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Publication 463
taxmap/pubs/p463-010.htm#en_us_publink100033912

Chapter 4
Transportation(p14)

This chapter discusses expenses you can deduct for business transportation when you are not traveling away from home as defined in chapter 1. These expenses include the cost of transportation by air, rail, bus, taxi, etc., and the cost of driving and maintaining your car.
Transportation expenses include the ordinary and necessary costs of all of the following. Transportation expenses do not include expenses you have while traveling away from home overnight. Those expenses are travel expenses discussed in chapter 1. However, if you use your car while traveling away from home overnight, use the rules in this chapter to figure your car expense deduction. See Car Expenses, later.
Daily transportation expenses you incur while traveling from home to one or more regular places of business are generally nondeductible commuting expenses. However, there may be exceptions to this general rule. You can deduct daily transportation expenses incurred going between your residence and a temporary work station outside the metropolitan area where you live. Also, daily transportation expenses can be deducted if: (1) If you have one or more regular work locations away from your residence or (2) your residence is your principal place of business and you incur expenses going between the residence and another work location in the same trade or business, regardless of whether the work is temporary or permanent and regardless of the distance.
taxmap/pubs/p463-010.htm#en_us_publink100033913

Illustration of transportation expenses.(p14)

rule
Figure B illustrates the rules that apply for deducting transportation expenses when you have a regular or main job away from your home. You may want to refer to it when deciding whether you can deduct your transportation expenses.
taxmap/pubs/p463-010.htm#en_us_publink100033914

Temporary work location.(p14)

rule
If you have one or more regular work locations away from your home and you commute to a temporary work location in the same trade or business, you can deduct the expenses of the daily round-trip transportation between your home and the temporary location, regardless of distance.
If your employment at a work location is realistically expected to last (and does in fact last) for 1 year or less, the employment is temporary unless there are facts and circumstances that would indicate otherwise.
If your employment at a work location is realistically expected to last for more than 1 year or if there is no realistic expectation that the employment will last for 1 year or less, the employment is not temporary, regardless of whether it actually lasts for more than 1 year.
If employment at a work location initially is realistically expected to last for 1 year or less, but at some later date the employment is realistically expected to last more than 1 year, that employment will be treated as temporary (unless there are facts and circumstances that would indicate otherwise) until your expectation changes. It will not be treated as temporary after the date you determine it will last more than 1 year.
If the temporary work location is beyond the general area of your regular place of work and you stay overnight, you are traveling away from home. You may have deductible travel expenses as discussed in chapter 1.
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No regular place of work.(p14)

rule
If you have no regular place of work but ordinarily work in the metropolitan area where you live, you can deduct daily transportation costs between home and a temporary work site outside that metropolitan area.
Generally, a metropolitan area includes the area within the city limits and the suburbs that are considered part of that metropolitan area.
You cannot deduct daily transportation costs between your home and temporary work sites within your metropolitan area. These are nondeductible commuting expenses.
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Two places of work.(p15)

rule
If you work at two places in one day, whether or not for the same employer, you can deduct the expense of getting from one workplace to the other. However, if for some personal reason you do not go directly from one location to the other, you cannot deduct more than the amount it would have cost you to go directly from the first location to the second.
Transportation expenses you have in going between home and a part-time job on a day off from your main job are commuting expenses. You cannot deduct them.
taxmap/pubs/p463-010.htm#en_us_publink100033917

Armed Forces reservists.(p15)

rule
A meeting of an Armed Forces reserve unit is a second place of business if the meeting is held on a day on which you work at your regular job. You can deduct the expense of getting from one workplace to the other as just discussed under Two places of work.
You usually cannot deduct the expense if the reserve meeting is held on a day on which you do not work at your regular job. In this case, your transportation generally is a nondeductible commuting expense. However, you can deduct your transportation expenses if the location of the meeting is temporary and you have one or more regular places of work.
If you ordinarily work in a particular metropolitan area but not at any specific location and the reserve meeting is held at a temporary location outside that metropolitan area, you can deduct your transportation expenses.
If you travel away from home overnight to attend a guard or reserve meeting, you can deduct your travel expenses. These expenses are discussed in chapter 1.
If you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you may be able to deduct some of your reserve-related travel costs as an adjustment to gross income rather than as an itemized deduction. For more information, see Armed Forces Reservists Traveling More Than 100 Miles From Home under Special Rules, in chapter 6.
taxmap/pubs/p463-010.htm#en_us_publink100033918

Commuting expenses.(p15)

rule
You cannot deduct the costs of taking a bus, trolley, subway, or taxi, or of driving a car between your home and your main or regular place of work. These costs are personal commuting expenses. You cannot deduct commuting expenses no matter how far your home is from your regular place of work. You cannot deduct commuting expenses even if you work during the commuting trip.
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Example.(p15)

You sometimes use your cell phone to make business calls while commuting to and from work. Sometimes business associates ride with you to and from work, and you have a business discussion in the car. These activities do not change the trip from personal to business. You cannot deduct your commuting expenses.
taxmap/pubs/p463-010.htm#en_us_publink100033920
Parking fees.(p15)
Fees you pay to park your car at your place of business are nondeductible commuting expenses. You can, however, deduct business-related parking fees when visiting a customer or client.
taxmap/pubs/p463-010.htm#en_us_publink100033921
Advertising display on car.(p15)
Putting display material that advertises your business on your car does not change the use of your car from personal use to business use. If you use this car for commuting or other personal uses, you still cannot deduct your expenses for those uses.
taxmap/pubs/p463-010.htm#en_us_publink100033922
Car pools.(p15)
You cannot deduct the cost of using your car in a nonprofit car pool. Do not include payments you receive from the passengers in your income. These payments are considered reimbursements of your expenses. However, if you operate a car pool for a profit, you must include payments from passengers in your income. You can then deduct your car expenses (using the rules in this publication).
taxmap/pubs/p463-010.htm#en_us_publink100033923
Hauling tools or instruments.(p15)
Hauling tools or instruments in your car while commuting to and from work does not make your car expenses deductible. However, you can deduct any additional costs you have for hauling tools or instruments (such as for renting a trailer you tow with your car).
taxmap/pubs/p463-010.htm#en_us_publink100033924
Union members' trips from a union hall.(p15)
If you get your work assignments at a union hall and then go to your place of work, the costs of getting from the union hall to your place of work are nondeductible commuting expenses. Although you need the union to get your work assignments, you are employed where you work, not where the union hall is located.
taxmap/pubs/p463-010.htm#en_us_publink100033925

Office in the home.(p15)

rule
If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. (See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business.)
taxmap/pubs/p463-010.htm#en_us_publink100033926

Examples of deductible transportation.(p15)

rule
The following examples show when you can deduct transportation expenses based on the location of your work and your home.
taxmap/pubs/p463-010.htm#en_us_publink100033927

Example 1.(p15)

You regularly work in an office in the city where you live. Your employer sends you to a 1-week training session at a different office in the same city. You travel directly from your home to the training location and return each day. You can deduct the cost of your daily round-trip transportation between your home and the training location.
taxmap/pubs/p463-010.htm#en_us_publink100033928

Example 2.(p15)

Your principal place of business is in your home. You can deduct the cost of round-trip transportation between your qualifying home office and your client's or customer's place of business.
taxmap/pubs/p463-010.htm#en_us_publink100033929

Example 3.(p15)

You have no regular office, and you do not have an office in your home. In this case, the location of your first business contact inside the metropolitan area is considered your office. Transportation expenses between your home and this first contact are nondeductible commuting expenses. Transportation expenses between your last business contact and your home are also nondeductible commuting expenses. While you cannot deduct the costs of these trips, you can deduct the costs of going from one client or customer to another.
taxmap/pubs/p463-010.htm#en_us_publink100033930

Car Expenses(p15)

rule
If you use your car for business purposes, you ordinarily can deduct car expenses. You generally can use one of the two following methods to figure your deductible expenses.
If you use actual expenses to figure your deduction for a car you lease, there are rules that affect the amount of your lease payments you can deduct. See Leasing a Car, later.
In this publication, "car" includes a van, pickup, or panel truck. For the definition of "car" for depreciation purposes, see Car defined under Actual Car Expenses, later.
Deposit
You may be entitled to a tax credit for an alternative motor vehicle you place in service during the year. The vehicle must meet certain requirements, and you do not have to use it in your business to qualify for the credit. However, you must reduce your basis for depreciation of the alternative motor vehicle by the amount of the credit you claim. See Depreciation Deduction, later, under Actual Car Expenses.
For more information on alternative motor vehicles, see Form 8910, Alternative Motor Vehicle Credit.
taxmap/pubs/p463-010.htm#en_us_publink100033933

Rural mail carriers.(p15)

rule
If you are a rural mail carrier, you may be able to treat the qualified reimbursement you received as your allowable expense. Because the qualified reimbursement is treated as paid under an accountable plan, your employer should not include the reimbursement in your income.
If your vehicle expenses are more than the amount of your reimbursement, you can deduct the unreimbursed expenses as an itemized deduction on Schedule A (Form 1040). You must complete Form 2106 and attach it to your Form 1040, U.S. Individual Income Tax Return.
A "qualified reimbursement" is the reimbursement you receive that meets both of the following conditions. See your employer for information on your reimbursement.
EIC
If you are a rural mail carrier and received a qualified reimbursement, you cannot use the standard mileage rate.
taxmap/pubs/p463-010.htm#en_us_publink100033935

