How to Really Depreciate a Vehicle for Business – Don’t Make This Mistake + FAQs

Lana Dolyna, EA, CTC

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Depreciating a business vehicle can save your company thousands of dollars in taxes.

Whether you run a delivery service, operate a sales fleet, or use your personal car for business errands, understanding how vehicle depreciation works is crucial.

What Is Business Vehicle Depreciation (and Why It Matters)? 🤔

Vehicle depreciation is a tax deduction that lets you recover the cost of a business vehicle over time. Instead of deducting the entire price of a car or truck in the year you buy it, you generally write off portions of the cost across several years. This aligns with the idea that the vehicle’s value wears down (depreciates) as you use it for business.

Why it matters: For small business owners, depreciation translates into significant tax savings. By spreading out the vehicle’s cost as an expense each year, you lower your business’s taxable income year after year. Essentially, depreciation lets you convert the vehicle’s purchase price into deductible business expenses, reducing your tax bill. Not only does this adhere to IRS rules, but it also helps you manage cash flow by not missing out on valuable deductions.

Example: Suppose you buy a delivery van for $50,000. Without depreciation, you’d have no deduction beyond perhaps the immediate expense options (if allowed). With depreciation, you might deduct around $10,000 (or more) each year over several years. If your tax rate is 24%, each $10,000 deduction saves about $2,400 in taxes. Over time, that’s real money back in your pocket. 💸

Step-by-Step: How to Depreciate Your Business Vehicle 🧮

Depreciating a vehicle for business involves a series of steps to ensure you’re following IRS guidelines and optimizing your deduction. Here’s a step-by-step roadmap:

Step 1: Confirm Business Use Percentage

Determine how much you use the vehicle for business versus personal driving. The IRS only allows depreciation on the business-use portion of the vehicle. For example, if you drive your car 80% for business and 20% for personal use, you can only depreciate 80% of the vehicle’s cost. It’s crucial to keep mileage logs or records to substantiate the business use percentage. (If business use is 50% or less, special rules apply — more on that later.)

Step 2: Calculate the Vehicle’s Depreciable Basis 💲

The depreciable basis is essentially the portion of the vehicle’s cost that can be depreciated. Start with the purchase price (including sales tax and any improvements or upgrades to the vehicle). If you traded in another vehicle, use the carryover basis from that trade. Now adjust this cost by the business-use percentage from Step 1.

For example: You buy a car for $30,000 and use it 100% for business. Your depreciable basis is $30,000. If you use it 80% for business, your basis for depreciation is $30,000 × 0.80 = $24,000. This is the amount on which depreciation calculations will be based.

Step 3: Choose a Depreciation Method or Deduction Strategy

Now decide how you want to depreciate the vehicle on your tax return. There are a few paths, and you can often combine strategies:

Standard MACRS Depreciation: Most business vehicles are depreciated using the IRS’s Modified Accelerated Cost Recovery System (MACRS). Under MACRS, a passenger automobile or light truck is classified as 5-year property. This doesn’t mean you only depreciate for 5 years; rather, it defines the schedule of percentages you deduct each year. MACRS for vehicles uses accelerated rates (more deduction in earlier years) with a “half-year convention” (treats the vehicle as placed in service halfway through the first year by default). We’ll illustrate the yearly rates in a table soon.
Section 179 Deduction: Section 179 is a special tax provision that allows you to expense (deduct immediately) a large portion or all of the vehicle’s cost in the first year, instead of spreading it out. You can elect Section 179 for a vehicle purchase if the vehicle is used more than 50% for business and the total Section 179 claims don’t exceed the annual limit. As of recent years, the overall Section 179 deduction limit is over $1 million (it adjusts annually for inflation, e.g. $1.16 million for 2023). However, passenger vehicles have a specific Section 179 cap – typically around $10,000 to $11,000 for cars, and a higher cap (around $27,000–$30,000) for heavy SUVs. Section 179 is great for immediately reducing taxable income, but it’s limited by your business’s net income (you can’t use it to create a loss; any unused portion can carry forward).
Bonus Depreciation: Bonus depreciation (also called the special depreciation allowance) is another tool for first-year write-offs. In years when bonus depreciation is available, it lets you deduct a set percentage of the vehicle’s cost upfront. Under the Tax Cuts and Jobs Act, bonus depreciation was 100% for new and used qualifying property placed in service between late 2017 and 2022 – meaning you could write off the entire business portion of a vehicle in the first year. This is now phasing down: for example, 80% bonus in 2023, 60% in 2024, and so on (unless laws change). Bonus depreciation is not limited by business income, so it can create a tax loss. It can be used alongside Section 179: typically, you apply Section 179 first (if you choose to), then bonus depreciation on any remaining basis, and finally regular depreciation on whatever is left.

