Self Employed

Ask The Tax Expert: Taking the Depreciation Deduction

Stephen Fishman
Tax expert and contributor MileIQ

Q. I bought a $40,000 car that I used 100% for business. If I use the standard mileage deduction, can I still take a Section 179 depreciation tax deduction? If I don’t take a standard mileage deduction, is it mandatory that I use Section 179?

Depreciation Tax Deduction

The first year you use a passenger vehicle for business you get to decided whether to use the standard mileage rate to deduct your business mileage or deduct your actual expenses. If you do use the standard mileage rate for 2016, you get to deduct 54 cents per business mile. This amount includes all the depreciation to which you’re entitled, so you get not additional deduction for regular depreciation, bonus depreciation, or Section 179 expensing. The only items you can deduct in addition to the 54 cents per mile are tolls, parking, and car loan interest.

If you elect to deduct your actual expenses, you get to deduct the actual cost of operating your car, including gas, repairs, insurance, license and registration fees, and just about everything else you pay for your car. You also get to take a separate annual depreciation deduction.

Unfortunately, the annual depreciation deduction for automobiles is limited to 
a set dollar amount each year. The annual limit applies to all passenger vehicles, no matter how much they cost. You can reference the following chart for passenger automobiles purchased in 2015 or 2016.

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Year Placed in Service | 2015 or 2016

1st tax year | $11,160 for new cars ($3,160 regular depreciation + bonus depreciation); $3,160 for used cars

2nd tax year | $5,100

3rd tax year | $3,050

4th and later years | $1,875

These numbers must be reduced by the percentage of personal use of a car. For example, if you use your car 50% of the time for business, your annual limit is cut in half. If you use a new vehicle more than 50% of the time for business, you qualify for bonus depreciation and get $8,000 added to your depreciation first-year limit, giving you a total $8,160 deduction.

You may combine Section 179 expensing, bonus depreciation, and regular depreciation, in that order. It is not mandatory that you use Section 179, it is always voluntary. Since your total deduction cannot exceed the annual limits listed in the charts above, there here is usually no point in using Section 179 for a vehicle because you’ll likely reach the annual first-year limit using bonus depreciation and/or regular accelerated depreciation.

If you elect to use the actual expense method to deduct your car expenses, you’ll be able to take a $8,160 deprecation deduction plus deduct the other car expenses you incurred during the year. This may give you a larger deduction than using the standard mileage rate. You can figure your deduction both ways and then decide which one to use.

One thing to keep in mind, however, is that if you use the actual expense method the first year you must continue to use that method for the life of the vehicle. You can’t switch back to the standard mileage rate. On the other hand, if you use the standard mileage rate the first you, you can switch to the actual expense method in a future year—but only if you didn’t use bonus depreciation or accelerated depreciation.

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