Standard Mileage Rate(p15)

rule
You may be able to use the standard mileage rate to figure the deductible costs of operating your car for business purposes. For 2011, the standard mileage rate for the cost of operating your car for business use is 51 cents per mile before July 1, 2011. After June 30, 2011, the business mileage rate increases to 551/2 cents per mile.
EIC
If you use the standard mileage rate for a year, you cannot deduct your actual car expenses for that year. You cannot deduct depreciation, lease payments, maintenance and repairs, gasoline (including gasoline taxes), oil, insurance, or vehicle registration fees. See Choosing the standard mileage rate and Standard mileage rate not allowed, later.
You generally can use the standard mileage rate whether or not you are reimbursed and whether or not any reimbursement is more or less than the amount figured using the standard mileage rate. See chapter 6 for more information on reimbursements.
taxmap/pubs/p463-010.htm#en_us_publink100033937

Choosing the standard mileage rate.(p16)

rule
If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then in later years, you can choose to use either the standard mileage rate or actual expenses.
If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period. For leases that began on or before December 31, 1997, the standard mileage rate must be used for the entire portion of the lease period (including renewals) that is after 1997.
You must make the choice to use the standard mileage rate by the due date (including extensions) of your return. You cannot revoke the choice. However, in later years, you can switch from the standard mileage rate to the actual expenses method. If you change to the actual expenses method in a later year, but before your car is fully depreciated, you have to estimate the remaining useful life of the car and use straight line depreciation.
taxmap/pubs/p463-010.htm#en_us_publink1000250305

Example.(p16)

Larry is an employee who occasionally uses his own car for business purposes. He purchased the car in 2009, but he did not claim any unreimbursed employee expenses on his 2009 tax return. Because Larry did not use the standard mileage rate the first year the car was available for business use, he cannot use the standard mileage rate in 2011 to claim unreimbursed employee business expenses.
For more information about depreciation included in the standard mileage rate, see Exception under Methods of depreciation under Depreciation Deduction, later.
taxmap/pubs/p463-010.htm#en_us_publink100033938

Standard mileage rate not allowed.(p16)

rule
You cannot use the standard mileage rate if you:
Note.Beginning in 2011, you can elect to use the standard mileage rate if you used a car for hire (such as a taxi). However, if you use five or more cars at the same time (as in fleet operations) then you cannot elect to use the standard mileage rate.
taxmap/pubs/p463-010.htm#en_us_publink100033939
Five or more cars.(p16)
If you own or lease five or more cars that are used for business at the same time, you cannot use the standard mileage rate for the business use of any car. However, you may be able to deduct your actual expenses for operating each of the cars in your business. See Actual Car Expenses, later, for information on how to figure your deduction.
You are not using five or more cars for business at the same time if you alternate using (use at different times) the cars for business.
The following examples illustrate the rules for when you can and cannot use the standard mileage rate for five or more cars.
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Example 1.(p16)

Marcia, a salesperson, owns three cars and two vans that she alternates using for calling on her customers. She can use the standard mileage rate for the business mileage of the three cars and the two vans because she does not use them at the same time.
taxmap/pubs/p463-010.htm#en_us_publink100033941

Example 2.(p16)

Tony and his employees use his four pickup trucks in his landscaping business. During the year, he traded in two of his old trucks for two newer ones. Tony can use the standard mileage rate for the business mileage of all six of the trucks he owned during the year.
taxmap/pubs/p463-010.htm#en_us_publink100033942

Example 3.(p16)

Chris owns a repair shop and an insurance business. He and his employees use his two pickup trucks and van for the repair shop. Chris alternates using his two cars for the insurance business. No one else uses the cars for business purposes. Chris can use the standard mileage rate for the business use of the pickup trucks, van, and the cars because he never has more than four vehicles used for business at the same time.
taxmap/pubs/p463-010.htm#en_us_publink100033943

Example 4.(p16)

Maureen owns a car and four vans that are used in her housecleaning business. Her employees use the vans, and she uses the car to travel to various customers. Maureen cannot use the standard mileage rate for the car or the vans. This is because all five vehicles are used in Maureen's business at the same time. She must use actual expenses for all vehicles.
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Interest.(p16)

rule
If you are an employee, you cannot deduct any interest paid on a car loan. This applies even if you use the car 100% for business as an employee.
However, if you are self-employed and use your car in your business, you can deduct that part of the interest expense that represents your business use of the car. For example, if you use your car 60% for business, you can deduct 60% of the interest on Schedule C (Form 1040). You cannot deduct the part of the interest expense that represents your personal use of the car.
Deposit
If you use a home equity loan to purchase your car, you may be able to deduct the interest. See Publication 936, Home Mortgage Interest Deduction, for more information.
taxmap/pubs/p463-010.htm#en_us_publink100033946

Personal property taxes.(p16)

rule
If you itemize your deductions on Schedule A (Form 1040), you can deduct on line 7 state and local personal property taxes on motor vehicles. You can take this deduction even if you use the standard mileage rate or if you do not use the car for business.
If you are self-employed and use your car in your business, you can deduct the business part of state and local personal property taxes on motor vehicles on Schedule C, Schedule C-EZ, or Schedule F (Form 1040). If you itemize your deductions, you can include the remainder of your state and local personal property taxes on the car on Schedule A (Form 1040).
taxmap/pubs/p463-010.htm#en_us_publink100033947

Parking fees and tolls.(p16)

rule
In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses.)
taxmap/pubs/p463-010.htm#en_us_publink100033948

Sale, trade-in, or other disposition.(p16)

rule
If you sell, trade in, or otherwise dispose of your car, you may have a gain or loss on the transaction or an adjustment to the basis of your new car. See Disposition of a Car, later.
taxmap/pubs/p463-010.htm#en_us_publink100033949

Actual Car Expenses(p16)

rule
If you do not use the standard mileage rate, you may be able to deduct your actual car expenses.
Deposit
If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction.
Actual car expenses include:
Depreciation
Licenses
Lease
 payments
Registration
 fees
GasInsuranceRepairs
OilGarage rentTires
TollsParking fees 
If you have fully depreciated a car that you still use in your business, you can continue to claim your other actual car expenses. Continue to keep records, as explained later in chapter 5.
taxmap/pubs/p463-010.htm#en_us_publink100033951

Business and personal use.(p16)

rule
If you use your car for both business and personal purposes, you must divide your expenses between business and personal use. You can divide your expense based on the miles driven for each purpose.
taxmap/pubs/p463-010.htm#en_us_publink100033952

Example.(p16)

You are a sales representative for a clothing firm and drive your car 20,000 miles during the year: 12,000 miles for business and 8,000 miles for personal use. You can claim only 60% (12,000 ÷ 20,000) of the cost of operating your car as a business expense.
taxmap/pubs/p463-010.htm#en_us_publink100033953

Employer-provided vehicle.(p16)

rule
If you use a vehicle provided by your employer for business purposes, you can deduct your actual unreimbursed car expenses. You cannot use the standard mileage rate. See Vehicle Provided by Your Employer in chapter 6.
taxmap/pubs/p463-010.htm#en_us_publink100033954

Interest on car loans.(p16)

rule
If you are an employee, you cannot deduct any interest paid on a car loan. This interest is treated as personal interest and is not deductible. If you are self-employed and use your car in that business, see Interest, earlier, under Standard Mileage Rate.
taxmap/pubs/p463-010.htm#en_us_publink100033955

Taxes paid on your car.(p16)

rule
If you are an employee, you can deduct personal property taxes paid on your car if you itemize deductions. Enter the amount paid on line 7 of Schedule A (Form 1040).
taxmap/pubs/p463-010.htm#en_us_publink100033956
Sales taxes.(p17)
Generally, sales taxes on your car are part of your car's basis and are recovered through depreciation, discussed later.
taxmap/pubs/p463-010.htm#en_us_publink100033957

Fines and collateral.(p17)

rule
You cannot deduct fines you pay or collateral you forfeit for traffic violations.
taxmap/pubs/p463-010.htm#en_us_publink100033958

Casualty and theft losses.(p17)

rule
If your car is damaged, destroyed, or stolen, you may be able to deduct part of the loss not covered by insurance. See Publication 547, Casualties, Disasters, and Thefts, for information on deducting a loss on your car.
taxmap/pubs/p463-010.htm#en_us_publink100033959

Depreciation and section 179 deductions.(p17)

rule
Generally, the cost of a car, plus sales tax and improvements, is a capital expense. Because the benefits last longer than 1 year, you generally cannot deduct a capital expense. However, you can recover this cost through the section 179 deduction (the deduction allowed by section 179 of the Internal Revenue Code), special depreciation allowance, and depreciation deductions. Depreciation allows you to recover the cost over more than 1 year by deducting part of it each year. The section 179 deduction, special depreciation allowance, and depreciation deductions are discussed later.
Generally, there are limits on these deductions. Special rules apply if you use your car 50% or less in your work or business.
You can claim a section 179 deduction and use a depreciation method other than straight line only if you do not use the standard mileage rate to figure your business-related car expenses in the year you first place a car in service.
If you claim either a section 179 deduction or use a depreciation method other than straight line in the year you first place a car in service, you cannot use the standard mileage rate on that car in any future year.
taxmap/pubs/p463-010.htm#en_us_publink100033960

