Depreciation Recapture Rule For Vehicles

What to Do if Business Use Drops to 50% or Less

If business use of your car, truck or van is 50% or less in the first year you place it in service, you may not use accelerated MACRS, first-year expensing, or bonus depreciation.

If business use drops to 50% or less, you must:

  1. Discontinue using accelerated MACRS
  2. Begin using straight-line depreciation
  3. Compute excess depreciation for all prior years
  4. Recapture excess depreciation by reporting it as ordinary income

Computing Recaptured Depreciation

Recaptured depreciation is the difference between:

  1. First-year expensing deduction, plus
  2. Accelerated MACRS deductions allowed in previous years before business use dropped to 50% or less, plus
  3. First-year bonus depreciation allowance, if any, minus
  4. The amount of depreciation that would have been allowed for those same years had you claimed straight-line depreciation.

The following table shows the computation of recaptured depreciation:

Computation of Recaptured Depreciation
2012-2015
1. Total first-year expensing deduction (section 179) deduction $10,000
2. 200% MACRS depreciation claimed - half year convention 6,618
3. Bonus Depreciation 0
4. Total Depreciation Claimed 2012-2015 before business use dropped to 50% or less (lines: 1+2+3). $16,618
MINUS  
5. Depreciation that would have been allowed 2012-2015 had the Straight-Line Method been used. (12,600)
   
6. Recaptured Depreciation (line 4 minus line 5)
Report this amount as ordinary income
$4,018

Where to Report Recaptured Depreciation

  1. First, complete Form 4797, Sales of Business Property, Part IV.
  2. Next, enter the recaptured amount shown on Form 4797 as other income on the form or schedule you took the deduction. See the instructions to Form 4797 ( page 10). For example, if you're self-employed and used Schedule C to deduct depreciation, you would first complete Form 4797, Part IV, then enter the excess depreciation amount as Other income on Schedule C, Part I, line 6.

Employees

If you were an employee and used Form 2106, report the recaptured amount as Other income on Form 1040.

Basis Adjustment

Add the recaptured amount to the adjusted basis of the property for figuring gain or loss when the property is eventually disposed of.

When Recapture Rule Does Not Apply

The recapture rule does not apply to property that has been depreciated using straight-line depreciation from the date it was placed in service.

File your personal and small business taxes (Schedule C)