Choosing the strategy: If you want the biggest immediate deduction, combining Section 179 and bonus depreciation (if available) can potentially write off most or all of your vehicle’s business cost in Year 1. On the other hand, if you prefer to spread deductions over several years (or you don’t have enough income to absorb a big deduction this year), you might use just the standard depreciation without electing these accelerated options. Keep in mind, once you use up the vehicle’s cost via Section 179 or bonus, you won’t have depreciation deductions in later years. It’s a timing decision: get the benefits now vs. later.

Step 4: Apply the Correct Recovery Period and Method

For vehicles, the standard recovery period (the time over which you depreciate the asset) is 5 years under MACRS (this applies to cars, vans, and light trucks). The IRS provides depreciation percentage tables for 5-year property. With the half-year convention, the depreciation schedule typically looks like:

Year 1: 20% of the depreciable basis
Year 2: 32% of the basis
Year 3: 19.2%
Year 4: 11.52%
Year 5: 11.52%
Year 6: 5.76%

This adds up to 100%. (Year 6 gets the small leftover due to the half-year in year 1.) If you don’t use Section 179 or bonus on a fully business-use vehicle, these percentages determine your write-off each year.

Important: For passenger automobiles (weighing 6,000 lbs or less), the IRS imposes annual depreciation deduction limits often called “luxury auto caps.” Even if the MACRS percentages would yield a higher number, you cannot deduct above the cap for that year. For example, in 2023 the max depreciation for a car in the first year was $12,200 (if you don’t claim bonus) or $20,200 (if you do claim bonus). There are set dollar limits for each year of the vehicle’s life. These caps mainly affect higher-cost cars. If your vehicle is inexpensive or you don’t hit the limit, you can use the full MACRS percentage. Vehicles with a gross weight over 6,000 lbs are exempt from these “luxury auto” caps (they’re not considered “luxury” in tax terms, regardless of actual cost).

Additionally, if your business use of the vehicle falls to 50% or below in any year, you can’t use accelerated depreciation anymore. In fact, if you had taken Section 179 or bonus and then business use drops ≤50%, the IRS will recapture (take back) some of the tax benefit — essentially you may have to pay back taxes on the excess depreciation. In that scenario, you’d also switch to a straight-line method for depreciation going forward.

Step 5: Claim Depreciation on IRS Form 4562 📄

To actually take the deduction, you’ll fill out IRS Form 4562: Depreciation and Amortization on your tax return. This form has specific sections for different depreciation items:

Part I of Form 4562 is for the Section 179 deduction. If you elect to expense part of the vehicle’s cost under Section 179, you enter the details here (cost, business use %, elected amount, etc.).
Part II is for special depreciation allowance (bonus depreciation). Here you indicate if you’re claiming bonus and how much.
Part III is for listed property (which includes vehicles). You’ll enter information about your vehicle: the cost, date placed in service, business-use percentage, depreciation method, and the deduction for the year. There’s also a section in Part V where you detail the business vs. personal use miles to ensure you meet the >50% requirement for accelerated methods.
The remaining parts handle other depreciation (for assets that aren’t listed property) and amortization, which aren’t our focus here.

Filing this form ensures you’ve documented the deduction. Keep this with your tax return, and maintain records (like purchase documents and mileage logs) in case of any IRS questions down the road.

