This is helpful when a business vehicle is disposed of early, before the minimum five year time period required when claiming a business vehicle.
In this case when a business vehicle is sold, converted to less than 50% business use, or otherwise disposed before it is claimed for five years as a business expense, then depreciation recapture is needed. This will require some manual calculation and the formula above is great for those who took standard mileage only.
Mileage claimed each year includes a small amount of depreciation. This must then be recaptured if business use ended before five years. Other ways to claim vehicles such as specific expenses, bonus depreciation, and Section 179 deductions include a larger depreciation amount, and a more complex calculation.
Only use the simple formula listed here if mileage, called SMR was selected each year in writing on the prior returns. The fifth year claimed will meet the requirements, so a maximum of three prior year returns are in this calculation (remember: if there are four prior year returns, you are on the fifth year, and meet the requirements to not do all the math for recapture!)
The formula for actual depreciation during the claimed business vehicle time period claimed is
[year 1 business mileage] x mileage rate in year 1 +
[year 2 business mileage] x mileage rate in year 2 +
[year 3 business mileage] x mileage rate in year 3
= Actual depreciation taken for vehicle in the past
This should be compared to the total allowed depreciation. This will see if any amount was too high to claim over the total time period. This will be calculated automatically in TurboTax by using the purchase price, purchase date, sales price, and sales date.
Note that the screen first encountered with depreciation recapture says "sales price of vehicle (business portion only)" and refers to a more simple calculation. In the year sold, find the sale or trade in amount, times the percent of business use in that year.
This is a manual entry and will require a calculation. Expenses in the next field are dealership fees times the percent used for business, but keep in mind a trade in amount is a total that includes this number already.
Like-Kind does not apply due to changes in the TCJA for years 2018-2025, and this may extend beyond 2025 depending on future tax law. For now, Like-Kind is not available after 2017.
After the sales price screen, TurboTax will ask for prior year depreciation in order to calculate depreciation recapture. That is where this formula comes in! If the vehicle was traded in, the basis can make this result in a loss when business use percent is high. This is advantageous to the tax payer and can increase their refund for the year. It is vastly better to trade or sell the vehicle than other disposal options for business vehicles claimed for under 5 years.
The depreciation rates for 2020 to 2024:
2020 was .27
2021 was .26
2022 was .26
2023 was .28
2024 was .30
With the depreciation formula being rates x business miles each year = depreciation claimed in past years
Summary for Depreciation Recapture of Business Vehicles disposed of before 5 year time requirement
1. Determine Sales Price (Business Portion): Current year business use percent x sales price
2. Determine actual Depreciation: Use formular of past year SMR x past year rate for each year vehicle claim, by viewing on prior year returns
3. Determine allowed Depreciation: automatic based on purchase and sale prices and dates entered
4. Review gain or loss: automatic
5. Explain how loss in this equation can increase refund amount, if needed!
