciation allowance after any section 179 deduction you choose to claim, but before figuring your regular depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS). Www.1040ez.com See Depreciation Deduction under Actual Car Expenses in chapter 4 of Publication 463 for information about MACRS. Www.1040ez.com You can claim the special depreciation allowance only for the year the qualified property is placed in service. Www.1040ez.com Qualified property. Www.1040ez.com   Qualified property includes a car (any four-wheeled vehicle, including a truck or van not more than 6,000 pounds, that is made primarily for use on public streets, roads, and highways) that meets all of the following requirements. Www.1040ez.com You bought it new. Www.1040ez.com You bought it after September 10, 2001. Www.1040ez.com (But a car is not qualified property if a binding written contract for you to buy the car was in effect before September 11, 2001. Www.1040ez.com ) You began using it for business after September 10, 2001, and used it more than 50% in a qualified business use. Www.1040ez.com Example. Www.1040ez.com Bob bought a new car on October 15, 2001, for $20,000 and placed it in service immediately, using it 75% for business. Www.1040ez.com Bob's car is qualified property. Www.1040ez.com Bob chooses not to take a section 179 deduction for the car. Www.1040ez.com He does claim the new special depreciation allowance. Www.1040ez.com Bob first must figure the car's depreciable basis, which is $15,000 ($20,000 × . Www.1040ez.com 75). Www.1040ez.com He then figures the special depreciation allowance of $4,500 ($15,000 × . Www.1040ez.com 30). Www.1040ez.com The remaining depreciable basis of $10,500 ($15,000 - $4,500) is depreciated using MACRS (200% declining balance method, half-year convention) and results in a deduction of $2,100 ($10,500 × . Www.1040ez.com 20), for a total depreciation deduction for 2001 of $6,600 ($4,500 + $2,100). Www.1040ez.com However, Bob's depreciation deduction is limited to $5,745 ($7,660 × . Www.1040ez.com 75), as discussed next. Www.1040ez.com Depreciation Limit The limit on your depreciation deduction for 2001 is increased to $7,660 for a car that is qualified property (defined above) and for which you claim the special depreciation allowance. Www.1040ez.com The limit is increased to $23,080 if the car is an electric car. Www.1040ez.com The section 179 deduction is treated as depreciation for purposes of this limit. Www.1040ez.com If you use a car less than 100% in your business or work, the limit is $7,660 (or $23,080 for an electric car) multiplied by the percentage of business and investment use during the year. Www.1040ez.com For cars that do not qualify for (or for which you choose not to claim) the special depreciation allowance, the limit remains $3,060 ($9,280 for electric cars). Www.1040ez.com Amended Return If you filed your 2001 calendar year return before June 1, 2002, and did not claim the new special depreciation allowance for a qualified car, you can claim it by filing an amended return on Form 1040X, Amended U. Www.1040ez.com S. Www.1040ez.com Individual Income Tax Return, by April 15, 2003. Www.1040ez.com At the top of the Form 1040X, print “Filed pursuant to Revenue Procedure 2002–33. Www.1040ez.com ” If you are an employee, attach Form 2106, Employee Business Expenses (revised March 2002). Www.1040ez.com If you are self-employed, attach Form 4562, Depreciation and Amortization (revised March 2002). Www.1040ez.com Or, you can claim the special depreciation allowance by filing Form 3115, Application for Change in Accounting Method, with your 2002 return. Www.1040ez.com For details, see Revenue Procedure 2002–33. Www.1040ez.com (But, filing Form 1040X for 2001 enables you to claim the special allowance earlier than attaching Form 3115 to your 2002 return. Www.1040ez.com ) You cannot claim the special depreciation allowance on an amended return (or by using Form 3115) if you made, or are treated as having made, the election not to claim it described later. Www.1040ez.com Example. Www.1040ez.com The facts are the same as in the previous example except that Bob filed his original 2001 income tax return on April 15, 2002, and claimed a $3,000 ($20,000 x . Www.1040ez.com 75 x . Www.1040ez.com 20) depreciation deduction for his new car using MACRS. Www.1040ez.com Bob now wishes to claim the special depreciation allowance for his new car on an amended 2001 return. Www.1040ez.com Bob, who is an employee, files Form 1040X, by April 15, 2003, with an updated Form 2106 (revised March 2002) attached, increasing his total depreciation deduction to $5,745, as figured in the earlier example. Www.1040ez.com Bob's new filled-in Form 2106 is shown later. Www.1040ez.com Election Not To Claim Special Allowance You can elect not to claim the special depreciation allowance for a car by making a statement attached to, or written on, your return indicating that you are electing not to claim the special depreciation allowance for 5-year property. Www.1040ez.com As a general rule, you must make this election by the due date (including extensions) of your return. Www.1040ez.com You can have an automatic extension of 6 months from the due date of your return (excluding extensions) to make the election with an amended return. Www.1040ez.com To get this extension, you must have filed your original return by the due date (including extensions). Www.1040ez.com At the top of the statement, print “Filed pursuant to section 301. Www.1040ez.com 9100–2. Www.1040ez.com ” If you elect not to claim the special depreciation allowance for a car, you cannot claim it for any other 5-year property placed in service during the same year. Www.1040ez.com Unless you elect (or are treated as electing) 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. Www.1040ez.com Deemed election for return filed before June 1, 2002. Www.1040ez.com   If you did not make the election not to claim the special depreciation allowance in the time and manner described above, you will still be treated as electing not to claim it if all of the following apply. Www.1040ez.com You filed your 2001 return before June 1, 2002. Www.1040ez.com You claimed depreciation on your return but did not claim the special depreciation allowance. Www.1040ez.com You did not file an amended 2001 return by April 15, 2003, or a Form 3115 with your 2002 return, to claim the special depreciation allowance. Www.1040ez.com Form 2106, Page 1, for Bob Smith Form 2106, Page 2, for Bob Smith Prev  Up  Next   Home   More Online Publications
