How to Depreciate a Vehicle on Taxes

If you use a vehicle for business purposes, you may depreciate your vehicle and record the depreciation expense related to your business use on your federal income-tax return. Depreciation is an expense allowed by the IRS that allows you to recover a portion of your cost for the car due to normal wear and tear and loss in value. The cost of your vehicle that is attributed to your business activities is recovered over a period of five years.

Instructions

1. Obtain the IRS form and instructions for Form 4562, "Depreciation and Amortization," from the IRS.gov website.

2. Calculate your basis for depreciation. This includes the cost of the vehicle and the sales tax you pay when you purchase the vehicle. If you claim a credit for a qualified electric vehicle, you must reduce your basis by the amount of the credit.

3. Calculate your business-use percentage. Calculate the total miles you drive the vehicle during the year, and calculate the number of miles you drive for business miles during the year. Divide your business miles by the total miles driven on the car during the year. The result is your business-use percentage as a decimal.

4. Multiply your business-use percentage to your basis for depreciation. The result is your business basis for depreciation.

5. Complete Form 4562, Part V, “Listed Property.” If your business use of the vehicle is more than 50 percent, complete section 26. If your business use is less than 50 percent, complete section 27. Write a description of the vehicle in column A, the date you first began using the vehicle for business in column B and the percent you use the vehicle for business in column C.

6. Write your basis for depreciation on Form 4562, Part V, column D. Report the total basis for depreciation in column D and your business basis for depreciation in column E. Enter “5” in column F.

7. Decide if you wish to depreciate your vehicle using the 200-percent or 150-percent declining-balance depreciation method. The 200-percent declining-balance method gives you a greater deduction in the first few years of your cost recovery, while a 150-percent declining balance method gives you the greatest deduction in the middle years of your recovery period. If you choose the 200-percent method, write “200 DB/HY” in column G. If you choose the 150-percent method, write “150 DB/HY” in column G.

8. Look at the depreciation tables in the instruction booklet for Form 4562. Use Table A or Table B, depending on your percent declining-balance selection. Multiply your business basis for depreciation (column E) by the percentage in the table for your vehicle’s year of service. Record the result on Form 4562, column H -- and on the “depreciation” expense line of your business income-tax return.

References

• IRS.gov: A Brief Overview of Depreciation
• IRS.gov: Publication 463: Travel, Entertainment, Gift and Car Expense: Actual Car Expenses
• IRS.gov: Form 4562 (PDF)
• IRS.gov: Instructions for Form 4562 -- Lines 26 and 27