The Actual Expense Method

Car and calculator

Under the actual expense method, you deduct business-related operating expenses plus depreciation.

Switching Methods:

If you start out using the actual expense method for a particular vehicle the first year it is placed in service for business use, you may not switch to the IRS mileage allowance method for that particular vehicle in any other year.

On the other hand, if you start out using the IRS mileage allowance for a particular vehicle the first year it is placed in service for business use, you may switch to the actual expense method for that vehicle, but you can no longer switch back to the IRS mileage allowance method for that vehicle.

Examples of Deductible Car Expenses

  • Fuel
  • Garage rent
  • Insurance
  • Interest on vehicle loan (must be self-employed to deduct this)
  • Parking fees
  • Repairs and maintenance
  • Tires
  • Tolls

Deductions that Need Some Explaining

Interest on your car loan:

Employees:

Employees may not claim the interest deduction on a car loan even if their vehicle is used 100% for the job.

Self-Employed:

Self-employed persons may deduct interest on a car loan.

To determine the amount on car loan interest you may deduct, multiply the total annual interest paid by your business-use percentage. Interest related to personal-use is not deductible; it is a personal expense.

For example, if you used one car only for business all year, your business-use percentage would be 100% for that car and you may claim 100% of the annual interest paid on a car loan for that car. However, if you used your vehicle less than 100% for business, say 60%, you may deduct only 60% of the annual interest paid on a loan for that vehicle.

Computing Your Business-Use Percentage:

To figure your business-use percentage, divide your annual business miles traveled by your total annual miles traveled for both business and personal purposes..

For example, if you drove your vehicle 40,000 miles during the year for business and personal purposes and 20,000 miles for just business purposes, your business-use percentage would be 50% (20,000/40,000). If you paid $3,000 for interest on a loan for that vehicle for the year, you may deduct $1,500 (50% x $3,000).

Depreciation for Vehicles

You can use one of the following methods to depreciate your vehicle:

  • 200% declining balance method (200% DB) over a 5-year recovery period that switches to the straight-line method when that method produces an equal or greater deduction (the switch is built into the table).
  • 150% declining balance method (150% DB) over a 5-year recovery period that switches to the straight-line method when that method produces an equal or greater deduction (the switch is built into the table).
  • Straight-line method over a 5-year recovery period.

Passenger Cars:

Passenger cars placed in service in 2015, weight-rated under 6,000 pounds when unloaded (no passengers) are subject to an annual depreciation limit of:

  1. $3,160 for the firs year
  2. $5,100 for the second tax year
  3. $3,050 for the third tax year
  4. $1,875 for each successive tax year:

With bonus depreciation of $8,000, the annual limit is $11,160.

Trucks and Vans:

For trucks and vans, the 2015 limit including the first year special allowance ( bonus depreciation) is:

  1. First year: $11,460 (3,460 is you elect not to claim the special first year allowance)
  2. Second year: $5,600
  3. Third year: $3,350
  4. Each successive year: $1,975

SUVS, light trucks, vans, and mini vans:

SUVS, light trucks, vans, and mini vans placed in service in 2015, weight-rated by the manufacturer at 6,000 pounds or less when fully loaded (gross vehicle weight), are subject to an annual depreciation limit of $3,360. With bonus depreciation of $8,000, the annual limit is $11.360.

See the tables in IRS Publication 4562 Instructions for annual depreciation limits for passenger passenger cars ( Table 3) and light trucks, vans, and SUVs weight-rated 6,000 pounds or less (Table 4).

Keep in mind, the annual depreciation ceilings in the tables assume 100% business use. Consequently, if you used your vehicle for both business and personal use, you may only claim the business-use portion of the annual ceiling.

For example, if you used your passenger car 80% for business purposes and 20% for personal use, and your vehicle was new when you placed it in service in 2013, you may claim 80% x $11,160 or $8,928. If your passenger car was a used car, you may only claim 80% x $3,160 or $2,528. Bonus depreciation only applies to new equipment, including vehicles.

SUVs, trucks, and vans weight-rated over 6,000 pounds:

SUVs, trucks, and vans weight-rated over 6,000 pounds are not subject to annual depreciation ceilings.

Bonus depreciation (Section 168(k))

Bonus depreciation update due to tax extenders bill passed December 2015 (PATH Act):

The 50% bonus depreciation for qualified business property is retroactively extended to 2015. The percentage will be reduced to 40% for 2018 and then 30% for 2019. After 2019, bonus depreciation will completely expire unless it is extended again. (More on tax extenders bill.)

