1. Depreciation Basics
When you use a vehicle for business, you recover its cost through depreciation over several years. Vehicles are 5-year property under MACRS (Modified Accelerated Cost Recovery System). This applies whether you own or lease the vehicle.
2. Section 179 Expensing
Section 179 allows you to deduct the full cost of qualifying property in the year placed in service. For 2024, the Section 179 limit is $1,220,000. However, passenger vehicles have special limits: the maximum Section 179 deduction for SUVs with gross vehicle weight rating over 6,000 pounds is $28,900.
3. Passenger Automobile Limits
For passenger automobiles (not SUVs over 6,000 lbs), depreciation is capped. For 2024, the first-year depreciation limit is $12,200 ($20,200 with bonus depreciation if applicable). Second year: $19,500. Third year: $11,200. Fourth and later years: $6,600 annually until fully depreciated.
4. Bonus Depreciation
Bonus depreciation allows 60% of the cost to be deducted in the first year (for 2024) in addition to regular depreciation. This percentage decreases each year: 40% for 2025, 20% for 2026, and 0% for 2027 and later. Bonus depreciation applies after applying Section 179 but before regular MACRS depreciation.
5. Lease vs. Buy
Leased vehicles do not use depreciation. Instead, a portion of each lease payment is deductible based on business use percentage. However, lessors include an inclusion amount in income for luxury vehicles, which reduces the deductible lease amount.
6. Documentation Requirements
Track business vs. personal use through mileage logs. Business use percentage determines the deductible portion of depreciation, interest, and other expenses. Mixed-use vehicles require allocation between business and personal portions.