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Www. Www.1040ez.com 1040ez. Www.1040ez.com com 4. Www.1040ez.com   Transportation Table of Contents Parking fees. Www.1040ez.com Advertising display on car. Www.1040ez.com Car pools. Www.1040ez.com Hauling tools or instruments. Www.1040ez.com Union members' trips from a union hall. Www.1040ez.com 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. Www.1040ez.com These expenses include the cost of transportation by air, rail, bus, taxi, etc. Www.1040ez.com , and the cost of driving and maintaining your car. Www.1040ez.com Transportation expenses include the ordinary and necessary costs of all of the following. Www.1040ez.com 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. Www.1040ez.com Tax home is defined in chapter 1. Www.1040ez.com Visiting clients or customers. Www.1040ez.com Going to a business meeting away from your regular workplace. Www.1040ez.com Getting from your home to a temporary workplace when you have one or more regular places of work. Www.1040ez.com These temporary workplaces can be either within the area of your tax home or outside that area. Www.1040ez.com Transportation expenses do not include expenses you have while traveling away from home overnight. Www.1040ez.com Those expenses are travel expenses discussed in chapter 1 . Www.1040ez.com However, if you use your car while traveling away from home overnight, use the rules in this chapter to figure your car expense deduction. Www.1040ez.com See Car Expenses , later. Www.1040ez.com Daily transportation expenses you incur while traveling from home to one or more regular places of business are generally nondeductible commuting expenses. Www.1040ez.com However, there may be exceptions to this general rule. Www.1040ez.com You can deduct daily transportation expenses incurred going between your residence and a temporary work station outside the metropolitan area where you live. Www.1040ez.com 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. Www.1040ez.com Illustration of transportation expenses. Www.1040ez.com    Figure B , earlier, illustrates the rules that apply for deducting transportation expenses when you have a regular or main job away from your home. Www.1040ez.com You may want to refer to it when deciding whether you can deduct your transportation expenses. Www.1040ez.com Temporary work location. Www.1040ez.com   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. Www.1040ez.com   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. Www.1040ez.com   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. Www.1040ez.com   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. Www.1040ez.com It will not be treated as temporary after the date you determine it will last more than 1 year. Www.1040ez.com   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. Www.1040ez.com You may have deductible travel expenses as discussed in chapter 1 . Www.1040ez.com No regular place of work. Www.1040ez.com   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. Www.1040ez.com   Generally, a metropolitan area includes the area within the city limits and the suburbs that are considered part of that metropolitan area. Www.1040ez.com   You cannot deduct daily transportation costs between your home and temporary work sites within your metropolitan area. Www.1040ez.com These are nondeductible commuting expenses. Www.1040ez.com Two places of work. Www.1040ez.com   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. Www.1040ez.com 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. Www.1040ez.com   Transportation expenses you have in going between home and a part-time job on a day off from your main job are commuting expenses. Www.1040ez.com You cannot deduct them. Www.1040ez.com Armed Forces reservists. Www.1040ez.com   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. Www.1040ez.com You can deduct the expense of getting from one workplace to the other as just discussed under Two places of work . Www.1040ez.com   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. Www.1040ez.com In this case, your transportation generally is a nondeductible commuting expense. Www.1040ez.com 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. Www.1040ez.com   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. Www.1040ez.com   If you travel away from home overnight to attend a guard or reserve meeting, you can deduct your travel expenses. Www.1040ez.com These expenses are discussed in chapter 1 . Www.1040ez.com   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. Www.1040ez.com For more information, see Armed Forces Reservists Traveling More Than 100 Miles From Home under Special Rules, in chapter 6. Www.1040ez.com Commuting expenses. Www.1040ez.com   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. Www.1040ez.com These costs are personal commuting expenses. Www.1040ez.com You cannot deduct commuting expenses no matter how far your home is from your regular place of work. Www.1040ez.com You cannot deduct commuting expenses even if you work during the commuting trip. Www.1040ez.com Example. Www.1040ez.com You sometimes use your cell phone to make business calls while commuting to and from work. Www.1040ez.com Sometimes business associates ride with you to and from work, and you have a business discussion in the car. Www.1040ez.com These activities do not change the trip from personal to business. Www.1040ez.com You cannot deduct your commuting expenses. Www.1040ez.com Parking fees. Www.1040ez.com    Fees you pay to park your car at your place of business are nondeductible commuting expenses. Www.1040ez.com You can, however, deduct business-related parking fees when visiting a customer or client. Www.1040ez.com Advertising display on car. Www.1040ez.com   Putting display material that advertises your business on your car does not change the use of your car from personal use to business use. Www.1040ez.com If you use this car for commuting or other personal uses, you still cannot deduct your expenses for those uses. Www.1040ez.com Car pools. Www.1040ez.com   You cannot deduct the cost of using your car in a nonprofit car pool. Www.1040ez.com Do not include payments you receive from the passengers in your income. Www.1040ez.com These payments are considered reimbursements of your expenses. Www.1040ez.com However, if you operate a car pool for a profit, you must include payments from passengers in your income. Www.1040ez.com You can then deduct your car expenses (using the rules in this publication). Www.1040ez.com Hauling tools or instruments. Www.1040ez.com   Hauling tools or instruments in your car while commuting to and from work does not make your car expenses deductible. Www.1040ez.com 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). Www.1040ez.com Union members' trips from a union hall. Www.1040ez.com   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. Www.1040ez.com Although you need the union to get your work assignments, you are employed where you work, not where the union hall is located. Www.1040ez.com Office in the home. Www.1040ez.com   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. Www.1040ez.com (See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Www.1040ez.com ) Examples of deductible transportation. Www.1040ez.com   The following examples show when you can deduct transportation expenses based on the location of your work and your home. Www.1040ez.com Example 1. Www.1040ez.com You regularly work in an office in the city where you live. Www.1040ez.com Your employer sends you to a 1-week training session at a different office in the same city. Www.1040ez.com You travel directly from your home to the training location and return each day. Www.1040ez.com