Step 7: Depreciation of vehicles

Depreciation is the amount you can deduct to recover the cost or other basis of your vehicle over a certain number of years.

Generally, the federal 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 placed the car in service and changed to the actual expense method in a later year and before the car is fully depreciated, you must use straight-line depreciation over the estimated remaining useful life of the car. There are limits on how much depreciation you can deduct (from IRS Topic No. 510, Business Use of Car ).

For additional information on federal depreciation methods and limits, see Itemized deductions and review the 2023 IRS Publication 463, Travel, Gift, and Car Expenses .

Line 30: Enter the vehicle’s actual cost or other basis. Do not reduce your basis by any prior year’s depreciation. However, you must reduce your basis by the following federal items: any deductible casualty loss, deduction for clean-fuel vehicle, gas guzzler tax, alternative motor vehicle credit, or qualified plug-in electric vehicle credit you claimed.

If you traded in your vehicle, your basis is the adjusted basis of the old vehicle (reduced by depreciation calculated as if 100% of the vehicle’s use had been for business purposes) plus any additional amount you pay for the new vehicle.

If you converted the vehicle from personal use to business use, your basis for depreciation is the smaller of the vehicle’s adjusted basis or its FMV on the date of the conversion.

Line 31: Enter the amount of any IRC § 179 deduction and, if applicable, any special depreciation allowed for this tax year, using current IRC rules, methods, and limitations, visit www.irs.gov .

Line 32: To calculate the basis for depreciation, multiply line 30 by line 14. From that result, subtract the total amount of any IRC § 179 deduction and special depreciation allowance claimed this year (see line 31) or any IRC § 179 deduction and special depreciation allowance claimed in any previous year for this vehicle.

Line 33: If you used the standard mileage rate in the first year the vehicle was placed in service and now elect to use the actual expense method, you must use the federal straight-line method of depreciation for the vehicle’s estimated useful life. Otherwise, use MACRS (declining balance method). For additional information, see Itemized deductions and review the 2023 IRS Publication 946, How to Depreciate Property .

Line 36: Using the date you placed your vehicle in service, use the instructions and applicable chart ( Limits for Passenger Automobiles (Except Trucks and Vans) or Limits for Trucks and Vans ) in the instructions for 2023 federal Form 2106, to find the amount to enter on line 36.