Car defined.(p17)

rule
For depreciation purposes, a car is any four-wheeled vehicle (including a truck or van) made primarily for use on public streets, roads, and highways. Its unloaded gross vehicle weight must not be more than 6,000 pounds. A car includes any part, component, or other item physically attached to it or usually included in the purchase price.
A car does not include:
taxmap/pubs/p463-010.htm#en_us_publink100033961
Qualified nonpersonal use vehicles.(p17)
These are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. They include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by installation of permanent shelving and painting the vehicle to display advertising or the company's name. Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat, are qualified nonpersonal use vehicles.
taxmap/pubs/p463-010.htm#en_us_publink100033962
More information.(p17)
See Depreciation Deduction, later, for more information on how to depreciate your vehicle.
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Section 179 Deduction(p17)

rule
The section 179 deduction allows you to treat a portion or all of the business cost of a car as a current expense instead of taking depreciation deductions over a number of years.
Deposit
There is a limit on the total section 179 deduction, special depreciation allowance, and depreciation deduction for cars, trucks, and vans that may reduce or eliminate any benefit from claiming the section 179 deduction. See Depreciation Limits, later.
You can claim the section 179 deduction only in the year you place the car in service. For this purpose, a car is placed in service when it is ready and available for a specific use, whether in a trade or business, a tax-exempt activity, a personal activity, or for the production of income. Even if you are not using the property, it is in service when it is ready and available for its specific use.
A car first used for personal purposes cannot qualify for the deduction in a later year when its use changes to business.
taxmap/pubs/p463-010.htm#en_us_publink100033965

Example.(p17)

In 2010 you bought a new car and used it for personal purposes. In 2011, you began to use it for business. Changing its use to business use does not qualify the cost of your car for a section 179 deduction in 2011. However, you can claim a depreciation deduction for the business use of the car starting in 2011. See Depreciation Deduction, later.
taxmap/pubs/p463-010.htm#en_us_publink100033966

More than 50% business use requirement.(p17)

rule
You must use the property more than 50% for business to claim any section 179 deduction. If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. The result is the cost of the property that can qualify for the section 179 deduction.
taxmap/pubs/p463-010.htm#en_us_publink100033967

Example.(p17)

Peter purchased a car in April 2011 for $19,500 and used it 60% for business. The total cost of Peter's car that qualifies for the section 179 deduction is $11,700 ($19,500 cost × 60% business use). But see Limit on total section 179, special depreciation allowance, and depreciation deduction, discussed later.
taxmap/pubs/p463-010.htm#en_us_publink100033968

Limits.(p17)

rule
There are limits on:
taxmap/pubs/p463-010.htm#en_us_publink100033969
Limit on the amount of the section 179 deduction.(p17)
For 2011, the total amount you can choose to deduct under section 179 generally cannot be more than $500,000.
If the cost of your qualifying section 179 property placed in service in 2011 is over $2,000,000, you must reduce the $500,000 dollar limit (but not below zero) by the amount of cost over $2,000,000. If the cost of your section 179 property placed in service during 2011 is $2,500,000 or more, you cannot take a section 179 deduction.
The total amount you can deduct under section 179 each year after you apply the limits listed above cannot be more than the taxable income from the active conduct of any trade or business during the year.
If you are married and file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service.
If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit. You must allocate the dollar limit (after any reduction) between you.
For more information on the above section 179 deduction limits, see Publication 946.
taxmap/pubs/p463-010.htm#en_us_publink100033970
Limit for sport utility and certain other vehicles.(p17)
For sport utility and certain other vehicles placed in service in 2011, the portion of the vehicle's cost taken into account in figuring your section 179 deduction is limited to $25,000. This rule applies to any four-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is not subject to any of the passenger automobile limits explained under Depreciation Limits, later, and that is rated at no more than 14,000 pounds gross vehicle weight. However, the $25,000 limit does not apply to any vehicle:
taxmap/pubs/p463-010.htm#en_us_publink100033971
Limit on total section 179, special depreciation allowance, and depreciation deduction.(p17)
Generally, the total amount of section 179, special depreciation allowance, and depreciation deduction you can claim for a qualified car you placed in service in 2011 is $11,060. The limit is reduced if your business use of the car is less than 100%. See Depreciation Limits, later, for more information.
taxmap/pubs/p463-010.htm#en_us_publink100033972

Example.(p17)

In the earlier example under More than 50% business use requirement, Peter had a car with a qualifying cost (for purposes of the section 179 deduction) of $11,700. However, Peter's total section 179, special depreciation allowance, and depreciation deduction is limited to $6,636 ($11,060 limit x 60% business use).
taxmap/pubs/p463-010.htm#en_us_publink100033973

Cost of car.(p18)

rule
For purposes of the section 179 deduction, the cost of the car does not include any amount figured by reference to any other property held by you at any time. For example, if you buy (for cash and a trade-in) a new car to use in your business, your cost for purposes of the section 179 deduction does not include your adjusted basis in the car you trade in for the new car. Your cost includes only the cash you paid.
taxmap/pubs/p463-010.htm#en_us_publink100033974
Basis of car for depreciation.(p18)
The amount of the section 179 deduction reduces your basis in your car. If you choose the section 179 deduction, you must subtract the amount of the deduction from the cost of your car. The resulting amount is the basis in your car you use to figure your depreciation deduction.
taxmap/pubs/p463-010.htm#en_us_publink100033975

When to choose.(p18)

rule
If you want to take the section 179 deduction, you must make the choice in the tax year you both purchase the car and place it in service for business or work.
taxmap/pubs/p463-010.htm#en_us_publink100033976

How to choose.(p18)

rule
Employees use Form 2106 to make this choice and report the section 179 deduction. All others use Form 4562.
File the appropriate form with either of the following.
EIC
You must keep records that show the specific identification of each piece of qualifying section 179 property. These records must show how you acquired the property, the person you acquired it from, and when you placed it in service.
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Revoking an election.(p18)
An election (or any specification made in the election) to take a section 179 deduction for 2011 can only be revoked with the Commissioner's approval.
taxmap/pubs/p463-010.htm#en_us_publink100033979

Recapture of section 179 deduction.(p18)

rule
To be eligible to claim the section 179 deduction, you must use your car more than 50% for business or work in the year you acquired it. If your business use of the car is 50% or less in a later tax year during the recovery period, you have to recapture (include in income) in that later year any excess depreciation. Any section 179 deduction claimed on the car is included in calculating the excess depreciation. For information on this calculation, see Excess depreciation, later in this chapter under Car Used 50% or Less for Business.
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Dispositions.(p18)

rule
If you dispose of a car on which you had claimed the section 179 deduction, the amount of that deduction is treated as a depreciation deduction for recapture purposes. You treat any gain on the disposition of the property as ordinary income up to the amount of the section 179 deduction and any allowable depreciation (unless you establish the amount actually allowed). For information on the disposition of a car, see Disposition of a Car, later.
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Special Depreciation Allowance(p18)

rule
You may be able to claim the special depreciation allowance for your car, truck, or van, if it is qualified property and was placed in service in 2011. For vehicles purchased before September 9, 2010, the allowance is an additional depreciation deduction of 50% of the car's depreciable basis (after any section 179 deduction, but before figuring your regular depreciation deduction under MACRS). If you purchased the vehicle after September 8, 2010, and placed it in service before January 1, 2012, the additional depreciation allowance increases to 100% of depreciable basis. The special depreciation allowance applies only for the first year the car is placed in service. To qualify for the allowance more than 50% of the use of the car must be in a qualified business use (as defined under Depreciation Deduction, later).
Generally, if you claim the 100% additional depreciation allowance, no depreciation deduction is allowed after the year your passenger automobile is placed in service and before the end of the recovery period. However, a safe harbor exception, explained later, allows part or all of this entire amount to be deducted in years following the placed-in-service year during the recovery period.
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Figuring the special depreciation allowance.(p18)

rule
To determine the special depreciation allowance, you must calculate your 100% additional first-year depreciation deduction on your qualified car, truck, or van using your unadjusted basis. This depreciation deduction is limited by the maximum allowable depreciation deduction. For 2011, the maximum allowable first-year depreciation deduction for cars is $11,060 and for trucks and vans is $11,260. Any excess amount beyond the maximum depreciation deduction is considered your unrecovered basis and is treated as a deductible expense in the first tax year after the end of the recovery period. The excess amount is subject to the maximum depreciation limit for that period.
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Example 1.(p19)

Maria Jones, a calendar-year taxpayer, placed a new car in service in December 2011 with an unadjusted basis of $20,000. The car is eligible for the 100% additional first-year depreciation deduction. The 100% additional first-year depreciation deduction is limited to the maximum depreciation limit of $11,060. However, the excess amount of $8,940 ($20,000 – $11,060) is treated as unrecovered basis. Maria can deduct this $8,940 amount beginning in 2017. The $8,940 amount will be subject to the maximum depreciation limit for 2017.
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Safe harbor exception.(p19)
The safe harbor method of accounting allows you to recover the leftover basis in your passenger automobile without having to wait until the end of the recovery period. You elect this method of accounting on your federal tax return for the first tax year after the placed-in service year of the passenger automobile. Under this safe harbor, you would be deemed to have elected the 50% additional depreciation allowance rather than the 100% depreciation allowance. The following steps describe how to use the safe harbor method.
  1. In the tax year you placed the automobile in service, determine your 100% additional first-year depreciation deduction on your qualified car, truck, or van using your unadjusted basis, as discussed earlier under Figuring the special depreciation allowance.
  2. In the following tax year, you would determine your unrecovered basis, if any, by recalculating the special depreciation allowance for the year you placed the automobile in service using the 50% additional depreciation allowance instead of the 100% depreciation allowance described in (1).
  3. If there is unrecovered basis, it is excluded from adjusted depreciable basis but will be used to determine the depreciation deduction for tax years after the placed-in-service year. See Example 2.
  4. If there is no unrecovered basis, you will determine the depreciation deduction for the subsequent years by multiplying your adjusted depreciable basis by the applicable depreciation rate for each tax year. See Example 3.
Use the Unrecovered Basis for Safe Harbor Exception Worksheet earlier to determine whether you have an unrecovered basis for purposes of the safe harbor exception.
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Pencil