You can deduct the cost of your daily round-trip transportation between your home and the training location. Www.1040ez.com Example 2. Www.1040ez.com Your principal place of business is in your home. Www.1040ez.com You can deduct the cost of round-trip transportation between your qualifying home office and your client's or customer's place of business. Www.1040ez.com Example 3. Www.1040ez.com You have no regular office, and you do not have an office in your home. Www.1040ez.com In this case, the location of your first business contact inside the metropolitan area is considered your office. Www.1040ez.com Transportation expenses between your home and this first contact are nondeductible commuting expenses. Www.1040ez.com Transportation expenses between your last business contact and your home are also nondeductible commuting expenses. Www.1040ez.com While you cannot deduct the costs of these trips, you can deduct the costs of going from one client or customer to another. Www.1040ez.com Car Expenses If you use your car for business purposes, you ordinarily can deduct car expenses. Www.1040ez.com You generally can use one of the two following methods to figure your deductible expenses. Www.1040ez.com Standard mileage rate. Www.1040ez.com Actual car expenses. Www.1040ez.com 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. Www.1040ez.com See Leasing a Car , later. Www.1040ez.com In this publication, “car” includes a van, pickup, or panel truck. Www.1040ez.com For the definition of “car” for depreciation purposes, see Car defined under Actual Car Expenses, later. Www.1040ez.com Rural mail carriers. Www.1040ez.com   If you are a rural mail carrier, you may be able to treat the qualified reimbursement you received as your allowable expense. Www.1040ez.com Because the qualified reimbursement is treated as paid under an accountable plan, your employer should not include the reimbursement in your income. Www.1040ez.com   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). Www.1040ez.com You must complete Form 2106 and attach it to your Form 1040, U. Www.1040ez.com S. Www.1040ez.com Individual Income Tax Return. Www.1040ez.com   A “qualified reimbursement” is the reimbursement you receive that meets both of the following conditions. Www.1040ez.com It is given as an equipment maintenance allowance (EMA) to employees of the U. Www.1040ez.com S. Www.1040ez.com Postal Service. Www.1040ez.com It is at the rate contained in the 1991 collective bargaining agreement. Www.1040ez.com Any later agreement cannot increase the qualified reimbursement amount by more than the rate of inflation. Www.1040ez.com See your employer for information on your reimbursement. Www.1040ez.com    If you are a rural mail carrier and received a qualified reimbursement, you cannot use the standard mileage rate. Www.1040ez.com 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. Www.1040ez.com For 2013, the standard mileage rate for the cost of operating your car for business use is 56½ cents per mile. Www.1040ez.com If you use the standard mileage rate for a year, you cannot deduct your actual car expenses for that year. Www.1040ez.com You cannot deduct depreciation, lease payments, maintenance and repairs, gasoline (including gasoline taxes), oil, insurance, or vehicle registration fees. Www.1040ez.com See Choosing the standard mileage rate and Standard mileage rate not allowed, later. Www.1040ez.com 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. Www.1040ez.com See chapter 6 for more information on reimbursements . Www.1040ez.com Choosing the standard mileage rate. Www.1040ez.com   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. Www.1040ez.com Then, in later years, you can choose to use either the standard mileage rate or actual expenses. Www.1040ez.com   If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period. Www.1040ez.com 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. Www.1040ez.com   You must make the choice to use the standard mileage rate by the due date (including extensions) of your return. Www.1040ez.com You cannot revoke the choice. Www.1040ez.com However, in later years, you can switch from the standard mileage rate to the actual expenses method. Www.1040ez.com 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. Www.1040ez.com Example. Www.1040ez.com Larry is an employee who occasionally uses his own car for business purposes. Www.1040ez.com He purchased the car in 2011, but he did not claim any unreimbursed employee expenses on his 2011 tax return. Www.1040ez.com 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. Www.1040ez.com   For more information about depreciation included in the standard mileage rate, see Exception under Methods of depreciation, later. Www.1040ez.com Standard mileage rate not allowed. Www.1040ez.com   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. Www.1040ez.com (See Rural mail carriers , earlier. Www.1040ez.com ) Note. Www.1040ez.com 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. Www.1040ez.com Five or more cars. Www.1040ez.com   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. Www.1040ez.com However, you may be able to deduct your actual expenses for operating each of the cars in your business. Www.1040ez.com See Actual Car Expenses , later, for information on how to figure your deduction. Www.1040ez.com   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. Www.1040ez.com   The following examples illustrate the rules for when you can and cannot use the standard mileage rate for five or more cars. Www.1040ez.com Example 1. Www.1040ez.com Marcia, a salesperson, owns three cars and two vans that she alternates using for calling on her customers. Www.1040ez.com 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. Www.1040ez.com Example 2. Www.1040ez.com Tony and his employees use his four pickup trucks in his landscaping business. Www.1040ez.com During the year, he traded in two of his old trucks for two newer ones. Www.1040ez.com Tony can use the standard mileage rate for the business mileage of all six of the trucks he owned during the year. Www.1040ez.com Example 3. Www.1040ez.com Chris owns a repair shop and an insurance business. Www.1040ez.com He and his employees use his two pickup trucks and van for the repair shop. Www.1040ez.com Chris alternates using his two cars for the insurance business. Www.1040ez.com No one else uses the cars for business purposes. Www.1040ez.com 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. Www.1040ez.com Example 4. Www.1040ez.com Maureen owns a car and four vans that are used in her housecleaning business. Www.1040ez.com Her employees use the vans, and she uses the car to travel to various customers. Www.1040ez.com Maureen cannot use the standard mileage rate for the car or the vans. Www.1040ez.com This is because all five vehicles are used in Maureen's business at the same time. Www.1040ez.com She must use actual expenses for all vehicles. Www.1040ez.com Interest. Www.1040ez.com   If you are an employee, you cannot deduct any interest paid on a car loan. Www.1040ez.com This applies even if you use the car 100% for business as an