Are you ready for this?

[Snaggletooth]

A farmer gave $10,000 for a light pickup truck in 1985. Farm/business use, using a weighted average over the last 20+ years, is 56% (roughly, for purposes of discussion).
Truck has over 230,000 miles on it.

We have used the standard mileage rate every year. Using the depreciation component of the SMR (e.g. 2008 was 21 cents), we have taken over $12,000 in depreciation on this presumption over the last 20+ years.

The "weighted average" basis of original value would be $5600, or 56% of $10,000.

The amount of depreciation calculated is not only more than $5600, it is even more than the entire $10,000 paid for the truck.

Are there any consequences, such as:
a) depreciation component of SMR must be denied after basis reaches zero.
b) "excess" depreciation allowed but must be reported as LTCG income.
c) "excess" depreciation is allowed to accumulate, but must be recaptured when vehicle is sold.
d) "excess" depreciation is allowed to accumulate, but must be recaptured when vehicle is traded.
e) none of the above.

[JG EA]

If sold it is all handled on 4794 (or at least the business % is).
If it is trashed nothing is done.
If it is given away the recipient gets current basis.
If it is traded in do the traded in worksheet.
If TP dies then it gets FMV.

If it is still being used you don't have to stop the standard rate just because the depreciation has in theory all been used up. (We used to have to do that a long time ago.)

[erchess]

Agree with JG on all particulars

but I do have one question. Why are you using a weighted average rather than an arithmatic average and how are you calculating it? I know what a weighted average is (one that gives more weight to in this case the more recent numbers) but I don't know how to calculate one.

[Nashville]

Weighted Average

I believe in this context, the "weighted average" business use % is the calculated percentage over the life of the vehicle.

Example, client has car for 3 years, and drives 20K, 30K, and 40K respectively. His business miles are 10K, 15K and 10K respectively. His arithmetic average is 50% plus 50% plus 25%, or 125%/3, meaning an average of 41.7% per year.

His "weighted" average would total business miles, 35K divided by total miles 90K, or in his case: 38.9% Not a whole heap o' difference, but a preferred method I would think.

[Gretel]

Snag, look at the website below from the U.S. Master Depreciation Guide (2008) starting at page 524. The way I understand it is that you don't have to reduce basis below zero.

http://books.google.com/books?id=--pLHsdfhEoC&pg=PA527&lpg=PA527&dq=depreciation+of+mileage+component+exceeds+basis&source=web&ots=ZpQmIrKFqB&sig=JVuHTpGbqwSPHop7Tm-4efOH8nc&hl=en&ei=klmQSemYGoKqsAO-xemYCQ&sa=X&oi=book_result&resnum=2&ct=result#PPA525,M1