Why is auto depreciation only $1,500?

[scott123xyz]

car cost 31,000 and purchased 3/1/2013, 80% business

[MichaelDC · Accepted solution]

You probably took the Bonus depreciation the first year you placed the vehicle in service.

There is a pretty severe limitation on auto depreciation by the IRS. Congress decided years ago that the taxpayers should not subsidize extravagant vehicles used by business. To prevent that, the law squeezes otherwise allowable depreciation deductions for “luxury cars.” Luxury doesn't mean Rolls Royce. Congress has a much less extravagant view of luxury. For 2016, the maximum first-year depreciation write-off for a new (not used) car is $3,160 plus up to an additional $8,000 in bonus depreciation. For a used car, the maximum first-year write-off for 2016 is a much lower $3,160. (These figures assume 100% business use.)

Example: the depreciation on a new (not used) auto would be limited to the business-use percentage of 80% times the maximum 2016 first-year allowance of $3,160, or $2,528.

If bonus depreciation was claimed the first year, for the remainder of the vehicle’s life, you must deduct the lesser of the MACRS amount or the $1,875 allowed under Procedure 2012-21 until the vehicle is fully depreciated.

1875 X 80% = $1,500

If you have any other details regarding this question, please feel free to post them in the comment section.

[KathyP2]

Purchased Honda Accord in July 2013. The life of the auto is 5 years per the depreciation report. We took Sec 179 depr of $11,160 the first year and $1875 annual depreciation thereafter. At this rate, the vehicle will not be fully depreciated until 2024.  What if I retire before then and the auto is no longer used for business?

[MarilynG1]

@KathyP2  If you stop using your Business Vehicle before it is fully depreciated, you may be subject to Depreciation Recapture.

Click this link for more info on 179 Depreciation Recapture.