Step 6: Repeat Each Year and Adjust if Needed

Each year, continue to depreciate the vehicle by following the schedule or applying any remaining bonus. Remember to adjust for any changes:

If your business usage % changes, you’ll need to calculate that year’s depreciation based on the new usage (and again, if dropping to 50% or less, special rules kick in).
If you made improvements to the vehicle (capital improvements, not routine maintenance), those might be depreciated separately.
If you sell or dispose of the vehicle before it’s fully depreciated, you’ll stop depreciating and handle any gain or loss on disposition. (Any amount you sold above the vehicle’s remaining depreciated value is typically taxable income, known as depreciation recapture up to the amount of depreciation you took.)

By following these steps, you methodically account for your vehicle’s cost over its useful life and stay compliant with tax regulations.

Key Depreciation Strategies: Section 179 vs. Bonus vs. Regular MACRS

Understanding the differences between Section 179, bonus depreciation, and standard MACRS is key to maximizing your benefit. Here’s a quick comparison of these strategies:

Feature	Section 179	Bonus Depreciation	Standard MACRS
Type of Deduction	Elective immediate expensing (you choose the amount up to limits)	Automatic (if you opt in for qualified assets, a set % is deducted)	Fixed annual schedule (no first-year boost unless combined with the others)
Maximum Deduction	Up to $1.2 million (approximate recent limit) across all assets; SUVs >6,000 lbs: around $28k limit; passenger cars: ~$11k limit in first year	No dollar limit on amount (you can bonus 100% of cost when allowed); limited by a percentage (e.g. 80% in 2023)	No upfront limit except annual luxury auto caps for cars under 6,000 lbs
Business Income Limit	Yes – cannot exceed your business’s taxable income (excess carries forward)	No – can create a loss or NOL (net operating loss)	N/A (each year’s depreciation just happens regardless of income)
Vehicle Eligibility	New or used assets, >50% business use. Certain vehicles (heavy SUVs) have reduced limit.	New and used assets (post-2017 law) >50% business use. Most business property with recovery period 20 yrs or less qualifies (vehicles do).	All business vehicles, but if >50% business use not met, must use straight-line instead.
How It’s Applied	You elect on a per-asset basis on Form 4562 (can choose all or part of an asset’s cost)	Automatically applies to qualifying assets unless you elect out; taken after Section 179 (remaining basis)	Default method – apply MACRS percentages each year to the basis left (after any 179/bonus)
Pros	– Huge first-year deduction if you have profit – You control the amount to match your needs – Can be used even when bonus drops to 0%	– Can also deduct large portion immediately – Not limited by income (useful if you want to create a tax loss) – Fairly straightforward (fixed percent)	– Spreads deductions over years, which can be good for future tax years – No special action required if not using other methods – Avoids using up all deductions at once
Cons	– Limited by income (excess carries over) – Has dollar caps (especially for vehicles) – Recapture if business use falls <50%	– Subject to change (phasing out by 2027) – Still subject to luxury auto annual caps for cars – If used fully, no deductions left for later years	– Lower deduction in early years compared to 179/bonus – Might miss immediate tax savings if not combined with others

In practice: You can actually use all three in combination for a vehicle:

Apply Section 179 to a portion (or all) of the business-use basis (respecting the caps).
Then take bonus depreciation on the remaining basis (if any).
Finally, depreciate whatever is left with MACRS over 5 years.

For example, imagine you purchased a heavy pickup truck for $80,000 (100% business use) in a year when 80% bonus is allowed. You could elect Section 179 on $50,000 of it, deducting that immediately. That leaves $30,000 basis. Then apply 80% bonus on $30,000 = $24,000 additional first-year deduction. Now $6,000 of basis remains to depreciate in later years with MACRS. This flexibility allows tailoring the deduction to your tax situation.

Real-World Examples: Vehicle Depreciation in Action 📊

Let’s illustrate how vehicle depreciation works with a few scenarios. These examples use hypothetical vehicles and assume the tax rules in effect for recent years:

Example 1: Standard Car (Sedan) – Using MACRS vs. Accelerated Options

Scenario: You buy a sedan for $30,000 in 2023 and use it 100% for business.