employee. Www.1040ez.com   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. Www.1040ez.com For example, if you use your car 60% for business, you can deduct 60% of the interest on Schedule C (Form 1040). Www.1040ez.com You cannot deduct the part of the interest expense that represents your personal use of the car. Www.1040ez.com    If you use a home equity loan to purchase your car, you may be able to deduct the interest. Www.1040ez.com See Publication 936, Home Mortgage Interest Deduction, for more information. Www.1040ez.com Personal property taxes. Www.1040ez.com   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. Www.1040ez.com You can take this deduction even if you use the standard mileage rate or if you do not use the car for business. Www.1040ez.com   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). Www.1040ez.com 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). Www.1040ez.com Parking fees and tolls. Www.1040ez.com   In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. Www.1040ez.com (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses. Www.1040ez.com ) Sale, trade-in, or other disposition. Www.1040ez.com   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. Www.1040ez.com See Disposition of a Car , later. Www.1040ez.com Actual Car Expenses If you do not use the standard mileage rate, you may be able to deduct your actual car expenses. Www.1040ez.com If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction. Www.1040ez.com 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. Www.1040ez.com Continue to keep records, as explained later in chapter 5 . Www.1040ez.com Business and personal use. Www.1040ez.com   If you use your car for both business and personal purposes, you must divide your expenses between business and personal use. Www.1040ez.com You can divide your expense based on the miles driven for each purpose. Www.1040ez.com Example. Www.1040ez.com 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. Www.1040ez.com You can claim only 60% (12,000 ÷ 20,000) of the cost of operating your car as a business expense. Www.1040ez.com Employer-provided vehicle. Www.1040ez.com   If you use a vehicle provided by your employer for business purposes, you can deduct your actual unreimbursed car expenses. Www.1040ez.com You cannot use the standard mileage rate. Www.1040ez.com See Vehicle Provided by Your Employer in chapter 6. Www.1040ez.com Interest on car loans. Www.1040ez.com   If you are an employee, you cannot deduct any interest paid on a car loan. Www.1040ez.com This interest is treated as personal interest and is not deductible. Www.1040ez.com If you are self-employed and use your car in that business, see Interest , earlier, under Standard Mileage Rate. Www.1040ez.com Taxes paid on your car. Www.1040ez.com   If you are an employee, you can deduct personal property taxes paid on your car if you itemize deductions. Www.1040ez.com Enter the amount paid on line 7 of Schedule A (Form 1040). Www.1040ez.com Sales taxes. Www.1040ez.com   Generally, sales taxes on your car are part of your car's basis and are recovered through depreciation, discussed later. Www.1040ez.com Fines and collateral. Www.1040ez.com   You cannot deduct fines you pay or collateral you forfeit for traffic violations. Www.1040ez.com Casualty and theft losses. Www.1040ez.com   If your car is damaged, destroyed, or stolen, you may be able to deduct part of the loss not covered by insurance. Www.1040ez.com See Publication 547, Casualties, Disasters, and Thefts, for information on deducting a loss on your car. Www.1040ez.com Depreciation and section 179 deductions. Www.1040ez.com   Generally, the cost of a car, plus sales tax and improvements, is a capital expense. Www.1040ez.com Because the benefits last longer than 1 year, you generally cannot deduct a capital expense. Www.1040ez.com 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. Www.1040ez.com Depreciation allows you to recover the cost over more than 1 year by deducting part of it each year. Www.1040ez.com The section 179 deduction , special depreciation allowance , and depreciation deductions are discussed later. Www.1040ez.com   Generally, there are limits on these deductions. Www.1040ez.com Special rules apply if you use your car 50% or less in your work or business. Www.1040ez.com   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. Www.1040ez.com   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. Www.1040ez.com Car defined. Www.1040ez.com   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. Www.1040ez.com Its unloaded gross vehicle weight must not be more than 6,000 pounds. Www.1040ez.com A car includes any part, component, or other item physically attached to it or usually included in the purchase price. Www.1040ez.com   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. Www.1040ez.com Qualified nonpersonal use vehicles. Www.1040ez.com   These are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. Www.1040ez.com 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. Www.1040ez.com Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat, are qualified nonpersonal use vehicles. Www.1040ez.com More information. Www.1040ez.com   See Depreciation Deduction , later, for more information on how to depreciate your vehicle. Www.1040ez.com 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. Www.1040ez.com 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. Www.1040ez.com 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. Www.1040ez.com See Depreciation Limits, later. Www.1040ez.com You can claim the section 179 deduction only in the year you place the car in service. Www.1040ez.com 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. Www.1040ez.com Even if you are not using the property, it is in service when it is ready and available for its specifically assigned use. Www.1040ez.com A car first used for personal purposes cannot qualify for the deduction in a later year when its use changes to business. Www.1040ez.com Example. Www.1040ez.com In 2012, you bought a new car and used it for personal purposes. Www.1040ez.com In 2013, you began to use it for business. Www.1040ez.com Changing its use to business use does not qualify the cost of your car for a section 179 deduction in 2013. Www.1040ez.com However, you can claim a depreciation deduction for the business use of the car starting in 2013. Www.1040ez.com See Depreciation Deduction , later. Www.1040ez.com More than 50% business use requirement. Www.1040ez.com   You must use the property more than 50% for business to claim any section 179 deduction. Www.1040ez.com If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Www.1040ez.com The result is the cost of the property that can qualify for the section 179 deduction. Www.1040ez.com Example. Www.1040ez.com Peter purchased a car in April 2013 for $24,500 and used it 60% for business. Www.1040ez.com 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). Www.1040ez.com But see Limit on total section 179, special depreciation allowance, and depreciation deduction , discussed later. Www.1040ez.com Limits. Www.1040ez.com   