Occasionally a taxpayer will present you with a question regarding their business's vehicle:
- They desire to change from using standard mileage to actual expenses.
- They have a vehicle that has been in service but hasn't been depreciated.
- They have a vehicle that was being used for personal reasons but is now being used in their business.
- They have a vehicle being used for the business but now no longer qualifies due to a change in usage.
The taxpayer wishes to claim actual expenses rather than standard mileage
The standard mileage rate includes depreciation, the vehicle can be added to the depreciation module. In the vehicle's record in the module, the date placed in service is the original date placed in service, not the date the change to actual expenses occurred.
The IRS requires the straight line method of depreciation to be used for the remaining years of the vehicle's life. The accumulated depreciation will equal each previous years' mileage multiplied by the depreciation component of the standard mileage rate for that year. (See each year's standard mileage rates here for the portion treated as depreciation.) For listed property, enter the percentage of business use and it must be greater than 50%.
Vehicle has been in service but never depreciated on prior year returns
If a taxpayer has been claiming actual vehicle expenses but has failed to depreciate the vehicle, they may amend up to the 3 prior year returns to recognize the depreciation. Returns cannot be amended to recognize the tax benefit of depreciation prior to the 3-year allowance. Thus depreciation prior to 3 years is a lost tax savings.
If depreciation was not recognized on prior year returns, the allowable depreciation cost must still be considered per IRS recapture rules upon disposition. Depreciation allowable is depreciation you are entitled to deduct. Disposition is defined as a change of use for a vehicle, i.e., sold, traded, retired, or converted to personal use.
Vehicle was used for personal purposes, now business
If a vehicle previously considered for personal use is now used for business purposes, depreciation begins on date the vehicle was placed in service for business use. The depreciable basis is the lesser of the following:
- The fair market value (FMV) of the property on the date of the change in use, or
- The original cost or other basis adjusted as follows:
- increased by the cost of any permanent improvements or additions and other costs that must be added to the basis, and
- decreased by any deductions claimed for casualty and theft losses and other items that reduced the basis.
Vehicle is no longer being used for business or its business usage has fallen to 50% or less
When a vehicle's business use reduced to 50% or less, the depreciation method changes and any Section 179 previously claimed needs to be recaptured as ordinary income. See Publication 946 for more information.