Unrecovered Basis for Safe Harbor Exception Worksheet

Note:Use the information from the Form 2106 and its instructions for the tax year you placed the vehicle in service, and claimed the 100% additional first-year special depreciation deduction
1.Enter the total amount from line 30 of your Form 2106
2.Multiply line 1 by the percentage on Form 2106, line 14, and enter the result
3.Enter any section 179 deduction claimed
4.Subtract line 3 from line 2
5.Multiply line 4 by 50% (.50)
6.Subtract line 5 from line 4
7.Multiply line 6 by the applicable depreciation rate
8.Add lines 5 and 7
9.Multiply the applicable limit explained in the Form 2106, line 36, instructions by the percentage on Form 2106, line 14, and enter the result
10.Subtract line 3 from line 9
11.Subtract line 10 from line 8. If negative, enter -0-. This is your unrecovered basis
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Example 2.(p19)

In September 2010, Jason Smith, a calendar-year taxpayer, purchased a new car and placed it in service for use in his business. The cost basis of the car was $20,000. The car is 5-year property under section 168(e), and is eligible for the 100% additional first-year depreciation deduction. Jason does not claim any section 179 deduction for the passenger automobile. For 2010, Jason deducts $11,060 for the 100% additional first-year depreciation for this property, which is the depreciation deduction limitation for 2010, and adopts the safe harbor method of accounting described above to recover the leftover basis.
Under the safe harbor method of accounting, Jason is assumed to have claimed the 50% additional first-year depreciation deduction for purposes of determining the unrecovered basis of the car. As a result, the total depreciation allowable for the car in 2010 is deemed to be $12,000 [($20,000, the unadjusted depreciable basis × 50%, the deemed additional special depreciation allowance) + ($10,000, the remaining adjusted depreciable basis × 20%, the percentage from the 2010 optional depreciation tables using the 200% declining balance method)]. However, because his depreciation deduction is limited to $11,060, the unrecovered basis for the car for 2010 is $940 ($12,000 − $11,060). The $940 is recovered by Jason beginning in the 2016 tax year, subject to the 2016 limits.
For 2011, the total depreciation deduction allowable for the car is $3,200 ($10,000, the remaining adjusted depreciable basis × 32%, the percentage from the 2011 optional depreciation tables using the 200% declining balance method). Because this amount is less than the depreciation limit of $4,900 for 2011, Jason deducts $3,200 as depreciation on his federal income tax return for the 2011 tax year.
taxmap/pubs/p463-010.htm#en_us_publink1000262974

Example 3.(p19)

The facts are the same as above, except the cost of the passenger automobile is $18,400. For 2010, Jason deducts $11,060 for the 100% additional first-year depreciation for this property, which is the depreciation limitation for 2010. Under the safe harbor method of accounting, Jason is deemed to have claimed the 50% additional first-year depreciation deduction for purposes of determining the unrecovered basis and the remaining adjusted depreciable basis of the passenger automobile. As a result, for 2010, the total depreciation allowable for the passenger automobile is deemed to be $11,040 [($18,400, the unadjusted depreciable basis × 50%, the deemed additional special depreciation allowance) + ($9,200, the remaining adjusted depreciable basis × 20%)]. As a result, there is no unrecovered basis for the car for 2010 because the 2010 allowable deemed depreciation of $11,040 is less than the 2010 depreciation deduction of $11,060.
Jason must not use the optional depreciation tables for computing the depreciation deductions for the car for the tax years after the placed-in-service year. Assuming the applicable depreciation method and convention for the car is the 200% declining balance method and the half-year convention, respectively, the total depreciation allowable for the passenger automobile for 2011 is $2,936 [40% × $7,340, the adjusted depreciable basis ($18,400, unadjusted depreciable basis − $11,060, total depreciation allowable for prior tax year)]. Because this amount is less than the depreciation limit of $4,900 for 2011, Jason deducts $2,936 as depreciation on his federal income tax return for the 2011 tax year.
For more information about the 100% additional depreciation allowance and the safe harbor, see Rev. Proc. 2011-26, 2011-16 I.R.B. 664, available at www.irs.gov/irb/2011-16_IRB/ar10.html.
Note.Your combined section 179 deduction, special depreciation allowance, and regular MACRS depreciation deduction is limited to the maximum allowable depreciation deduction for cars of $11,060 ($3,060 if you elect not to claim the special depreciation allowance). For trucks and vans, the first-year limit has increased to $11,260 ($3,260 if you elect not to claim the special depreciation allowance). See Depreciation Limits, later in this chapter.
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Qualified car.(p19)

rule
To be a qualified car (including trucks and vans), the car must meet all of the following tests.
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Election not to claim the special depreciation allowance.(p19)

rule
You can elect not to claim the special depreciation allowance for your car, truck, or van, that is qualified property. If you make this election, it applies to all 5-year property placed in service during the year.
To make the election, attach a statement to your timely filed return (including extensions) indicating the class of property (5-year for cars) for which you are making the election and that you are electing not to claim the special depreciation allowance for qualified property acquired after December 31, 2008.
EIC
Unless you elect not to claim the special depreciation allowance, you must reduce the car's adjusted basis by the amount of the allowance, even if the allowance was not claimed.
taxmap/pubs/p463-010.htm#en_us_publink100033986

Depreciation Deduction(p19)

rule
If you use actual car expenses to figure your deduction for a car you own and use in your business, you can claim a depreciation deduction. This means you can deduct a certain amount each year as a recovery of your cost or other basis in your car.
You generally need to know the following things about the car you intend to depreciate.
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Basis.(p19)

rule
Your basis in a car for figuring depreciation is generally its cost. This includes any amount you borrow or pay in cash, other property, or services.
Generally, you figure depreciation on your car, truck, or van using your unadjusted basis (see Unadjusted basis, later). However, in some situations you will use your adjusted basis (your basis reduced by depreciation allowed or allowable in earlier years). For one of these situations see Exception under Methods of depreciation, later.
If you change the use of a car from personal to business, your basis for depreciation is the lesser of the fair market value or your adjusted basis in the car on the date of conversion. Additional rules concerning basis are discussed later in this chapter under Unadjusted basis.
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Placed in service.(p20)

rule
You generally place a car in service when it is available for use in your work or business, in an income-producing activity, or in a personal activity. Depreciation begins when the car is placed in service for use in your work or business or for the production of income.
For purposes of computing depreciation, if you first start using the car only for personal use and later convert it to business use, you place the car in service on the date of conversion.
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Car placed in service and disposed of in the same year.(p20)
If you place a car in service and dispose of it in the same tax year, you cannot claim any depreciation deduction for that car.
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Methods of depreciation.(p20)

rule
Generally, you figure depreciation on cars using the Modified Accelerated Cost Recovery System (MACRS). MACRS is discussed later in this chapter.
taxmap/pubs/p463-010.htm#en_us_publink100033991
Exception.(p20)
If you used the standard mileage rate in the first year of business use and change to the actual expenses method in a later year, you cannot depreciate your car under the MACRS rules. You must use straight line depreciation over the estimated remaining useful life of the car.
To figure depreciation under the straight line method, you must reduce your basis in the car (but not below zero) by a set rate per mile for all miles for which you used the standard mileage rate. The rate per mile varies depending on the year(s) you used the standard mileage rate. For the rate(s) to use, see Depreciation adjustment when you used the standard mileage rate under Disposition of a Car, later.
This reduction of basis is in addition to those basis adjustments described later under Unadjusted basis. You must use your adjusted basis in your car to figure your depreciation deduction. For additional information on the straight line method of depreciation, see Publication 946.
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More-than-50%-use test.(p20)

rule
Generally, you must use your car more than 50% for qualified business use (defined next) during the year to use MACRS. You must meet this more-than-50%-use test each year of the recovery period (6 years under MACRS) for your car.
If your business use is 50% or less, you must use the straight line method to depreciate your car. This is explained later under Car Used 50% or Less for Business.
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Qualified business use.(p20)

rule
A qualified business use is any use in your trade or business. It does not include use for the production of income (investment use). However, you do combine your business and investment use to compute your depreciation deduction for the tax year.
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Use of your car by another person.(p20)
Do not treat any use of your car by another person as use in your trade or business unless that use meets one of the following conditions.
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Business use changes.(p20)

rule
If you used your car more than 50% in qualified business use in the year you placed it in service, but 50% or less in a later year (including the year of disposition), you have to change to the straight line method of depreciation. See Qualified business use 50% or less in a later year under Car Used 50% or Less for Business, later.
Deposit
Property does not cease to be used more than 50% in qualified business use by reason of a transfer at death.
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Use for more than one purpose.(p20)

rule
If you use your car for more than one purpose during the tax year, you must allocate the use to the various purposes. You do this on the basis of mileage. Figure the percentage of qualified business use by dividing the number of miles you drive your car for business purposes during the year by the total number of miles you drive the car during the year for any purpose.
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Change from personal to business use.(p20)

rule
If you change the use of a car from 100% personal use to business use during the tax year, you may not have mileage records for the time before the change to business use. In this case, you figure the percentage of business use for the year as follows.
  1. Determine the percentage of business use for the period following the change. Do this by dividing business miles by total miles driven during that period.
  2. Multiply the percentage in (1) by a fraction. The numerator (top number) is the number of months the car is used for business and the denominator (bottom number) is 12.
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Example.(p20)

