Business Vehicle Deduction and Depreciation

[user99991]

Hi,

First question,

Recently I purchased (with financing)  a business car for $23,000. It's less than 6,000 lbs. I paid a $3K downpayment and financed the $20,000.

I wanted to understand the tax situation. Before this, I used the standard mileage method for the old car.

It seems for the small business cars, 1st year and 2nd-year depreciation schedules are like this:

• 10,100 for the first year ($18,100 with bonus depreciation),
• $16,100 for the second year

This means, in 2022 I can write off $18,100 (with bonus depreciation)  and second-year $4,900 in 2023 against my income. Is this correct?  Plus, I also write off the interest expenses, gas, oil, insurance, maint. etc.

The second question is, what happens when I sell or trade in the car 3 years later? I'm guessing I would have a trade value of $13,000. Am I going to pay taxes for $13,000? Or because of full depreciation, I don't need to pay anything? Somebody also mentioned a 5-year rule but I got confused.  Thanks.

[ColeenD3]

You will have to recapture the bonus depreciation if you sell the car before the 5 year useful life is over. For 2021, bonus depreciation is 100%.

Please see this answer from PatriciaV.

Basically, bonus depreciation allows you to write off an additional 50% of the cost of eligible property that you begin using during the current tax year. It's considered "special" or a "bonus" because when this IRS rule first went into effect, it was expected to be for a very limited time. The provision has been extended several times over the years.

From IRS Pub 946: Special (Bonus) Depreciation:

Bonus depreciation is "a special depreciation allowance under IRS rules that allows you to recover part of the cost of qualified property, placed in service during the tax year. The allowance applies only for the first year you place the property in service. For qualified property placed in service in 2015, you can take an additional 50% special allowance. The allowance is an additional deduction you can take after any section 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service."

TurboTax will offer this bonus depreciation during the asset interview sequence if your property qualifies for this special allowance. Because this type of depreciation can be "recaptured" as ordinary income when you sell the asset, taking this additional deduction is optional.

[AmeliesUncle]

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@user99991 wrote:

It seems for the small business cars, 1st year and 2nd-year depreciation schedules are like this:

• 10,100 for the first year ($18,100 with bonus depreciation),
• $16,100 for the second year

This means, in 2022 I can write off $18,100 (with bonus depreciation)  and second-year $4,900 in 2023 against my income. Is this correct? 

The second question is, what happens when I sell or trade in the car 3 years later? 

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No, those are the MAXIMUM amounts (based on a $50,000+ car).  

If you take the $8000, then the first year is 20% of the remaining $15,000 (*there ARE additional rules that could change that amount*).

The second year is 32% of the $15,000.

That is based on 100% business use.  If you also have personal use, those amount are prorated.

After 3 years, let's say you have claimed $19,500 in depreciation.  For tax purposes, that now puts your "Basis" of the vehicle at $3,500 ($23,000-$19,500).  If you sold the vehicle for $13,000, you would then need to pay taxes on the $9,500 gain ($13,000-$3,500).

[user99991]

Thank you for your reply.

What happens if I sell the car after 5 years then? It seems I will have to recapture the bonus depreciation if I sell the car before the 5-year useful life is over. Do I still need to pay capital gain tax after 5 years?  Because the car value depreciates as well.

[AmeliesUncle]

If you sold it after 5 years, the vehicle would be fully depreciated.  So the full amount of the sale would be taxable ($13,000 in the example).  Again, that is based on 100% business use - personal use prorates things and makes it more complicated.