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. Www.1040ez.com Limit on the amount of the section 179 deduction. Www.1040ez.com   For 2013, the total amount you can choose to deduct under section 179 generally cannot be more than $500,000. Www.1040ez.com   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. Www.1040ez.com 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. Www.1040ez.com   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. Www.1040ez.com   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. Www.1040ez.com   If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit. Www.1040ez.com You must allocate the dollar limit (after any reduction) between you. Www.1040ez.com   For more information on the above section 179 deduction limits, see Publication 946. Www.1040ez.com Limit for sport utility and certain other vehicles. Www.1040ez.com   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. Www.1040ez.com 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. Www.1040ez.com 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. Www.1040ez.com    Limit on total section 179, special depreciation allowance, and depreciation deduction. Www.1040ez.com   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. Www.1040ez.com The limit is reduced if your business use of the car is less than 100%. Www.1040ez.com See Depreciation Limits , later, for more information. Www.1040ez.com Example. Www.1040ez.com 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. Www.1040ez.com 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). Www.1040ez.com Cost of car. Www.1040ez.com   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. Www.1040ez.com 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. Www.1040ez.com Your cost includes only the cash you paid. Www.1040ez.com Basis of car for depreciation. Www.1040ez.com   The amount of the section 179 deduction reduces your basis in your car. Www.1040ez.com If you choose the section 179 deduction, you must subtract the amount of the deduction from the cost of your car. Www.1040ez.com The resulting amount is the basis in your car you use to figure your depreciation deduction. Www.1040ez.com When to choose. Www.1040ez.com   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. Www.1040ez.com How to choose. Www.1040ez.com    Employees use Form 2106 to make this choice and report the section 179 deduction. Www.1040ez.com All others use Form 4562. Www.1040ez.com   File the appropriate form with either of the following. Www.1040ez.com Your original tax return filed for the year the property was placed in service (whether or not you file it timely). Www.1040ez.com An amended return filed within the time prescribed by law. Www.1040ez.com 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. Www.1040ez.com The amended return must also include any resulting adjustments to taxable income. Www.1040ez.com    You must keep records that show the specific identification of each piece of qualifying section 179 property. Www.1040ez.com These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. Www.1040ez.com Revoking an election. Www.1040ez.com   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. Www.1040ez.com Recapture of section 179 deduction. Www.1040ez.com   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. Www.1040ez.com 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. Www.1040ez.com Any section 179 deduction claimed on the car is included in calculating the excess depreciation. Www.1040ez.com For information on this calculation, see Excess depreciation , later in this chapter under Car Used 50% or Less for Business. Www.1040ez.com Dispositions. Www.1040ez.com   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. Www.1040ez.com 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). Www.1040ez.com For information on the disposition of a car, see Disposition of a Car , later. Www.1040ez.com 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. Www.1040ez.com 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). Www.1040ez.com The special depreciation allowance applies only for the first year the car is placed in service. Www.1040ez.com 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). Www.1040ez.com Combined depreciation. Www.1040ez.com   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). Www.1040ez.com For trucks and vans, the first-year limit remains at $11,360 ($3,360 if you elect not to claim the special depreciation allowance). Www.1040ez.com See Depreciation Limits , later in this chapter. Www.1040ez.com Qualified car. Www.1040ez.com   To be a qualified car (including trucks and vans), the car must meet all of the following tests. Www.1040ez.com 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. Www.1040ez.com Election not to claim the special depreciation allowance. Www.1040ez.com   You can elect not to claim the special depreciation allowance for your car, truck, or van, that is qualified property. Www.1040ez.com If you make this election, it applies to all 5-year property placed in service during the year. Www.1040ez.com   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. Www.1040ez.com    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. Www.1040ez.com 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. Www.1040ez.com This means you can deduct a certain amount each year as a recovery of your cost or other basis in your car. Www.1040ez.com You generally need to know the following things about the car you intend to depreciate. Www.1040ez.com Your basis in the car. Www.1040ez.com The date you place the car in service. Www.1040ez.com The method of depreciation and recovery period you will use. Www.1040ez.com Basis. Www.1040ez.com   Your basis in a car for figuring depreciation is generally its cost. Www.1040ez.com This includes any amount you borrow or pay in cash, other property, or services. Www.1040ez.com   Generally, you figure depreciation on your car, truck, or van using your unadjusted basis (see Unadjusted basis , later). Www.1040ez.com However, in some situations you will use your adjusted basis (your basis reduced by depreciation allowed or allowable in earlier years). Www.1040ez.com For one of these situations see Exception under Methods of depreciation, later. Www.1040ez.com   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. Www.1040ez.com Additional rules concerning basis are discussed later in this chapter under Unadjusted basis . Www.1040ez.com Placed in service. Www.1040ez.com   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. Www.1040ez.com Depreciation begins when the car is placed in service for use in your work or business or for the production of income. Www.1040ez.com   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. Www.1040ez.com Car placed in service and disposed of in the same year. Www.1040ez.com   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. Www.1040ez.com Methods of depreciation. Www.1040ez.com   Generally, you figure depreciation on cars using the Modified Accelerated Cost Recovery System (MACRS). Www.1040ez.com MACRS is discussed later in this chapter. Www.1040ez.com Exception. Www.1040ez.com   