Electing out of bonus depreciation:

You are automatically deemed to have claimed bonus depreciation even if you did not and must reduce the basis of the property by the amount of the depreciation that could have been claimed.

If you don't want to claim bonus depreciation and would prefer to elect out of it, simply attach a statement to your return specifying the class of property. For example, 5-year property includes cars, light duty trucks, and heavy general-purpose tucks..

Caution! If you claimed the 100% bonus allowance for a vehicle purchased after September 8, 2010 and before 2012, your deductions for years after the first year should be figured under a safe harbor method. See Revenue Procedure 2011-26 for the IRS explanation and examples of the safe harbor rule.

First-year Expensing for Vehicles

Although SUVs, trucks, and vans weight-rated by the manufacturer at more than 6,000 pounds gross vehicle weight are not subject to an annual depreciation limit, SUVs, trucks, and vans weight-rated over 6,000 pounds but not more than 14,000 pounds gross vehicle weight are limited to a $25,000 first-year expensing deduction rather than $500,000, which is the general first-year expensing limit for 2013.

For the purpose of the Section 179 $25,000 limit, an SUV is defined as any four-wheeled vehicle primarily designed or which can be used to carry passengers over public thoroughfares that are weight-rated over 6,000 pounds gross vehicle weight (fully loaded) and not more than 14,000 pounds gross vehicle weight.

Certain excepted vehicles are not subject to the first-year expensing limit of $25,000 and you may claim up to $500,000 for 2013.

If you take the Section 179 deduction, the annual depreciation limits still apply. If you use your vehicle for both business and personal use, you must reduce the annul limits for personal use.

Excepted vehicles include:

  • Vehicles that can seat nine or more passengers behind the driver's seat (i.e.: Hotel and Airport shuttle vans).
  • Pickup trucks with an interior cargo bed at least six feet long that is an open area or is enclosed and not readily accessible to passengers.
  • Cargo vans without rear seating and with no body sections protruding more than 30 inches ahead of the windshield.
  • To qualify for the first-year expensing deduction, the vehicle must be purchased from someone not related to you, placed in service in 2013, and used over 50% for business.

Note that to qualify for bonus depreciation, the property must be new in the year it is placed in service. However, to qualify for first-year expensing. the property does not have to be new. It just has to be purchased from an unrelated party in 2013 and placed in service in 2013 and used more than 50% for business.

What if Business Use Falls Below 50%?

If business use of a vehicle drops to 50% or less at any time during the recovery period and you were using accelerated MACRS (200% or 150% declining balance method) to depreciate the vehicle, you must stop using accelerated MACRS in the year business use drops to 50% or less for that vehicle and you must begin using straight-line depreciation.

In addition, you must also recapture the benefit of the accelerated deductions claimed in prior years.

To figure the recapture amount:

  • Jot down the total depreciation you actually claimed under accelerated MACRS.
  • Then, recompute the depreciation for the same period using straight-line depreciation.
  • Finally, subtract the total straight-line depreciation you just determined from the total accelerated MACRS amount actually claimed.
  • The amount by which accelerated MACRS exceeds straight-line depreciation is the recapture amount.

Lease payments:

If you lease a vehicle, you may deduct the lease payments as a business expense. If you use the vehicle for business and personal purposes, you may only deduct the lease payments allocated to business use.

If in 2013 you lease a vehicle for a lease term of 30 days or more, you may have to indirectly report as income and amount based on an IRS table. On Schedule C (if self-employed) or Form 2106 (if an employee) the income inclusion amount reduces your deduction for lease payments and therefore indirectly increases your income.

NOTE: The income inclusion rule does not apply if you claim the standard mileage allowance.

The income amount is reduced where you leased the vehicle for less than the entire year or business use is less than 100%.

See IRS Publication 463, page 24 for the details on how to determine the inclusion amount.

Vehicle Registration fees

Personal property tax included in registration fee:

Some states charge a registration fee based on the value of the vehicle rather than its weight, model, year, or horsepower.

The part of the fee related to the value of the vehicle is a personal property tax.

If you use your vehicle less than 100% for business, deduct the business portion of the registration fee as a business expense. Deduct the non-business portion of the personal property tax on Schedule A if you itemize your deductions.

States that assess a personal property tax on vehicles include: AL, AZ, AR, CA, CO, GA, IN, IO, KY, LA, MI, MN, MS, MO, MT, NE, NV, NH, SC, WA, WY. Check with your state


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