Without Section 179/Bonus: Using regular MACRS (5-year schedule), your depreciation deductions would roughly be:
- Year 1: 20% of $30,000 = $6,000 (this is below the luxury auto cap of $12,200 for year 1, so $6k is fully deductible).
- Year 2: 32% = $9,600.
- Year 3: 19.2% = $5,760.
- Year 4: 11.52% = $3,456.
- Year 5: 11.52% = $3,456.
- Year 6: 5.76% = $1,728 (the final bit of depreciation to sum to the full $30k).
  In total, over about 6 tax years, you’d deduct $30,000. Early years have higher amounts, easing the cost when the vehicle is newer (which aligns with the idea that a car’s value drops faster in initial years).
With Section 179 and Bonus: Now suppose you want a bigger deduction upfront. In 2023, bonus depreciation is available at 80%. You also have Section 179 available.
- You could elect Section 179 on, say, $10,000 of the car’s cost (remember, for passenger cars there’s a cap around this range for 179).
- Then take bonus on the remaining $20,000 basis. At 80%, that’s $16,000 bonus depreciation.
- That leaves $4,000 of basis. MACRS 5-year would depreciate that over the years (e.g., $800 first year, $1,280 second year, etc., small amounts).
- Combining these, Year 1 deduction becomes $10,000 (179) + $16,000 (bonus) + $800 (MACRS on leftover) = $26,800 in the first year. However, here the luxury auto limit would actually restrict your first-year deduction. The cap with bonus for 2023 was $20,200, so you couldn’t actually take the full $26,800 on a regular car in Year 1. You’d be limited to $20,200 in Year 1, and the rest of the deduction would carry into Year 2. In Year 2, you’d deduct the remaining amount (since the Year 2 cap is $19,500, there’s ample room).
Result: By using the accelerated methods, you maxed out the allowed deduction in Year 1 ($20,200). In Year 2 you’d finish depreciating the car with the remaining balance (since you had $30k total, about $9,800 would remain after Year 1’s max, which is within Year 2’s limit). In contrast, the standard MACRS path spread it out with $9,600 in Year 2 and more in later years. In both cases, you eventually deduct the full $30k, but the timing differs. Accelerating gives you more upfront (within allowed limits).

Example 2: Heavy SUV (Over 6,000 lbs) – Maximizing First-Year Write-Off

Scenario: Your company purchases a new heavy SUV for $60,000 in 2024, and it’s 100% business use. This SUV has a Gross Vehicle Weight Rating (GVWR) of over 6,000 lbs, which means the luxury auto caps do not apply. However, as an SUV (not a cargo van or pickup), it is subject to a Section 179 SUV limit (around $30,000 for 2024).

Here’s how you could depreciate it:

Section 179: You can elect up to $30,500 (the 2024 SUV limit) as a first-year Section 179 expense on this vehicle. Let’s take the full $30,500 deduction via Section 179.
Bonus Depreciation: After Section 179, the remaining basis is $29,500 ($60k – $30.5k). In 2024, bonus depreciation is 60%. You can take $17,700 (which is 60% of $29,500) as bonus depreciation.
Remaining MACRS: Now, $11,800 of the vehicle’s cost remains (the portion not covered by 179 or bonus). Under the 5-year MACRS, you’ll deduct this over the years. Year 1 MACRS on that leftover (half-year convention) would be about $2,360 (20% of $11,800) in addition to the above. Year 2 would deduct ~$3,776 (32%), etc., until the $11,800 is fully written off.

Total first-year deduction: $30,500 (179) + $17,700 (bonus) + $2,360 (MACRS) = $50,560 in Year 1. That’s over 84% of the vehicle’s cost deducted immediately. And because this is a heavy vehicle not subject to the passenger auto caps, you get to use the full deductions without an overriding dollar limit in Year 1. The remaining $9,440 will be depreciated across Years 2–6 approximately.

This example shows the power of combining Section 179 and bonus for heavier vehicles. Essentially, you nearly wrote off the entire $60k in the first year, giving a huge tax break upfront.