You use a car only for personal purposes during the first 6 months of the year. During the last 6 months of the year, you drive the car a total of 15,000 miles of which 12,000 miles are for business. This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Your business use for the year is 40% (80% × 6/12).
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Limits.(p20)

rule
The amount you can claim for section 179, special depreciation allowance, and depreciation deductions may be limited. The maximum amount you can claim depends on the year in which you placed your car in service. You have to reduce the maximum amount if you did not use the car exclusively for business. See Depreciation Limits, later.
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Unadjusted basis.(p20)

rule
You use your unadjusted basis (often referred to as your basis or your basis for depreciation) to figure your depreciation using the MACRS depreciation chart, explained later under Modified Accelerated Cost Recovery System (MACRS). Your unadjusted basis for figuring depreciation is your original basis increased or decreased by certain amounts.
To figure your unadjusted basis, begin with your car's original basis, which generally is its cost. Cost includes sales taxes (see Sales taxes earlier), destination charges, and dealer preparation. Increase your basis by any substantial improvements you make to your car, such as adding air conditioning or a new engine. Decrease your basis by any section 179 deduction, special depreciation allowance, gas guzzler tax, clean-fuel vehicle deduction (for vehicles placed in service before Jan. 1, 2006), and alternative motor vehicle credit.
See Form 8910 for information on the alternative motor vehicle credit.
EIC
If your business use later falls to 50% or less, you may have to recapture (include in your income) any excess depreciation. See Car Used 50% or Less for Business, later, for more information.
If you acquired the car by gift or inheritance, see Publication 551, Basis of Assets, for information on your basis in the car.
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Improvements.(p20)
A major improvement to a car is treated as a new item of 5-year recovery property. It is treated as placed in service in the year the improvement is made. It does not matter how old the car is when the improvement is added. Follow the same steps for depreciating the improvement as you would for depreciating the original cost of the car. However, you must treat the improvement and the car as a whole when applying the limits on the depreciation deductions. Your car's depreciation deduction for the year (plus any section 179 deduction, special depreciation allowance, and depreciation on any improvements) cannot be more than the depreciation limit that applies for that year. See Depreciation Limits, later.
taxmap/pubs/p463-010.htm#en_us_publink100034004

Car trade-in.(p20)

rule
If you traded in one car (the "old car") for another car (the "new car") in 2011, there are two ways you can treat the transaction.
  1. You can elect to treat the transaction as a tax-free disposition of the old car and the purchase of the new car. If you make this election, you treat the old car as disposed of at the time of the trade-in. The depreciable basis of the new car is the adjusted basis of the old car (figured as if 100% of the car's use had been for business purposes) plus any additional amount you paid for the new car. You then figure your depreciation deduction for the new car beginning with the date you placed it in service. You make this election by completing Form 2106, Part II, Section D. This method is explained later, beginning at Effect of trade-in on basis.
  2. If you do not make the election described in (1), you must figure depreciation separately for the remaining basis of the old car and for any additional amount you paid for the new car. You must apply two depreciation limits (see Depreciation Limits, later). The limit that applies to the remaining basis of the old car generally is the amount that would have been allowed had you not traded in the old car. The limit that applies to the additional amount you paid for the new car generally is the limit that applies for the tax year, reduced by the depreciation allowance for the remaining basis of the old car. You must use Form 4562 to compute your depreciation deduction. You cannot use Form 2106, Part II, Section D. This method is explained in Publication 946.
If you elect to use the method described in (1), you must do so on a timely filed tax return (including extensions). Otherwise, you must use the method described in (2).
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Effect of trade-in on basis.(p21)
The discussion that follows applies to trade-ins of cars in 2011, where the election was made to treat the transaction as a tax-free disposition of the old car and the purchase of the new car. For information on how to figure depreciation for cars involved in a like-kind exchange (trade-in) in 2011, for which the election was not made, see Publication 946 and Regulations section 1.168(i)-6(d)(3).
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Traded car used only for business.(p21)
If you trade in a car you used only in your business for another car that will be used only in your business, your original basis in the new car is your adjusted basis in the old car, plus any additional amount you pay for the new car.
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Example 1.(p21)

Paul trades in a car that has an adjusted basis of $5,000 for a new car. In addition, he pays cash of $20,000 for the new car. His original basis of the new car is $25,000 (his $5,000 adjusted basis in the old car plus the $20,000 cash paid). Paul's unadjusted basis is $25,000 unless he claims the section 179 deduction, special depreciation allowance, or has other increases or decreases to his original basis, discussed under Unadjusted basis, earlier.
taxmap/pubs/p463-010.htm#en_us_publink100034008

Example 2.(p21)

In September 2008, Marcia purchased a car for $26,000 and placed it in service for 100% use in her business. Marcia did not claim a section 179 deduction or elect to claim the special depreciation allowance. Marcia's unadjusted basis for the car was $26,000. For 2008 through 2010, Marcia figured her depreciation deduction using the 200% declining balance method in the MACRS depreciation chart for those years.
In September 2011, Marcia traded that car in and paid $14,200 cash for a new car to be used 100% in her business. Marcia is allowed one-half of the MACRS depreciation amount figured for 2011 for her old car. (See Disposition of a Car, later.) Marcia figures her basis in the new car as follows.
Cost of old car $26,000
Less total depreciation allowed:
 2011—($26,000 × .1152*) × 1/2
    (Limit: $1,775**)
$1,498 
 2010—($26,000 × .192*)
    (Limit: $2,850**)
2,850 
 2009—($26,000 × .32*)
    (Limit: $4,800**)
4,800 
 2008—($26,000 × .20*)
    (Limit: $2,960**)
2,960 
Total depreciation allowed –12,108
   
Adjusted basis of old car and basis of part of new car that can be treated as newly purchased MACRS property $ 13,892
   
Additional basis (cash paid) for new car that is treated as newly purchased MACRS property +14,200
   
Total basis of new car $28,092

* These decimal amounts come from the Depreciation Method and Percentage Chart for that particular tax year's Form 2106 instructions.
** These limit amounts come from the Limits for Passenger Automobiles (Except Trucks and Vans) table for that particular tax year's Form 2106 instructions.
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Traded car used partly in business.(p21)
If you trade in a car you used partly in your business for a new car you will use in your business, you must make a "trade-in" adjustment for the personal use of the old car. This adjustment has the effect of reducing your basis in your old car, but not below zero, for purposes of figuring your depreciation deduction for the new car. (This adjustment is not used, however, when you determine the gain or loss on the later disposition of the new car. See Publication 544, Sales and Other Dispositions of Assets, for information on how to report the disposition of your car.)
To figure the unadjusted basis of your new car for depreciation, first add to your adjusted basis in the old car any additional amount you pay for the new car. Then subtract from that total the excess, if any, of:
  1. The total of the amounts that would have been allowable as depreciation during the tax years before the trade if 100% of the use of the car had been business and investment use, over
  2. The total of the amounts actually allowed as depreciation during those years.
For information about figuring depreciation, see Modified Accelerated Cost Recovery System (MACRS), which follows Example 2, later.
taxmap/pubs/p463-010.htm#en_us_publink100034010

Example 1.(p21)

In March, Mark traded his 2007 van (placed in service in June 2007) for a new 2011 model. He used the old van 75% for business and he used the new van 75% for business in 2011. Mark claimed actual expenses (including $10,881 depreciation expense) for the business use of the old van since 2007. He did not claim a section 179 deduction for the old or the new van.
Mark paid $19,500 for the 2007 van in June 2007. He paid an additional $12,500 when he acquired the 2011 van. Mark was allowed 1/2 of the depreciation deduction amount (which is included in the $10,881 depreciation expense total) for his old van for 2011, the year of disposition, as explained later under Disposition of a Car.
Mark figures the unadjusted basis for depreciating his new van as shown next. He uses the 200% declining balance method in the MACRS depreciation chart for those years.
Cost of old van$19,500
Less: Total depreciation allowed on
   the business cost of old van
   from 2007–2011
−10,881
Adjusted basis of old van before trade-in adjustment$ 8,619
   
Trade-in adjustment:  
Depreciation at 100% business use: 
2011–($19,500 × .1152*) × 1/2 
    (Limit: $1,875**)$ 1,123 
2010–($19,500 × .1152*) 
    (Limit: $1,875**)1,875 
2009–($19,500 × .192*) 
    (Limit: $3,050**)3,050 
2008–($19,500 × .32*) 
    (Limit: $5,200**)5,200 
2007–($19,500 × .20*)  
    (Limit: $3,260**)3,260 
Total$14,508 
Less: Actual depreciation
      allowed
−10,881 
Excess of 100% over actual$ 3,627 
Less: Lesser of excess amount 
    ($3,627) or adjusted basis
    of old van ($8,619)
− 3,627
   
Unadjusted basis of part of new van
   that can be treated as newly
   purchased MACRS property
$ 4,992
   
Additional basis (cash paid) for new
   van that is treated as newly
   purchased MACRS property
$12,500

* These decimal amounts come from the Depreciation Method and Percentage Chart for that particular tax year's Form 2106 instructions.
** These limit amounts come from the Limits for Trucks and Vans table for that particular tax year's Form 2106 instructions.
taxmap/pubs/p463-010.htm#en_us_publink100034011

Example 2.(p21)

Rob paid $21,000 for a new car that he placed in service in 2008. He used it partly for business in 2008 (9,600 business miles of 15,000 total miles), 2009 (12,000 business miles of 16,000 total miles), and 2010 (14,400 miles of 18,000 total miles). He used the standard mileage rate in those years to claim the business use of his car. (See Depreciation adjustment when you used the standard mileage rate under Disposition of a Car, later.)
On January 3, 2011, Rob traded in this car and paid an additional $10,000 for his new car. Rob figures the unadjusted basis for his new car as shown next.
Cost of old car  $21,000
Less: Total depreciation allowed:  
   2010—14,400 mi. × .23*$3,312  
   2009—12,000 mi. × .21*2,520  
   2008— 9,600 mi. × .21*2,016 − 7,848
Adjusted basis of old car before trade-in adjustment  $13,152
    