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. Www.1040ez.com You must use straight line depreciation over the estimated remaining useful life of the car. Www.1040ez.com   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. Www.1040ez.com The rate per mile varies depending on the year(s) you used the standard mileage rate. Www.1040ez.com For the rate(s) to use, see Depreciation adjustment when you used the standard mileage rate under Disposition of a Car, later. Www.1040ez.com   This reduction of basis is in addition to those basis adjustments described later under Unadjusted basis . Www.1040ez.com You must use your adjusted basis in your car to figure your depreciation deduction. Www.1040ez.com For additional information on the straight line method of depreciation, see Publication 946. Www.1040ez.com More-than-50%-use test. Www.1040ez.com   Generally, you must use your car more than 50% for qualified business use (defined next) during the year to use MACRS. Www.1040ez.com You must meet this more-than-50%-use test each year of the recovery period (6 years under MACRS) for your car. Www.1040ez.com   If your business use is 50% or less, you must use the straight line method to depreciate your car. Www.1040ez.com This is explained later under Car Used 50% or Less for Business . Www.1040ez.com Qualified business use. Www.1040ez.com   A qualified business use is any use in your trade or business. Www.1040ez.com It does not include use for the production of income (investment use). Www.1040ez.com However, you do combine your business and investment use to compute your depreciation deduction for the tax year. Www.1040ez.com Use of your car by another person. Www.1040ez.com   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. Www.1040ez.com It is directly connected with your business. Www.1040ez.com It is properly reported by you as income to the other person (and, if you have to, you withhold tax on the income). Www.1040ez.com It results in a payment of fair market rent. Www.1040ez.com This includes any payment to you for the use of your car. Www.1040ez.com Business use changes. Www.1040ez.com   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. Www.1040ez.com See Qualified business use 50% or less in a later year under Car Used 50% or Less for Business, later. Www.1040ez.com    Property does not cease to be used more than 50% in qualified business use by reason of a transfer at death. Www.1040ez.com Use for more than one purpose. Www.1040ez.com   If you use your car for more than one purpose during the tax year, you must allocate the use to the various purposes. Www.1040ez.com You do this on the basis of mileage. Www.1040ez.com 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. Www.1040ez.com Change from personal to business use. Www.1040ez.com   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. Www.1040ez.com In this case, you figure the percentage of business use for the year as follows. Www.1040ez.com Determine the percentage of business use for the period following the change. Www.1040ez.com Do this by dividing business miles by total miles driven during that period. Www.1040ez.com Multiply the percentage in (1) by a fraction. Www.1040ez.com The numerator (top number) is the number of months the car is used for business and the denominator (bottom number) is 12. Www.1040ez.com Example. Www.1040ez.com You use a car only for personal purposes during the first 6 months of the year. Www.1040ez.com 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. Www.1040ez.com This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Www.1040ez.com Your business use for the year is 40% (80% × 6/12). Www.1040ez.com Limits. Www.1040ez.com   The amount you can claim for section 179, special depreciation allowance, and depreciation deductions may be limited. Www.1040ez.com The maximum amount you can claim depends on the year in which you placed your car in service. Www.1040ez.com You have to reduce the maximum amount if you did not use the car exclusively for business. Www.1040ez.com See Depreciation Limits , later. Www.1040ez.com Unadjusted basis. Www.1040ez.com   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) . Www.1040ez.com Your unadjusted basis for figuring depreciation is your original basis increased or decreased by certain amounts. Www.1040ez.com   To figure your unadjusted basis, begin with your car's original basis, which generally is its cost. Www.1040ez.com Cost includes sales taxes (see Sales taxes , earlier), destination charges, and dealer preparation. Www.1040ez.com Increase your basis by any substantial improvements you make to your car, such as adding air conditioning or a new engine. Www.1040ez.com 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. Www.1040ez.com 1, 2006), and alternative motor vehicle credit. Www.1040ez.com   See Form 8910 for information on the alternative motor vehicle credit. Www.1040ez.com If your business use later falls to 50% or less, you may have to recapture (include in your income) any excess depreciation. Www.1040ez.com See Car Used 50% or Less for Business, later, for more information. Www.1040ez.com If you acquired the car by gift or inheritance, see Publication 551, Basis of Assets, for information on your basis in the car. Www.1040ez.com Improvements. Www.1040ez.com   A major improvement to a car is treated as a new item of 5-year recovery property. Www.1040ez.com It is treated as placed in service in the year the improvement is made. Www.1040ez.com It does not matter how old the car is when the improvement is added. Www.1040ez.com Follow the same steps for depreciating the improvement as you would for depreciating the original cost of the car. Www.1040ez.com However, you must treat the improvement and the car as a whole when applying the limits on the depreciation deductions. Www.1040ez.com 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. Www.1040ez.com See Depreciation Limits , later. Www.1040ez.com Car trade-in. Www.1040ez.com   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. Www.1040ez.com You can elect to treat the transaction as a tax-free disposition of the old car and the purchase of the new car. Www.1040ez.com If you make this election, you treat the old car as disposed of at the time of the trade-in. Www.1040ez.com 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. Www.1040ez.com You then figure your depreciation deduction for the new car beginning with the date you placed it in service. Www.1040ez.com You make this election by completing Form 2106, Part II, Section D. Www.1040ez.com This method is explained later, beginning at Effect of trade-in on basis . Www.1040ez.com 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. Www.1040ez.com You must apply two depreciation limits (see Depreciation Limits , later). Www.1040ez.com 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. Www.1040ez.com 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. Www.1040ez.com You must use Form 4562 to compute your depreciation deduction. Www.1040ez.com You cannot use Form 2106, Part II, Section D. Www.1040ez.com This method is explained in Publication 