Example 3: Partial Business Use – Proportional Depreciation

Scenario: You buy a pickup truck for $40,000 in 2023, but you use it 75% for business (and 25% for personal use). The truck’s GVWR is 5,800 lbs (so it’s under 6,000 lbs, meaning luxury auto limits apply).

First, determine the depreciable basis: 75% of $40,000 = $30,000 that’s attributable to business use. The depreciation calculations will use $30,000 as the cost basis (not $40k).

Now, choose a method:

If you don’t use Section 179 or bonus, you depreciate $30,000 over time with MACRS (5-year schedule). Year 1 MACRS would be $6,000 (which is 20% of $30k). But recall the luxury auto first-year limit for 2023 without bonus is $12,200 – your $6,000 is below that, so it’s fine. Year 2 would be $9,600, well below the Year 2 cap of $19,500. Essentially, over 5-6 years you’ll deduct the full $30k following the normal schedule.
If you do use Section 179/bonus, ensure the business use is above 50% (it is 75%, so eligible). Let’s say you elect Section 179 on $10,000 of the business portion and then take 80% bonus on the remaining $20,000. That gives you $10,000 + $16,000 = $26,000 first year (plus a bit of MACRS on the remaining $4,000 basis). However, because the truck is under 6,000 lbs, the luxury auto cap with bonus ($20,200) would limit your first-year deduction to $20,200. So you’d actually end up with $20,200 deduction in Year 1, and then continue depreciating the rest (~$9,800) in the next year or two within the caps.

Key point: When a vehicle is not used 100% for business, all the limits and calculations (Section 179 limits, luxury caps) effectively scale down to your business-use percentage. In this example, since only 75% is for business, you effectively could only use 75% of the usual caps. Always pro-rate your deductions to the business use.

These scenarios demonstrate how depreciation works across different vehicle types and usage situations. For a light-duty vehicle with partial business use, depreciation is proportional. For heavier vehicles, tax law gives a favorable boost allowing much larger immediate deductions.

Mistakes to Avoid When Depreciating a Business Vehicle ⚠️

Depreciation can get complex, and there are pitfalls that small business owners should steer clear of. Here are some common mistakes and how to avoid them:

Not Tracking Business vs. Personal Use: Failing to keep accurate records of business miles can lead to disallowed deductions if audited. 📝 Avoidance: Maintain a mileage log or use an app to log trips. Always know your percentage of business use each year.
Taking Full Deductions on Personal Use: Trying to write off 100% of the vehicle when you have personal miles on it is a big no-no. Only the business-use portion is deductible. If you use the car 70% for business, you can only depreciate 70% of its cost.
Using Section 179/Bonus Without Qualifying: Remember the >50% business use rule. If you claim accelerated depreciation (Section 179 or bonus) and your business use later drops to 50% or below, you’ll face recapture – meaning you may have to pay back some of the tax benefit. Avoidance: Don’t aggressively claim 179 or bonus if you aren’t sure you’ll keep business use high on that vehicle for the foreseeable future.
Exceeding Luxury Auto Limits: If you’re not aware of the annual depreciation caps on passenger automobiles, you might assume you can deduct the full MACRS amount or large Section 179 amount in year one. The IRS will limit it. Avoidance: Know the yearly depreciation limits for your vehicle if it’s under 6,000 lbs. Plan your deductions (179/bonus) to stay within those or understand any excess will carry to future years.
Switching from Standard Mileage to Actual Expenses Improperly: If you start by using the IRS standard mileage rate for a vehicle and then later want to switch to actual expenses (which include depreciation), you must be careful. If you didn’t claim depreciation in the first year (because you used mileage), when you switch to actuals, your depreciation method is restricted (you generally have to use straight-line for the remaining life, rather than catching up accelerated depreciation). Avoidance: Decide early on if the actual expense method (with depreciation) or the mileage rate is more beneficial, and be consistent. If you do switch to actual expenses in a later year, consult a tax professional to do it correctly.
Forgetting to Recapture Depreciation on Sale: When you sell or trade in the vehicle, all the depreciation you claimed (or could have claimed) reduces your tax basis. If you sell the car for more than that reduced basis, the gain is taxable (and depreciation is “recaptured” as ordinary income to the extent of the depreciation taken). Some owners forget this and are surprised by a tax bill after selling a fully depreciated car. Avoidance: Keep track of your adjusted basis (cost minus depreciation). When disposing of the vehicle, calculate any gain and remember that previously deducted depreciation doesn’t just disappear – it’s accounted for in the tax on sale.
Ignoring State Depreciation Differences: A deduction might be allowed federally but disallowed or deferred on your state tax return. For instance, many states don’t allow bonus depreciation or have a lower Section 179 limit. Avoidance: Check your state’s rules. You may need to keep a separate depreciation schedule for state taxes to reflect different rules (for example, adding back bonus depreciation).