Trade-in adjustment:   
Depreciation at 100% business use:  
   2010—18,000 mi. × .23*$4,140  
   2009—16,000 mi. × .21*3,360  
   2008—15,000 mi. × .21*3,150  
Total$10,650  
Less: Actual depreciation
      allowed
− 7,848  
Excess of 100% over actual$2,802  
Less: Lesser of excess amount  
   ($2,802) or adjusted basis
    of old car ($13,152)
 − 2,802
    
Unadjusted basis of part of new car
   that can be treated as newly
   purchased MACRS property   
 $10,350
    
Additional basis (cash paid) for new
   car that is treated as newly
   purchased MACRS property
  $10,000

* These decimal amounts are from the chart under Depreciation adjustments when you used the standard mileage rate, later.
taxmap/pubs/p463-010.htm#en_us_publink100034012

Modified Accelerated Cost Recovery System (MACRS).(p21)

rule
The Modified Accelerated Cost Recovery System (MACRS) is the name given to the tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income.
The maximum amount you can deduct is limited, depending on the year you placed your car in service. See Depreciation Limits, later.
taxmap/pubs/p463-010.htm#en_us_publink100034013
Recovery period.(p21)
Under MACRS, cars are classified as 5-year property. You actually depreciate the cost of a car, truck, or van over a period of 6 calendar years. This is because your car is generally treated as placed in service in the middle of the year, and you claim depreciation for one-half of both the first year and the sixth year.
taxmap/pubs/p463-010.htm#en_us_publink1000254836
Depreciation deduction for certain Indian reservation property.(p22)
Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations after 1993 and before 2012. The recovery that applies for a business-use car is 3 years instead of 5 years. However, the depreciation limits, discussed later, will still apply.
For more information on the qualifications for this shorter recovery period and the percentages to use in figuring the depreciation deduction, see chapter 4 of Publication 946.
taxmap/pubs/p463-010.htm#en_us_publink100034014
Depreciation methods.(p22)
You can use one of the following methods to depreciate your car.
Deposit
If you use Table 4-1 (discussed later under MACRS depreciation chart) to determine your depreciation rate for 2011, you do not need to determine in what year using the straight line method provides an equal or greater deduction. This is because the chart has the switch to the straight line method built into its rates.
Before choosing a method, you may wish to consider the following facts.
taxmap/pubs/p463-010.htm#en_us_publink100034016

MACRS depreciation chart.(p22)

rule
A 2011 MACRS Depreciation Chart and instructions are included in this chapter as Table 4-1. Using this table will make it easy for you to figure the 2011 depreciation deduction for your car. A similar chart appears in the Instructions for Form 2106.
EIC
You may have to use the tables in Publication 946 instead of using this MACRS Depreciation Chart.
You must use the Depreciation Tables in Publication 946 rather than the 2011 MACRS Depreciation Chart in this publication if any one of the following four conditions applies to you.
  1. You file your return on a fiscal year basis.
  2. You file your return for a short tax year (less than 12 months).
  3. During the year, all of the following conditions apply.
    1. You placed some property in service from January through September.
    2. You placed some property in service from October through December.
    3. Your basis in the property you placed in service from October through December (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) was more than 40% of your total bases in all property you placed in service during the year.
  4. You placed qualified property in service on an Indian reservation.
taxmap/pubs/p463-010.htm#en_us_publink100034018
Depreciation in future years.(p22)
If you use the percentages from the chart, you generally must continue to use them for the entire recovery period of your car. However, you cannot continue to use the chart if your basis in your car is adjusted because of a casualty. In that case, for the year of the adjustment and the remaining recovery period, figure the depreciation without the chart using your adjusted basis in the car at the end of the year of the adjustment and over the remaining recovery period. See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946.
Deposit
In future years, do not use the chart in this edition of the publication. Instead, use the chart in the publication or the form instructions for those future years.
taxmap/pubs/p463-010.htm#en_us_publink100034020
Disposition of car during recovery period.(p22)
If you dispose of the car before the end of the recovery period, you are generally allowed a half year of depreciation in the year of disposition unless you purchased the car during the last quarter of a year. See Depreciation deduction for the year of disposition under Disposition of a Car, later, for information on how to figure the depreciation allowed in the year of disposition.
taxmap/pubs/p463-010.htm#en_us_publink100034021
How to use the 2011 chart.(p22)
To figure your depreciation deduction for 2011, find the percentage in the column of Table 4–1 based on the date that you first placed the car in service and the depreciation method that you are using. Multiply the unadjusted basis of your car (defined earlier) by that percentage to determine the amount of your depreciation deduction. If you prefer to figure your depreciation deduction without the help of the chart, see Publication 946.
EIC
Your deduction cannot be more than the maximum depreciation limit for cars. See Depreciation Limits, later.
taxmap/pubs/p463-010.htm#en_us_publink100034024

Example.(p22)

Phil bought a used truck in February 2010 to use exclusively in his landscape business. He paid $9,200 for the truck with no trade-in. Phil did not claim any section 179 deduction, the truck did not qualify for the special depreciation allowance, and he chose to use the 200% DB method to get the largest depreciation deduction in the early years.
Phil used the MACRS depreciation chart in 2010 to find his percentage. The unadjusted basis of his truck equals its cost because Phil used it exclusively for business. He multiplied the unadjusted basis of his truck, $9,200, by the percentage that applied, 20%, to figure his 2010 depreciation deduction of $1,840.
In 2011, Phil used the truck for personal purposes when he repaired his father's cabin. His records show that the business use of his truck was 90% in 2011. Phil used Table 4-1 to find his percentage. Reading down the first column for the date placed in service and across to the 200% DB column, he locates his percentage, 32%. He multiplies the unadjusted basis of his truck, $8,280 ($9,200 cost × 90% business use), by 32% to figure his 2011 depreciation deduction of $2,650.
taxmap/pubs/p463-010.htm#en_us_publink100034025

Depreciation Limits(p22)

rule
There are limits on the amount you can deduct for depreciation of your car, truck, or van. The section 179 deduction and special depreciation allowance are treated as depreciation for purposes of the limits. The maximum amount you can deduct each year depends on the year you place the car in service. These limits are shown in the following tables.
taxmap/pubs/p463-010.htm#en_us_publink1000136520

Maximum
Depreciation Deduction
for Cars

Date   4th & 
Placed1st 2nd 3rd Later 
 In ServiceYear Year Year Years 
2010–2011$11,0601$4,900 $2,950 $1,775 
2008–2009 10,9602 4,800  2,850  1,775 
2007  3,0604,9002,8501,775 
2006  2,9604,8002,8501,775 
2005  2,960 4,7002,8501,675 
2004 10,61024,8002,8501,675 
5/06/2003–
12/31/2003
 10,71034,9002,9501,775 
1/01/2003–
5/05/2003
  7,66044,9002,9501,775 
2001–2002  7,66044,9002,9501,775 
2000  3,0604,9002,9501,775 
1$3,060 if the car is not qualified property or if you elect not to claim the special depreciation allowance.
2$2,960 if the car is not qualified property or if you elect not to claim the special depreciation allowance.
3$7,660 if you acquired the car before 5/6/2003. $3,060 if the car is not qualified property or if you elect not to claim any special depreciation allowance.
4$3,060 if you acquired the car before 9/11/2001, the car is not qualified property, or you elect not to claim the special depreciation allowance.
taxmap/pubs/p463-010.htm#en_us_publink100034026
Trucks and vans.(p22)
For 2011, the maximum depreciation deductions for trucks and vans are generally higher than those for cars. A truck or van is a passenger automobile that is classified by the manufacturer as a truck or van and rated at 6,000 pounds gross vehicle weight or less. For trucks and vans placed in service before 2003, use the Maximum Depreciation Deduction for Cars table.
taxmap/pubs/p463-010.htm#en_us_publink1000266077

Maximum
Depreciation Deduction
for Trucks and Vans

Date   4th & 
Placed1st 2nd 3rd Later 
In ServiceYear Year Year Years 
2011$11,2601$5,200 $3,150 $1,875 
2010 11,16015,100 3,050 1,875 
2009 11,0601 4,900 2,950 1,775 
2008 11,16015,100 3,050 1,875 
2007  3,2605,200 3,050 1,875 
2005–2006  3,2605,200 3,150 1,875 
2004 10,91015,300 3,150 1,875 
2003 11,01025,400 3,250 1,975 
1If the special depreciation allowance does not apply or you make the election not to claim the special depreciation allowance, the first-year limit is $3,260 for 2011, $3,160 for 2010, $3,060 for 2009, $3,160 for 2008, $3,260 for 2004, and $3,360 for 2003.
2If the truck or van was acquired before 5/06/03, the truck or van is qualified property, and you claim the special depreciation allowance for the truck or van, the maximum deduction is $7,960.


taxmap/pubs/p463-010.htm#en_us_publink1000140897
Car used less than full year.(p23)
The depreciation limits are not reduced if you use a car for less than a full year. This means that you do not reduce the limit when you either place a car in service or dispose of a car during the year. However, the depreciation limits are reduced if you do not use the car exclusively for business and investment purposes. See Reduction for personal use later.
taxmap/pubs/p463-010.htm#en_us_publink100034029

Reduction for personal use.(p23)

rule
The depreciation limits are reduced based on your percentage of personal use. If you use a car less than 100% in your business or work, you must determine the depreciation deduction limit by multiplying the limit amount by the percentage of business and investment use during the tax year.
taxmap/pubs/p463-010.htm#en_us_publink100034031

Section 179 deduction.(p23)

rule
The section 179 deduction is treated as a depreciation deduction. If you place a car that is not a truck or van in service in 2011, use it only for business, and choose the section 179 deduction, the special depreciation allowance, and the depreciation deduction for that car for 2011 is limited to $11,060.
taxmap/pubs/p463-010.htm#en_us_publink100034032

