Depreciation Limits for Passenger Cars

While the expensing limit for general business property is $105,000 in 2005, the limit for cars is much lower: $2,960 is the maximum amount of depreciation of any type that can be written off if a passenger vehicle is first placed in service in 2005 ($3,260 for trucks and vans placed in service in 2005). This limit does periodically increase (or decrease) to reflect inflation.

The maximum amounts that may be deducted under the MACRS depreciation method (ACRS for cars placed in service before 1987) and under the Section 179 expensing election for the first year, are known as the "luxury car limitations," even though they apply to cars valued at a moderate cost. They are provided by the IRS in the form of a chart:

Note that the maximum annual amounts shown in the chart assume that the vehicle was used 100 percent for business. The amounts must be proportionately reduced if your business use of the vehicle was less than 100 percent.

Example In 2005, you purchased a new car. Sixty percent of the mileage you drove during the year was for business purposes. So, your maximum depreciation deduction for the first year would be $2,960 x .60 = $1,776.

This table represents the maximum depreciation you can claim. For the first year, if you used the car more than 50 percent for business, you may claim a proportionate part of the full amount, regardless of the actual cost of the car.

For later years, you must compute your depreciation on the car using the usual methods, but can't deduct more than the amount shown in the chart. As long as you continue to use the car more than 50 percent for business, you would multiply the business percentage of the car's cost by the percentage shown in the normal MACRS table for five-year property. The dollar amounts in the chart above, reduced proportionately for any non-business use of the car, acts as a ceiling on the amount of depreciation you can actually claim.

If you use the car 50 percent or less for business, you must use the straight-line ADS method for five-year property for that year, and for every subsequent year.

If you started out depreciating the car under MACRS, but then your business use dropped to 50 percent or less which required you to switch to the straight-line ADS method, you will have to "give back" some of the depreciation you claimed. Specifically, you'll have to report as income the amount (if any) by which the total MACRS depreciation you claimed is greater than the total straight-line depreciation you would have been entitled to claim.

Save Money If you use a van, truck, or sport-utility vehicle that weighs over 6,000 pounds in your business, it is not subject to the annual depreciation dollar caps or the annual lease income inclusion rules. In addition, the luxury car excise tax does not apply to these types of vehicles. Vehicle eligibility is based on a gross vehicle weight rating (GVWR), which is the maximum allowable weight of a fully loaded vehicle (i.e., weight of vehicle, including vehicle options, passengers, cargo, gas, oil, coolant, etc.). Generally, the GVWR is equal to the sum of the vehicle's curb weight and payload capacity. The GVWR of a particular vehicle is usually located on the vehicle's Safety Compliance Certification Label, usually attached to the left front door lock facing or the door latch post pillar. The American Jobs Creation Act of 2004, however, limits the cost of an SUV that may be expensed in the first year under the expensing election from $105,000 to $25,000, even if the SUV is exempt from the depreciation limitations. The reduced election amount applies to SUVs placed in service after October 22, 2004. The rules, otherwise, remain the same.

If you own a relatively low-priced car, you can expect to recover the entire basis of the business portion of the car over the six tax years for which the MACRS depreciation deductions are generally claimed.

However, when part of the normal MACRS deduction is disallowed because of the luxury car limitations, you'll recover only a portion of the car's basis during the normal recovery period. In that case, you may continue to depreciate the car for as long as it takes to recover the remaining basis of the business portion of the car.