By being aware of these mistakes, you can take full advantage of vehicle depreciation without running into trouble or missing out on deductions.

Key Terms and Concepts 🔑

Understanding depreciation involves some jargon. Here are key terms and concepts explained in plain language:

Depreciation: Allocation of an asset’s cost over its useful life. Instead of expensing $50,000 all at once, you deduct portions each year as the asset wears out or is used up.
MACRS (Modified Accelerated Cost Recovery System): The default tax depreciation system in the U.S. for most business property. “Accelerated” means larger deductions in early years and smaller in later years, according to IRS tables.
Recovery Period: The number of years the IRS says an asset should be depreciated. For business vehicles (cars, vans, light trucks), it’s 5 years under MACRS. (This is sometimes called “class life” or “useful life” in tax context, though actual useful life might be different.)
Half-Year Convention: A rule in depreciation assuming all assets placed in service during the year were placed in service in the midpoint of that year. Practically, it means in the first calendar year you only get a half-worth of depreciation (built into the percentages). This is why MACRS 5-year actually takes six calendar years to fully depreciate (the first and last are half-years).
Listed Property: A category of assets that the IRS considers prone to personal use. It includes vehicles, as well as things like computers and cameras (though rules have changed for some). Listed property has special requirements: if you don’t use them >50% for business, you can’t use accelerated depreciation or Section 179 on them, and you must use straight-line depreciation.
Section 179 Expensing: A tax provision that allows businesses to elect to immediately deduct the cost of qualifying assets (like equipment and vehicles) up to a large limit in the year of purchase. Think of it as turbo-charging your deduction in Year 1, subject to limits.
Bonus Depreciation: An additional first-year depreciation allowance set by law. When available, it allows a percentage (up to 100%) of the asset’s cost to be written off in the first year. It’s “bonus” because it’s on top of (or in place of) the normal depreciation schedule for that first year.
Luxury Auto Depreciation Limit: Despite the name, it applies to most regular cars. It’s an annual maximum depreciation deduction for passenger vehicles under a certain weight. These limits reset each year and typically span four years. They restrict how much depreciation (including 179 and bonus) you can claim each year on a car or light truck. Heavier vehicles above 6,000 lbs GVWR are exempt from these caps.
Gross Vehicle Weight Rating (GVWR): The manufacturer’s rating of the vehicle’s maximum weight (including its own weight and cargo). This matters because if GVWR > 6,000 lbs, the vehicle is not subject to luxury auto caps. Examples include many large pickups and SUVs.
Adjusted Basis: The remaining value of an asset for tax purposes. Initially, your basis is the cost. As you depreciate the vehicle, the basis is reduced. If you bought a truck for $50,000 and have taken $30,000 in depreciation, the adjusted basis is $20,000. If you sell the truck for $25,000, your taxable gain would be $5,000 over that adjusted basis.
Recapture: The process of “recapturing” a tax benefit. If you took depreciation deductions, the IRS may recoup some of that benefit in certain situations. For example, selling an asset for a gain triggers depreciation recapture (taxed as income up to the amount of depreciation taken). Or if you stop using an asset predominantly for business after using accelerated depreciation, the IRS will require you to add back some of the prior deductions to your income.
Form 4562: The tax form used to claim depreciation and Section 179. It details all the information about your depreciable assets and deductions. For vehicles, it’s where you report the vehicle, its business use percentage, and the depreciation or Section 179 claimed for the year.
Standard Mileage Rate vs. Actual Expenses: Two methods for deducting vehicle costs. The standard mileage rate is a per-mile rate (e.g., 65.5 cents per mile in 2023) that factors in depreciation, fuel, maintenance, etc. If you use this method, you can’t separately depreciate the vehicle because the depreciation is baked into the rate. Actual expenses means you track actual costs (fuel, maintenance, insurance, etc.) and depreciation. When you choose actual expenses, that’s when everything in this article about depreciation applies.
Alternative Depreciation System (ADS): A slower depreciation method required in certain cases (or by choice). For vehicles, ADS uses straight-line depreciation over a longer period (for autos, typically 5 years straight-line if business use ≤50%). Some businesses use ADS to align with financial accounting or to comply with certain regulations, or for alternative minimum tax considerations.