Example.(p23)

On September 4, 2011, Jack bought a used car for $10,000 and placed it in service. He used it 80% for his business, and he chooses to take a section 179 deduction for the car. The car is not qualified property for purposes of the special depreciation allowance.
Before applying the limit, Jack figures his maximum section 179 deduction to be $8,000. This is the cost of his qualifying property (up to the maximum $500,000 amount) multiplied by his business use ($10,000 × 80%).
Jack then figures that his section 179 deduction for 2011 is limited to $2,448 (80% of $3,060). He then figures his unadjusted basis of $5,552 (($10,000 × 80%) − $2,448) for determining his depreciation deduction. Jack has reached his maximum depreciation deduction for 2011. For 2012, Jack will use his unadjusted basis of $5,552 to figure his depreciation deduction.
taxmap/pubs/p463-010.htm#en_us_publink100034033

Deductions in years after the recovery period.(p23)

rule
If the depreciation deductions for your car are reduced under the passenger automobile limits (discussed earlier), you will have unrecovered basis in your car at the end of the recovery period. If you continue to use your car for business, you can deduct that unrecovered basis (subject to depreciation limits) after the recovery period ends.
taxmap/pubs/p463-010.htm#en_us_publink100034034
Unrecovered basis.(p23)
This is your cost or other basis in the car reduced by any clean-fuel vehicle deduction (for vehicles placed in service before Jan. 1, 2006), alternative motor vehicle credit, electric vehicle credit, gas guzzler tax, and depreciation (including any special depreciation allowance, discussed earlier, unless you elect not to claim it) and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use.
taxmap/pubs/p463-010.htm#en_us_publink100034035
The recovery period.(p23)
For 5-year property, your recovery period is 6 calendar years. A part year's depreciation is allowed in the first calendar year, a full year's depreciation is allowed in each of the next 4 calendar years, and a part year's depreciation is allowed in the 6th calendar year.
Under MACRS, your recovery period is the same whether you use declining balance or straight line depreciation. You determine your unrecovered basis in the 7th year after you placed the car in service.
taxmap/pubs/p463-010.htm#en_us_publink100034036
How to treat unrecovered basis.(p23)
If you continue to use your car for business after the recovery period, you can claim a depreciation deduction in each succeeding tax year until you recover your basis in the car. The maximum amount you can deduct each year is determined by the date you placed the car in service and your business-use percentage. For example, no deduction is allowed for a year you use your car 100% for personal purposes.
taxmap/pubs/p463-010.htm#en_us_publink100034037

Example.(p23)

In April 2005, Bob bought and placed in service a car he used exclusively in his business. The car cost $31,500. Bob did not claim a section 179 deduction or the special depreciation allowance for the car. He continued to use the car 100% in his business throughout the recovery period (2005 through 2010). For those years, Bob used the MACRS Depreciation Chart (200% declining balance method) and the Maximum Depreciation Deduction for Cars table for the applicable tax year to compute his depreciation deductions during the recovery period. Bob's depreciation deductions were subject to the depreciation limits so he will have unrecovered basis at the end of the recovery period as shown in the following table.
 MACRS  Deprec. 
Year%*AmountLimit**Allowed 
200520.00  $6,300 $2,960 $ 2,960 
200632.00  10,080 4,700 4,700 
200719.20  6,048 2,850 2,850 
200811.52  3,629 1,675 1,675 
200911.52  3,629 1,675 1,675 
20105.76  1,814 1,675 1,675 
Total$31,500 15,535
*These amounts come from the Depreciation Method and Percentage Chart for that particular tax year's Form 2106 instructions.
**These limit amounts come from the Limits for Passenger Automobiles (Except Trucks and Vans) table for that particular tax year's Form 2106 instructions.
At the end of 2010, Bob had an unrecovered basis in the car of $15,965 ($31,500 – $15,535). If Bob continued to use the car 100% for business in 2011 and later years, he can claim a depreciation deduction equal to the lesser of $1,675 or his remaining unrecovered basis.
If Bob's business use of the car was less than 100% during any year, his depreciation deduction would be less than the maximum amount allowable for that year. However, in determining his unrecovered basis in the car, he would still reduce his original basis by the maximum amount allowable as if the business use had been 100%. For example, if Bob had used his car 60% for business instead of 100%, his allowable depreciation deductions would have been $9,321 ($15,535 × 60%), but he still would have to reduce his basis by $15,535 to determine his unrecovered basis.
taxmap/pubs/p463-010.htm#en_us_publink1000134864

Table 4-1. 2011 MACRS Depreciation Chart
     (Use to Figure Depreciation for 2011.)

If you claim actual expenses for your car, use the chart below to find the depreciation method and percentage to use for your 2011 return.

First, using the left column, find the date you first placed the car in service. Then select the depreciation method and percentage from column (a), (b), or (c) following the rules explained in this chapter.
For cars placed in service before 2011, you must use the same method you used on last year's return unless a decline in your business use requires you to change to the straight line method. (See Car Used 50% or Less for Business.)

Multiply the unadjusted basis of your car by your business use percentage. Multiply the result by the percentage you found in the chart to find the amount of your depreciation deduction for 2011. (Also see Depreciation Limits.)
caution  If you placed your car in service after September of any year and you placed other business property in service during the same year, you may have to use the Jan. 1—Sept. 30 percentage instead of the Oct. 1—Dec. 31 percentage for your car.
       
To find out if this applies to you, determine: 1) the basis of all business property you placed in service after September of that year and 2) the basis of all business property you placed in service during that entire year. If the basis of the property placed in service after September is not more than 40% of the basis of all property (certain property is excluded) placed in service for the entire year, use the percentage for Jan. 1—Sept. 30 for figuring depreciation for your car. See Which Convention Applies? in chapter 4 of Publication 946 for more details.
       
Example. You buy machinery (basis of $32,000) in May 2011 and a new van (basis of $20,000) in October 2011, both used 100% in your business. You use the percentage for Jan. 1—Sept. 30, 2011, to figure the depreciation for your van. This is because the $20,000 basis of the property (van) placed in service after September is not more than 40% of the basis of all property placed in service during the year (40% × ($32,000 + 20,000) = $20,800).
       
   (a)(b)(c) 
 Date Placed In Service  200% Declining
  Balance (200% DB)1
  150% Declining   Balance (150% DB)1   Straight Line
   (SL)
 
 Oct. 1 — Dec. 31, 2011  200 DB   5.0%  150 DB   3.75%   SL 2.5% 
 Jan. 1 — Sept. 30, 2011  200 DB  20.0  150 DB  15.0   SL  10.0 
 Oct. 1 — Dec. 31, 2010  200 DB  38.0  150 DB  28.88   SL  20.0 
 Jan. 1 — Sept. 30, 2010  200 DB  32.0  150 DB  25.5   SL  20.0 
 Oct. 1 — Dec. 31, 2009  200 DB  22.8  150 DB  20.21   SL  20.0 
 Jan. 1 — Sept. 30, 2009  200 DB  19.2  150 DB  17.85   SL  20.0 
 Oct. 1 — Dec. 31, 2008  200 DB  13.68  150 DB  16.4   SL  20.0 
 Jan. 1 — Sept. 30, 2008  200 DB  11.52  150 DB  16.66   SL  20.0 
 Oct. 1 — Dec. 31, 2007  200 DB  10.94  150 DB  16.41   SL  20.0 
 Jan. 1 — Sept. 30, 2007  200 DB  11.52  150 DB  16.66   SL  20.0 
 Oct. 1 — Dec. 31, 2006  200 DB   9.58  150 DB  14.35   SL  17.5 
 Jan. 1 — Sept. 30, 2006  200 DB   5.76  150 DB   8.33   SL  10.0 
    Prior to 20062    
   1 You can use this column only if the business use of your car is more than 50%.
   2 If your car was subject to the maximum limits for depreciation and you have unrecovered basis in the car, you can continue to claim depreciation. See
    Deductions in years after the recovery period under Depreciation Limits.
taxmap/pubs/p463-010.htm#en_us_publink100034038

Car Used 50% or Less
for Business(p23)

rule
If you use your car 50% or less for qualified business use (defined earlier under Depreciation Deduction) either in the year the car is placed in service or in a later year, special rules apply. The rules that apply in these two situations are explained in the following paragraphs. (For this purpose, "car" was defined earlier under Actual Car Expenses and includes certain trucks and vans.)
taxmap/pubs/p463-010.htm#en_us_publink100034039

Qualified business use 50% or less in year placed in service.(p23)

rule
If you use your car 50% or less for qualified business use, the following rules apply.
Instead of making the computation yourself, you can use column (c) of Table 4-1 to find the percentage to use.
taxmap/pubs/p463-010.htm#en_us_publink100034040

Example.(p23)

In May 2011, Dan bought a car for $17,500. He used it 40% for his consulting business. Because he did not use the car more than 50% for business, Dan cannot take any section 179 deduction or special depreciation allowance, and he must use the straight line method over a 5-year recovery period to recover the cost of his car.
Dan deducts $700 in 2011. This is the lesser of:
  1. $700 (($17,500 cost × 40% business use) × 10% recovery percentage (from column (c), Table 4-1)), or
  2. $1,224 ($3,060 maximum limit × 40% business use).
taxmap/pubs/p463-010.htm#en_us_publink100034041

Qualified business use 50% or less in a later year.(p23)

rule
If you use your car more than 50% in qualified business use in the tax year it is placed in service but the business use drops to 50% or less in a later year, you can no longer use an accelerated depreciation method for that car.
For the year the business use drops to 50% or less and all later years in the recovery period, you must use the straight line depreciation method over a 5-year recovery period. In addition, for the year your business use drops to 50% or less, you must recapture (include in your gross income) any excess depreciation (discussed later). You also increase the adjusted basis of your car by the same amount.
taxmap/pubs/p463-010.htm#en_us_publink100034042

