Can depreciation expense be claimed on vehicles used for both business and personal purposes?
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Yes, depreciation expense can be claimed on vehicles used for both business and personal purposes, but only the portion attributable to business use is deductible. The tax treatment is governed by several key rules and limitations under the Internal Revenue Code, Treasury Regulations, and IRS guidance. Here is a comprehensive explanation:
1. General Rule: Business vs. Personal Use
- Depreciation is only allowed for the business/investment use portion of a vehicle. If a vehicle is used for both business and personal purposes, you must allocate expenses—including depreciation—based on the percentage of business use.
- Personal use is never deductible. For example, commuting between home and a regular place of work is considered personal use and is not deductible.
2. Determining Business Use Percentage
- The business use percentage is calculated by dividing the number of miles driven for business purposes by the total miles driven during the year.
- Adequate records (such as a mileage log) must be maintained to substantiate the business use.
3. Depreciation Methods and Limits
a. Depreciation Methods
- Most vehicles are depreciated under the Modified Accelerated Cost Recovery System (MACRS), typically as 5-year property.
- If the vehicle is used more than 50% for business, accelerated methods (such as 200% declining balance) may be used. If business use drops to 50% or less, straight-line depreciation under the Alternative Depreciation System (ADS) must be used.
b. Depreciation Limits (Luxury Auto Limits)
- For passenger automobiles (including many SUVs, trucks, and vans under certain weight limits), annual depreciation deductions are capped under IRC §280F. For 2025, the limits for vehicles acquired after September 27, 2017, and placed in service in 2025 are:
- 1st year: $20,400 (if bonus depreciation applies)
- 2nd year: $19,800
- 3rd year: $11,900
- Each succeeding year: $7,160
- If business use is less than 100%, these limits are reduced proportionally.
c. Section 179 and Bonus Depreciation
- Section 179 expensing and bonus depreciation are available for vehicles, but are also subject to the luxury auto limits and business use percentage.
- If business use is 50% or less, neither Section 179 nor bonus depreciation is allowed.
4. Recapture Rules
- If the business use of a vehicle falls to 50% or less after having claimed accelerated depreciation, Section 280F(b) requires recapture of excess depreciation as ordinary income. The taxpayer must recompute depreciation as if the straight-line method had been used from the start, and the difference (excess depreciation) is included in income.
5. Recordkeeping Requirements
- Taxpayers must keep records substantiating the business use, including mileage logs, dates, destinations, and business purposes.
- Receipts are required for expenses of $75 or more and for all lodging expenses.
6. Special Rules for Employees
- For most employees, unreimbursed business expenses (including vehicle depreciation) are not deductible for tax years 2018–2025 due to the suspension of miscellaneous itemized deductions under IRC §67(g), except for certain categories such as Armed Forces reservists, qualified performing artists, fee-basis government officials, and employees with impairment-related work expenses.
7. Vehicles Not Subject to Limits
- Vehicles with a gross vehicle weight rating (GVWR) over 6,000 pounds (trucks, vans, and SUVs) are generally not subject to the luxury auto limits, but special Section 179 limits apply to certain SUVs.
8. Summary of Steps to Claim Depreciation on Mixed-Use Vehicles
- Determine total and business miles driven.
- Calculate business use percentage.
- Apply business use percentage to the vehicle’s basis to determine depreciable basis.
- Apply Section 179 and/or bonus depreciation (if eligible and elected), subject to business use and annual limits.
- Depreciate the remaining basis using MACRS, subject to annual luxury auto limits and business use percentage.
- Maintain adequate records to substantiate business use.
- If business use drops to 50% or less, recapture excess depreciation.
In summary: Depreciation expense can be claimed on vehicles used for both business and personal purposes, but only the business portion is deductible, and strict substantiation and limitation rules apply.
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