Consultant’s Corner: Vehicle Depreciation Using Actual Expenses

Q. In the past I took the standard mileage rate for my business auto, but now I want to switch to actual expenses. Since I am switching and took standard mileage rate for 2 years prior, should I adjust the cost basis for the auto for depreciation?

A fixed amount per mile is built into the standard mileage rate for depreciation expense, so while switching from the standard mileage method to the actual expense method is permissible with a business vehicle, you will need to figure the depreciation expense claimed on the vehicle under the standard mileage rate method to calculate the accumulated depreciation on the vehicle and the vehicle’s remaining cost basis, if any, that can be depreciated under the actual expense method. The depreciation expense that is built into the standard mileage for 2016 and previous tax years can be found in IRS Publication 463 below (see page 25):

https://www.irs.gov/pub/irs-pdf/p463.pdf

Assuming there is any cost basis remaining to depreciate, keep in mind that after the switch you must use straight-line depreciation for the vehicle for its remaining useful life. As discussed in the following IRS information:

“Generally, the Modified Accelerated Cost Recovery System (MACRS) is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986. However, if you used the standard mileage rate in the year you place the car in service and change to the actual expense method in a later year and before your car is fully depreciated, you must use straight-line depreciation over the estimated remaining useful life of the car.”

https://www.irs.gov/taxtopics/tc510.html

“Choosing the standard mileage rate. If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either the standard mileage rate or actual expenses.

If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period. For leases that began on or before December 31, 1997, the standard mileage rate must be used for the entire portion of the lease period (including renewals) that is after 1997.

You must make the choice to use the standard mileage rate by the due date (including extensions) of your return. You cannot revoke the choice. However, in later years, you can switch from the standard mileage rate to the actual expenses method. If you change to the actual expenses method in a later year, but before your car is fully depreciated, you have to estimate the remaining useful life of the car and use straight line depreciation.”

https://www.irs.gov/publications/p463/ch04.html