Example.(p24)

In June 2008, you purchased a car for exclusive use in your business. You met the more-than-50%-use test for the first 3 years of the recovery period (2008 through 2010) but failed to meet it in the fourth year (2011). You determine your depreciation for 2011 using 20% (from column (c) of Table 4-1). You also will have to determine and include in your gross income any excess depreciation, discussed next.
taxmap/pubs/p463-010.htm#en_us_publink100034043
Excess depreciation.(p24)
You must include any excess depreciation in your gross income and add it to your car's adjusted basis for the first tax year in which you do not use the car more than 50% in qualified business use. Use Form 4797, Sales of Business Property, to figure and report the excess depreciation in your gross income.
Excess depreciation is:
  1. The amount of the depreciation deductions allowable for the car (including any section 179 deduction claimed and any special depreciation allowance claimed) for tax years in which you used the car more than 50% in qualified business use, minus
  2. The amount of the depreciation deductions that would have been allowable for those years if you had not used the car more than 50% in qualified business use for the year you placed it in service. This means the amount of depreciation figured using the straight line method.
taxmap/pubs/p463-010.htm#en_us_publink100034044

Example.(p24)

In September 2007, you bought a car for $20,500 and placed it in service. You did not claim the section 179 deduction or the special depreciation allowance. You used the car exclusively in qualified business use for 2007, 2008, 2009, and 2010. For those years, you used the appropriate MACRS Depreciation Chart to figure depreciation deductions totaling $12,585 ($3,060 for 2007, $4,900 for 2008, $2,850 for 2009, and $1,775 for 2010) under the 200% DB method.
During 2011, you used the car 30% for business and 70% for personal purposes. Since you did not meet the more-than-50%-use test, you must switch from the 200% DB depreciation method to the straight line depreciation method for 2011, and include in gross income for 2011 your excess depreciation determined as follows.
Total depreciation claimed:
 (MACRS 200% DB method)
 $12,585
Minus total depreciation allowable:
 (Straight line method)
 
2007—10% of $20,500$2,050 
    (Limit: $3,060*)  
2008—20% of $20,5004,100 
    (Limit: $4,900*)  
2009—20% of $20,5002,850 
    (Limit: $2,850*)  
2010—20% of $20,5001,77510,775
    (Limit: $1,775*)  
Excess depreciation $1,810

* These limit amounts come from the Limits for Passenger Automobiles (Except Trucks and Vans) table for that particular tax year's Form 2106 instructions.
In 2011, using Form 4797, you figure and report the $1,810 excess depreciation you must include in your gross income. Your adjusted basis in the car is also increased by $1,810. Your 2011 depreciation is $1,230 ($20,500 (unadjusted basis) × 30% (business use percentage) × 20% (from column (c) of Table 4-1 on the line for Jan. 1—Sept. 30, 2007)). However, your depreciation deduction is limited to $533 ($1,775 x 30% business use).
taxmap/pubs/p463-010.htm#en_us_publink100034045

Leasing a Car(p25)

rule
If you lease a car, truck, or van that you use in your business, you can use the standard mileage rate or actual expenses to figure your deductible expense. This section explains how to figure actual expenses for a leased car, truck, or van.
taxmap/pubs/p463-010.htm#en_us_publink100034046

Deductible payments.(p25)

rule
If you choose to use actual expenses, you can deduct the part of each lease payment that is for the use of the vehicle in your business. You cannot deduct any part of a lease payment that is for personal use of the vehicle, such as commuting.
You must spread any advance payments over the entire lease period. You cannot deduct any payments you make to buy a car, truck, or van even if the payments are called lease payments.
If you lease a car, truck, or van for 30 days or more, you may have to reduce your lease payment deduction by an "inclusion amount," explained next.
taxmap/pubs/p463-010.htm#en_us_publink100034047

Inclusion Amounts(p25)

rule
If you lease a car, truck, or van that you use in your business for a lease term of 30 days or more, you may have to include an inclusion amount in your income for each tax year you lease the vehicle. To do this, you do not add an amount to income. Instead, you reduce your deduction for your lease payment. (This reduction has an effect similar to the limit on the depreciation deduction you would have on the vehicle if you owned it.)
The inclusion amount is a percentage of part of the fair market value of the leased vehicle multiplied by the percentage of business and investment use of the vehicle for the tax year. It is prorated for the number of days of the lease term in the tax year.
The inclusion amount applies to each tax year that you lease the vehicle if the fair market value (defined next) when the lease began was more than the amounts shown in the following tables.
Cars
(Except for Trucks and Vans)
 Year Lease BeganFair Market Value 
 2008–2011$18,500 
 2007 15,500 
 2005–2006 15,200 
 2004 17,500 
 2003 18,000 
 2000–2002 15,500 
Trucks and Vans
 Year Lease BeganFair Market Value 
 2010–2011$19,000 
 200918,500 
 200819,000 
 200716,400 
 2005–200616,700 
 200418,000 
 2003 18,500 
 2000–200215,500 
taxmap/pubs/p463-010.htm#en_us_publink100034048

Fair market value.(p25)

rule
Fair market value is the price at which the property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all the necessary facts. Sales of similar property around the same date may be helpful in figuring the fair market value of the property.
Figure the fair market value on the first day of the lease term. If the capitalized cost of a car is specified in the lease agreement, use that amount as the fair market value.
taxmap/pubs/p463-010.htm#en_us_publink100034049

Figuring the inclusion amount.(p25)

rule
Inclusion amounts are listed in Appendix A for cars, in Appendix B for trucks and vans, and in Appendix C for electric cars leased after August 5, 1997, and before 2007. If the fair market value of the vehicle is $100,000 or less, use the appropriate appendix (depending on the year you first placed the vehicle in service) to determine the inclusion amount. If the fair market value is more than $100,000, see the Revenue Procedure(s) identified in the footnote of the appendices for the inclusion amount.
For each tax year during which you lease the car for business, determine your inclusion amount by following these three steps.
  1. Locate the appendix that applies to you. To find the inclusion amount, do the following.
    1. Find the line that includes the fair market value of the car on the first day of the lease term.
    2. Go across the line to the column for the tax year in which the car is used under the lease to find the dollar amount. For the last tax year of the lease, use the dollar amount for the preceding year.
  2. Prorate the dollar amount from (1)(b) for the number of days of the lease term included in the tax year.
  3. Multiply the prorated amount from (2) by the percentage of business and investment use for the tax year. This is your inclusion amount.
taxmap/pubs/p463-010.htm#en_us_publink100034050

Example.(p25)

On January 17, 2011, you leased a car for 3 years and placed it in service for use in your business. The car had a fair market value of $32,250 on the first day of the lease term. You use the car 75% for business and 25% for personal purposes during each year of the lease. Assuming you continue to use the car 75% for business, you use Appendix A-6 to arrive at the following inclusion amounts for each year of the lease:
Tax
 year 
 Dollar
amount
ProrationBusiness
 use 
Inclusion
amount
2011$17  349/365 75%$12 
2012 38  366/366 75%29 
201356  365/365 75%42 
201468  16/365 75%2 
For each year of the lease that you deduct lease payments, you must reduce your deduction by the inclusion amount computed for that year.
taxmap/pubs/p463-010.htm#en_us_publink100034051

Leased car changed from business to personal use.(p25)

rule
If you lease a car for business use and, in a later year, change it to personal use, follow the rules explained earlier under Figuring the inclusion amount. For the tax year in which you stop using the car for business, use the dollar amount for the previous tax year. Prorate the dollar amount for the number of days in the lease term that fall within the tax year.
taxmap/pubs/p463-010.htm#en_us_publink100034052

Example.(p25)

On August 16, 2010, Will leased a car with a fair market value of $38,500 for 3 years. He used the car exclusively in his own data processing business. On November 5, 2011, Will closed his business and went to work for a company where he is not required to use a car for business. Using Appendix A-5, Will computed his inclusion amount for 2010 and 2011 as shown in the following table and reduced his deductions for lease payments by those amounts.
Tax
 year 
 Dollar
amount
ProrationBusiness
 use 
Inclusion
amount
2010 $ 46138/365 100%  $  17
2011  100309/365 100%      85
taxmap/pubs/p463-010.htm#en_us_publink100034053

Leased car changed from personal to business use.(p25)

rule
If you lease a car for personal use and, in a later year, change it to business use, you must determine the car's fair market value on the date of conversion. Then figure the inclusion amount using the rules explained earlier under Figuring the inclusion amount. Use the fair market value on the date of conversion.
taxmap/pubs/p463-010.htm#en_us_publink100034054

Example.(p25)

In March 2009, Janice leased a car for 4 years for personal use. On June 1, 2011, she started working as a self-employed advertising consultant and started using the leased car for business purposes. Her records show that her business use for June 1 through December 31 was 60%. To figure her inclusion amount for 2011, Janice obtained an appraisal from an independent car leasing company that showed the fair market value of her 2009 car on June 1, 2011, was $21,650. Using Appendix A-6, Janice computed her inclusion amount for 2011 as shown in the following table.
Tax
 year 
Dollar
amount
ProrationBusiness
 use 
Inclusion
amount
 2011 $6214/365 60%$2 
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Reporting inclusion amounts.(p26)

rule
For information on reporting inclusion amounts, employees should see Car rentals under Completing Forms 2106 and 2106-EZ in chapter 6. Sole proprietors should see the Instructions for Schedule C (Form 1040) and farmers should see the Instructions for Schedule F (Form 1040).