Depreciation Guidelines for a Company Vehicle
Webster's online dictionary defines depreciation as the process of deducting a portion of a business asset's original cost from its taxable income over time as the value of the asset decreases. When a company owns vehicles, it must account for depreciation. There are different ways to calculate depreciation on company vehicles.
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Straight Line Depreciation
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Straight line depreciation is a traditional method of depreciation where the company knows how much they are going to sell the vehicle for (the salvage value). The company will subtract the salvage value from the cost of the vehicle to get the total amount of depreciation. That number, divided by the amount of years (or cycles) the vehicle is used for, provides the figure that is placed on the balance sheet each year in the space marked depreciation.
For example: Company X purchases a car for $10,000 that they will use for five years and after five years, they will sell the car for $5,000.
($10,000 - $5,000) / 5 years= $1,000
The car purchased by Company X depreciates $1000 each year in value.
Standard Mileage Rate
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The standard mileage rate is a rate that is published each year that is multiplied by the amount of miles a car is driven each year to produce a depreciation value. The standard mileage rate is used as a means to determine a car's value and has depreciation already built into the rate, according to Small Business Taxes & Management. The 2010 standard mileage (depreciation adjustment) rate is $.23 per mile. Therefore, if a company vehicle is driven 10,000 miles in the year 2010, the depreciation value in 2010 is $2,300.
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Modified Accelerated Cost Recovery System
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MACRS is a unique method of depreciation in that uses either the general depreciation system or the alternative depreciation system to calculate depreciation. Generally, the GDS is used unless the law requires the ADS to be used or you elect to use the ADS, according to the IRS. Under MACRS, property is assigned a recovery period. The IRS states that the ADS recovery period for a company vehicle is five years. The cost of the vehicle is divided by the recovery period to get the depreciation value.
For example: A car is purchased by company Y for $10,000.
$10,000 / 5 years recovery period = $2,000
The car depreciates $2,000 each year in value under MACRS.
Restrictions
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The IRS places limitations on how much depreciation a company is allowed to claim each year. In 2010, according to Small Business Taxes and Management, the depreciation limits for passenger cars were: $3,060 for the first year, $4,900 for the second year, $2,950 for the third year and $1,775 for each year thereafter. In the example in the previous section, Company Y would not be able to claim $2,000 in depreciation for years four and five, Company Y would have to adjust that figure down to $1,775.
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References
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