Knowing these terms helps you navigate discussions with your CPA or understand IRS instructions related to vehicle depreciation.

Federal vs. State Depreciation: Navigating Different Rules 🗺️

While we’ve focused on federal tax rules, be aware that state tax laws can differ:

Bonus Depreciation Differences: Not all states allow the federal bonus depreciation. For instance, California and New York do not permit bonus depreciation – they require you to add back any bonus claimed federally and use regular depreciation for state taxes. This means if you wrote off a vehicle 100% with bonus for IRS purposes, you might still have to depreciate it over years on your state return.
Section 179 Limits: Many states have their own limits for Section 179 expensing. Some conform to the federal dollar limit, while others cap it at a lower amount (for example, a state might only allow up to $25,000 expensing). Using our earlier example, if you expensed $30,500 on that SUV under federal Section 179, your state might only allow $25,000 and make you depreciate the rest over time.
Different Recovery Periods or Methods: A few states require you to use ADS or some other method for certain assets. This usually affects very specific scenarios or certain types of property. Most commonly for vehicles, it’s the bonus and 179 differences that matter.

What to do: Check your state’s tax conformity rules or talk to a tax professional about it. Often tax software will handle this automatically by having you input depreciation one way for federal and another for state. But it’s good to know so you aren’t surprised by a smaller deduction on your state return.

Remember, federal law largely drives the strategy (since that’s usually the bigger dollar impact), but always consider the state implications to optimize the overall tax outcome.

Frequently Asked Questions (FAQs) 🤔

Is bonus depreciation the same as Section 179?

No. Both give big first-year deductions. Section 179 has dollar and income limits. Bonus depreciation is a set percentage (up to 100%) with no dollar cap and can create a loss.

Do I have to use Section 179 or bonus depreciation?

No. You can choose not to. If you prefer spreading the deduction, skip 179 and bonus. The default is regular MACRS depreciation over the vehicle’s life.

What if my business has no profit – can I still depreciate a vehicle?

You can still depreciate. Section 179 can’t exceed your profit (it won’t create a loss). Bonus depreciation isn’t limited by income, so it can create a loss that carries forward.

Can I switch from the standard mileage rate to actual depreciation later?

Yes, but there are restrictions. If you used the standard mileage in year one, you must use straight-line depreciation when switching to actual expenses later. You also can’t retroactively take bonus or Section 179.

Are leases treated differently for vehicle deductions?

Yes. If you lease a vehicle, deduct the business portion of lease payments instead of depreciation (since you don’t own it). High-value leases require adding a small “lease inclusion” amount to income, limiting deductions.

What happens if I sell my business vehicle?

Calculate gain or loss. If the sale price exceeds the vehicle’s adjusted basis (cost minus depreciation), the excess (up to the original cost) is taxable recaptured income. Selling below basis can yield a deductible loss.

Can I depreciate multiple vehicles at once?

Yes. Each business vehicle is depreciated separately. You can split Section 179 among multiple assets (up to its overall limit). Bonus depreciation can also cover all qualifying vehicles, potentially writing off a whole fleet.