changing vehicle deduction methods

[avo]

for vehicle deduction, 1. can you switch back and forth between standard mileage rate and actual expenses from year to year? (this is not first year - which was was standard mileage). any red flag for always switching every year or so?

2. if change to actual expense, must depreciate vehicle. does it mean that if it's standard mileage, there's no deprecation required?

[SabrinaD2]

Switching Between Methods:

• If you want to use the standard mileage rate method in any tax year, you must do so in the first tax year you use your car for business. In later years you can choose to switch back and forth between the methods from year to year. Each year, you’ll want to calculate your expenses both ways and then choose the method that yields the larger deduction and greater tax benefit to you. 
• If you use the actual expense method in the first year you are required to continue to use this method for that specific vehicle in future years.

For more detailed information, you can refer to:

• TurboTax's guide on vehicle deductions

[avo]

What about depreciation of the vehicle? Is it required for both methods?

[MinhT1]

No.

You cannot deduct depreciation of the vehicle when you choose the Standard mileage method as depreciation is already included in the standard mileage rate.

See this TurboTax article.

[avo]

- I never understood the Form 4562 - Depreciation and Amortization Report (landscape form that shows the biz use % of the car and 0 depreciation - that Turbotax generates in the past years whenever I use the standard mileage method).  Can you explain the intent of this form even though there's no depreciation?

- If I use the Actual Expenses method in year 2 (and depreciation kicks in) and in year 3, I go back to Standard Mileage, does it mean that depreciation stops for 1 year? Then when I use Actual Expense method in year 4, then depreciation resumes again? Does it resume from year 2 when I last depreciated the vehicle?

[KrisD15 · Accepted solution]

Form 4562 is really only for the first year an asset is put into service, but TurboTax does use it year after year as well as supplying a depreciation worksheet. 

I assume this is done because many taxpayers that use TurboTax do not keep proper bookkeeping on their own and do not keep track of depreciation. We try to point them to the 4562 or depreciation schedule when they need to report the sale of a business asset and they don't know their adjusted basis or how much depreciation was taken.

If you use the Actual Expenses for a vehicle, depreciation will be computed based on the basis/value of the vehicle (and percentage of use if it is not a 100% business used vehicle).

If you use the Standard Milage Rate, the deduction is based on miles driven, with no regard to the value of the vehicle. 

When you use the Standard Milage Rate, depreciation is not computed separately, but it part of the rate per mile. For example, the 2024 business milage rate of .67 includes .30 depreciation. The rate can change year over year. 

So, for the years you use Actual Mileage, the depreciation claimed will lower the basis of the vehicle, but for the years you use the Standard Mileage rate, the basis stays the same. 

When the business asset is sold, the basis need to be adjusted by subtracting the depreciation taken (or could have been taken).

The remaining basis of the vehicle on the "books" would be the same as the adjusted basis if only actual expenses were used. 

If the Standard mileage rate was ever used, you need to add up that "depreciation equivalent" for the total miles claimed. That means you would need to go to each year that standard milage was used, multiply those miles by the depreciation equivalent of that year and subtract that from the original basis/cost. 

When actual expenses are used, once the depreciation has zeroed out the basis, depreciation stops, there is no remaining value to depreciate. 

The "depreciation equivalent" in the standard mileage rate can go on forever, so you could in theory claim 50,000 depreciation equivalent on a vehicle that cost you only 20,000.

Pub 463 explains further 

[avo]

Thank you so much for your explanation! I really appreciate this. 

[avo]

Are there disadvantages of using the Actual Expenses method? I'm not talking about the additional work of collecting receipts but more about selling the vehicle down the road. 

And also any disadvantages of using a mix of both methods whenever one method yields a better result each year?

[DawnC]

No, the sale of business property is handled the same whether you used the actual expenses method or the standard mileage rate.   You should use the method that provides the best tax outcome.   You will have to enter actual expenses and your mileage to be able to compare each year.  

If you sell or otherwise dispose of depreciated business property for a gain, depreciation recapture permits the IRS to take back or “recapture” some of the tax benefits you received over the years through depreciation deductions.  You also have to recapture a Section 179 deduction if the percentage of business use drops to 50% or less for any year during the property's recovery period.   Depreciation Recapture: Definition, Calculation, and Examples