946. Www.1040ez.com   If you elect to use the method described in (1), you must do so on a timely filed tax return (including extensions). Www.1040ez.com Otherwise, you must use the method described in (2). Www.1040ez.com Effect of trade-in on basis. Www.1040ez.com   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. Www.1040ez.com 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. Www.1040ez.com 168(i)-6(d)(3). Www.1040ez.com Traded car used only for business. Www.1040ez.com   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. Www.1040ez.com Example. Www.1040ez.com Paul trades in a car that has an adjusted basis of $5,000 for a new car. Www.1040ez.com In addition, he pays cash of $20,000 for the new car. Www.1040ez.com 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). Www.1040ez.com 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. Www.1040ez.com Traded car used partly in business. Www.1040ez.com   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. Www.1040ez.com 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. Www.1040ez.com (This adjustment is not used, however, when you determine the gain or loss on the later disposition of the new car. Www.1040ez.com See Publication 544, Sales and Other Dispositions of Assets, for information on how to report the disposition of your car. Www.1040ez.com )   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. Www.1040ez.com 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. Www.1040ez.com For information about figuring depreciation, see Modified Accelerated Cost Recovery System (MACRS) , which follows Example 2, later. Www.1040ez.com Modified Accelerated Cost Recovery System (MACRS). Www.1040ez.com   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. Www.1040ez.com   The maximum amount you can deduct is limited, depending on the year you placed your car in service. Www.1040ez.com See Depreciation Limits , later. Www.1040ez.com Recovery period. Www.1040ez.com   Under MACRS, cars are classified as 5-year property. Www.1040ez.com You actually depreciate the cost of a car, truck, or van over a period of 6 calendar years. Www.1040ez.com 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. Www.1040ez.com Depreciation deduction for certain Indian reservation property. Www.1040ez.com   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations after 1993 and before 2014. Www.1040ez.com The recovery that applies for a business-use car is 3 years instead of 5 years. Www.1040ez.com However, the depreciation limits, discussed later, will still apply. Www.1040ez.com   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. Www.1040ez.com Depreciation methods. Www.1040ez.com   You can use one of the following methods to depreciate your car. Www.1040ez.com 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. Www.1040ez.com 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. Www.1040ez.com The straight line method (SL) over a 5-year recovery period. Www.1040ez.com    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. Www.1040ez.com This is because the chart has the switch to the straight line method built into its rates. Www.1040ez.com   Before choosing a method, you may wish to consider the following facts. Www.1040ez.com Using the straight line method provides equal yearly deductions throughout the recovery period. Www.1040ez.com Using the declining balance methods provides greater deductions during the earlier recovery years with the deductions generally getting smaller each year. Www.1040ez.com MACRS depreciation chart. Www.1040ez.com   A 2013 MACRS Depreciation Chart and instructions are included in this chapter as Table 4-1 . Www.1040ez.com Using this table will make it easy for you to figure the 2013 depreciation deduction for your car. Www.1040ez.com A similar chart appears in the Instructions for Form 2106. Www.1040ez.com    You may have to use the tables in Publication 946 instead of using this MACRS Depreciation Chart. Www.1040ez.com   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. Www.1040ez.com You file your return on a fiscal year basis. Www.1040ez.com You file your return for a short tax year (less than 12 months). Www.1040ez.com During the year, all of the following conditions apply. Www.1040ez.com You placed some property in service from January through September. Www.1040ez.com You placed some property in service from October through December. Www.1040ez.com 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. Www.1040ez.com   You placed qualified property in service on an Indian reservation. Www.1040ez.com Depreciation in future years. Www.1040ez.com   If you use the percentages from the chart, you generally must continue to use them for the entire recovery period of your car. Www.1040ez.com However, you cannot continue to use the chart if your basis in your car is adjusted because of a casualty. Www.1040ez.com 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. Www.1040ez.com See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. Www.1040ez.com    In future years, do not use the chart in this edition of the publication. Www.1040ez.com Instead, use the chart in the publication or the form instructions for those future years. Www.1040ez.com Disposition of car during recovery period. Www.1040ez.com   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. Www.1040ez.com 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. Www.1040ez.com How to use the 2013 chart. Www.1040ez.com   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. Www.1040ez.com Multiply the unadjusted basis of your car (defined earlier) by that percentage to determine the amount of your depreciation deduction. Www.1040ez.com If you prefer to figure your depreciation deduction without the help of the chart, see Publication 946. Www.1040ez.com    Your deduction cannot be more than the maximum depreciation limit for cars. Www.1040ez.com See Depreciation Limits, later. Www.1040ez.com Example. Www.1040ez.com Phil bought a used truck in February 2012 to use exclusively in his landscape business. Www.1040ez.com He paid $9,200 for the truck with no trade-in. Www.1040ez.com 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. Www.1040ez.com Phil used the MACRS depreciation chart in 2012 to find his percentage. Www.1040ez.com The unadjusted basis of his truck equals its cost because Phil used it exclusively for business. Www.1040ez.com 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. Www.1040ez.com In 2013, Phil used the truck for personal purposes when he repaired his father's cabin. Www.1040ez.com His records show that the business use of his truck was 90% in 2013. Www.1040ez.com Phil used Table 4-1 to find his percentage. Www.1040ez.com Reading down the first column for the date placed in service and across to the 200% DB column, he locates his percentage, 32%. Www.1040ez.com 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. Www.1040ez.com Depreciation Limits There are limits on the amount you can deduct for depreciation of your car, truck, or van. Www.1040ez.com The section 179 deduction and special depreciation allowance are treated as depreciation for purposes