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The tax code places a limit on the amount of depreciation that can be deducted annually for the cost of passenger cars, trucks and vans. The limit is adjusted annually to reflect inflation, but not by much.
For cars placed in service in 2011, the first-year depreciation (including the Section 179 expense deduction and regular depreciation) is limited to $3,060 ($3,160 for trucks and vans). However, if you choose to take bonus depreciation, then the limit is increased by $8,000 for a maximum first-year deduction of $11,060 for cars and $11,160 for trucks and vans.
The maximum amounts that may be deducted under the MACRS depreciation method and under the Section 179 expensing election for the first year, are known as the "luxury car limitations," even though they apply to cars valued at a moderate cost. They are provided by the IRS in the form of a chart:
|For Cars Placed in Service||Depreciation Allowable in -|
|Year 1||Year 2||Year 3||Year 4
|1995 and 1996||3,060||4,900||2,950||1,775|
|2000 through 2003||3,060||4,900||2,950||1,775|
|2008 and 2009||10,960||4,800||2,850||1,775|
|* higher amount available if bonus depreciation claimed|
Note that the maximum annual amounts shown in the chart assume that the vehicle was used 100 percent for business. The amounts must be proportionately reduced if your business use of the vehicle was less than 100 percent.
This table represents the maximum depreciation you can claim. For the first year, if you used the car more than 50 percent for business, you may claim a proportionate part of the full amount, regardless of the actual cost of the car.
Separate maximum depreciation caps apply to trucks and vans. The following amounts are for trucks and vans placed in service in 2011: $11,160 in year one ($3,160 if bonus depreciation is not claimed); $5,100 in year two; $3,050 in year three; and $1,775 for each year thereafter.
For later years, you must compute your depreciation on the car using the usual methods, but can't deduct more than the amount shown in the chart. As long as you continue to use the car more than 50 percent for business, you would multiply the business percentage of the car's cost by the percentage shown in the MACRS table for five-year property. The dollar amounts in the chart above, reduced proportionately for any non-business use of the car, acts as a ceiling on the amount of depreciation you can actually claim.
If you use the car 50 percent or less for business, you must use the straight-line ADS method for five-year property for that year, and for every subsequent year.
If you started out depreciating the car under MACRS, but then your business use dropped to 50 percent or less which required you to switch to the straight-line ADS method, you will have to "give back" some of the depreciation you claimed. Specifically, you'll have to report as income the amount (if any) by which the total MACRS depreciation you claimed is greater than the total straight-line depreciation you would have been entitled to claim.
If you own a relatively low-priced car, you can expect to recover the entire basis of the business portion of the car over the six tax years for which the MACRS depreciation deductions are generally claimed.
However, when part of the normal MACRS deduction is disallowed because of the luxury car limitations, you'll recover only a portion of the car's basis during the normal recovery period. In that case, you may continue to depreciate the car for as long as it takes to recover the remaining basis of the business portion of the car.