of the limits. Www.1040ez.com The maximum amount you can deduct each year depends on the year you place the car in service. Www.1040ez.com These limits are shown in the following tables. Www.1040ez.com   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. Www.1040ez.com 2$3,060 if the car is not qualified property or if you elect not to claim the special depreciation allowance. Www.1040ez.com 3$2,960 if the car is not qualified property or if you elect not to claim the special depreciation allowance. Www.1040ez.com 4$7,660 if you acquired the car before 5/6/2003. Www.1040ez.com $3,060 if the car is not qualified property or if you elect not to claim any special depreciation allowance. Www.1040ez.com 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. Www.1040ez.com Trucks and vans. Www.1040ez.com   For 2013, the maximum depreciation deductions for trucks and vans are generally higher than those for cars. Www.1040ez.com 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. Www.1040ez.com For trucks and vans placed in service before 2003, use the Maximum Depreciation Deduction for Cars table. Www.1040ez.com 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. Www.1040ez.com 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. Www.1040ez.com Car used less than full year. Www.1040ez.com   The depreciation limits are not reduced if you use a car for less than a full year. Www.1040ez.com 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. Www.1040ez.com However, the depreciation limits are reduced if you do not use the car exclusively for business and investment purposes. Www.1040ez.com See Reduction for personal use , next. Www.1040ez.com Reduction for personal use. Www.1040ez.com   The depreciation limits are reduced based on your percentage of personal use. Www.1040ez.com 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. Www.1040ez.com Section 179 deduction. Www.1040ez.com   The section 179 deduction is treated as a depreciation deduction. Www.1040ez.com 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. Www.1040ez.com Example. Www.1040ez.com On September 4, 2013, Jack bought a used car for $10,000 and placed it in service. Www.1040ez.com He used it 80% for his business, and he chooses to take a section 179 deduction for the car. Www.1040ez.com The car is not qualified property for purposes of the special depreciation allowance. Www.1040ez.com Before applying the limit, Jack figures his maximum section 179 deduction to be $8,000. Www.1040ez.com This is the cost of his qualifying property (up to the maximum $500,000 amount) multiplied by his business use ($10,000 × 80%). Www.1040ez.com Jack then figures that his section 179 deduction for 2013 is limited to $2,528 (80% of $3,160). Www.1040ez.com He then figures his unadjusted basis of $5,472 (($10,000 × 80%) − $2,528) for determining his depreciation deduction. Www.1040ez.com Jack has reached his maximum depreciation deduction for 2013. Www.1040ez.com For 2014, Jack will use his unadjusted basis of $5,472 to figure his depreciation deduction. Www.1040ez.com Deductions in years after the recovery period. Www.1040ez.com   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. Www.1040ez.com If you continue to use your car for business, you can deduct that unrecovered basis (subject to depreciation limits) after the recovery period ends. Www.1040ez.com Unrecovered basis. Www.1040ez.com   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. Www.1040ez.com The recovery period. Www.1040ez.com   For 5-year property, your recovery period is 6 calendar years. Www.1040ez.com 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. Www.1040ez.com   Under MACRS, your recovery period is the same whether you use declining balance or straight line depreciation. Www.1040ez.com You determine your unrecovered basis in the 7th year after you placed the car in service. Www.1040ez.com How to treat unrecovered basis. Www.1040ez.com   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. Www.1040ez.com The maximum amount you can deduct each year is determined by the date you placed the car in service and your business-use percentage. Www.1040ez.com For example, no deduction is allowed for a year you use your car 100% for personal purposes. Www.1040ez.com Example. Www.1040ez.com In April 2007, Bob bought and placed in service a car he used exclusively in his business. Www.1040ez.com The car cost $31,500. Www.1040ez.com Bob did not claim a section 179 deduction or the special depreciation allowance for the car. Www.1040ez.com He continued to use the car 100% in his business throughout the recovery period (2007 through 2012). Www.1040ez.com 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. Www.1040ez.com 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. Www.1040ez.com      MACRS     Deprec. Www.1040ez.com Year % Amount Limit Allowed 2007 20. Www.1040ez.com 00 $6,300 $3,060 $ 3,060 2008 32. Www.1040ez.com 00 10,080 4,900 4,900 2009 19. Www.1040ez.com 20 6,048 2,850 2,850 2010 11. Www.1040ez.com 52 3,629 1,775 1,775 2011 11. Www.1040ez.com 52 3,629 1,775 1,775 2012 5. Www.1040ez.com 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. Www.1040ez.com   At the end of 2012, Bob had an unrecovered basis in the car of $15,365 ($31,500 – $16,135). Www.1040ez.com 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. Www.1040ez.com   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. Www.1040ez.com 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%. Www.1040ez.com 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. Www.1040ez.com Table 4-1. Www.1040ez.com 2013 MACRS Depreciation Chart (Use to Figure Depreciation for 2013. Www.1040ez.com ) 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. Www.1040ez.com   First, using the left column, find the date you first placed the car in service in 2013. Www.1040ez.com Then select the depreciation method and percentage from column (a), (b), or (c) following the rules explained in this chapter. Www.1040ez.com 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. Www.1040ez.com Refer back to the MACRS Depreciation Chart for the year you placed the car in service. Www.1040ez.com (See Car Used 50% or Less for Business . Www.1040ez.com )  Multiply the unadjusted basis of your car by your business use percentage. Www.1040ez.com Multiply the result by the percentage you found in the chart to find the amount of your depreciation deduction for 2013. Www.1040ez.com (Also see Depreciation Limits . Www.1040ez.com )   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. Www.1040ez.com 1—Sept. Www.1040ez.com 30 percentage instead of the Oct. Www.1040ez.com 1—Dec. Www.1040ez.com 31 percentage for your car. Www.1040ez.com               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. Www.1040ez.com 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. Www.1040ez.com 1—Sept. Www.1040ez.com 30 for figuring depreciation for your car. Www.1040ez.com See Which Convention Applies? in chapter 4 of Publication 946 for more details. Www.1040ez.com               Example. Www.1040ez.com 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. Www.1040ez.com You