Straight Line Depreciation for Cars

[Bees Knees]

A discussion on the other board over straight-line depreciation for cars prompted me to post this:

Rev. Proc. 2004-64 says:

“The business standard mileage rate may not be used to compute the deductible expenses of an automobile for which the taxpayer has (a) claimed depreciation using a method other than straight-line for its estimated useful life, (b) claimed a section 179 deduction, or (c) used the Accelerated Cost Recovery System under former section 168 or the Modified Accelerated Cost Recovery System (MACRS) under current section 168. By using the business standard mileage rate, the taxpayer has elected to exclude the automobile (if owned) from MACRS pursuant to section 168(f)(1). If, after using the business standard mileage rate, the taxpayer uses actual costs, the taxpayer must use straight-line depreciation for the automobile's remaining estimated useful life (subject to the applicable depreciation deduction limitations under section 280F).”

The confusion here lies in what is meant by straight-line depreciation for the remaining estimated useful life.

This is referring to straight-line depreciation that pre-dates ACRS and MACRS depreciation where you have a prescribed class life for various kinds of assets as opposed to having to “estimate” the useful life of an asset.

Prior to 1981, you would guess, or estimate what you thought the life of an asset would be, subtract out the estimated salvage value of it at the end of that life, and then depreciate it straight-line, allocating the first and last year depreciation by the number of months it was in service for those years.

Straight-line election under MACRS does not do it this way. MACRS has you use the prescribed class life for that asset (cars would be 5 years), and use either the half-year or mid-quarter conventions for the first and last year.

The question then that comes up: “Can I use actual expenses and straight-line over its estimated useful life in year one so that I can switch back and forth from year to year between the actual expense method and the standard mileage method?” Maybe I have one year where there are high repair costs, so actual expenses would be more advantages, but then another year where high mileage and low maintenance makes the standard mileage method better.

Well, what does the Rev. Proc. above say? Can you elect straight-line over estimated useful life in year one? The Rev. Proc. does not say you can. I am not aware of any election to use straight-line other than Section 168(b)(3)(D) and Section 168(g)(1)(E), both of which allows you to elect straight-line without regard to salvage value using a prescribed asset class life. In other words, these are still MACRS cost recovery methods under Section 168 that disqualify you from switching to the standard mileage method under Rev. Proc. 2004-64.

That being said, then, if you use actual expenses in year one, even if straight line depreciation is elected, you have disqualified that car from ever switching to the standard mileage method. It is stuck using actual expenses for all eternity.

How about this question: If I use the standard mileage method in year one, can I ever switch to actual expenses?

The Rev. Proc. says yes. It says:

“If, after using the business standard mileage rate, the taxpayer uses actual costs, the taxpayer must use straight-line depreciation for the automobile's remaining estimated useful life (subject to the applicable depreciation deduction limitations under section 280F).”

I think that is pretty clear. It appears to be a special case where a taxpayer can use pre-1981 straight line depreciation after a year in which the standard mileage method was used.

So bottom line is you have two choices in year one:

1) If you use actual expenses in year one, you can never switch to the standard mileage method in any following year for that car.

2) If you use standard mileage method in year one, you can switch to actual expenses in a following year, but you must use straight-line over its remaining estimated useful life with salvage value and all the other pre-1981 rules, subject to Section 280F limits.

[abby]

thank you, Bees

This is the kind of thing that will make me a loyal TMI follower as long as I'm a tax preparer.

Thanks so much for taking sticky topics and offering clear, concise guidance.

Most of us probably know that once we use actual expenses in the first year, we're stuck with it, but I'll wager that many of us have struggled with the SL rules and if there was an exception hidden in them.

This board has made clear that you folks care about going the extra mile and getting it right.

Ditto to all masterly pseudonymers.

[Chief]

SL Dep for Cars

BG I most certainly agree and support the former post. You have a loyal following.

[Gretel]

Ditto here

I was confused on this my first year in business and made this mistake myself. Thank you for the clarity.

I have an additional question. If you trade your cars are you stuck with your first year's choice for your first car for all eternity?

[Bees Knees]

Nobody knows, not even IRS.

They are requesting guidence from the public through T.D. 9115 which says:

"Property acquired in a like-kind exchange or involuntary conversion to replace property whose depreciation allowance is computed under a depreciation system other than MACRS, or to replace property for which a taxpayer made a valid election under section 168(f)(1) to exclude it from the application of section 168 (MACRS), is not within the scope of the temporary regulations. Additionally, this regulation does not provide guidance for a taxpayer acquiring property in an exchange for property that the taxpayer depreciated under the Accelerated Cost Recovery System (ACRS) or for a taxpayer acquiring an automobile for another automobile for which the taxpayer used the Standard Mileage Rate method of deducting expenses. Comments are requested on the depreciation treatment of like-kind exchange or involuntary conversion transactions described above and whether the depreciation treatment of these transactions should fall within the scope of this regulation."

I guess until they decide to make a stand on the issue, you are free to change methods when a car is traded.

[Bees Knees]

The question then that comes up: “Can I use actual expenses and straight-line over its estimated useful life in year one so that I can switch back and forth from year to year between the actual expense method and the standard mileage method?” Maybe I have one year where there are high repair costs, so actual expenses would be more advantages, but then another year where high mileage and low maintenance makes the standard mileage method better.

Well, what does the Rev. Proc. above say? Can you elect straight-line over estimated useful life in year one? The Rev. Proc. does not say you can. I am not aware of any election to use straight-line other than Section 168(b)(3)(D) and Section 168(g)(1)(E), both of which allows you to elect straight-line without regard to salvage value using a prescribed asset class life. In other words, these are still MACRS cost recovery methods under Section 168 that disqualify you from switching to the standard mileage method under Rev. Proc. 2004-64.

That being said, then, if you use actual expenses in year one, even if straight line depreciation is elected, you have disqualified that car from ever switching to the standard mileage method. It is stuck using actual expenses for all eternity.

I just attended an NATP seminar where their book says you can use the standard mileage method in a later year if you elect to use straight line in year one.

That may be true if you originally purchased a vehicle prior to 1981 and used straight line over its estimated life in year one, but it is not true for any vehicle purchased today. That is why IRS Pub 463 page 16 says if you want to use the standard mileage method, you have to use it in the first year, period. No mention of electing straight line depreciation in the first year.

[Nashville]

Huge Trucks

I don't use actual for ANY vehicle expenses except those which are clearly not listed property. I've always believed if you start with actual costs, you have to stick with them until the car is disposed.

Every year I have at least one client who brings his family in the back seat of shiny new $60,000 six passenger truck with immaculate factory paint still intact. He tells me this is the truck he takes to work over rocky-rough hard-hat areas and wants me to get back as much money as I can from Uncle Sam to help pay for it.

My question: How many miles did you drive for business purposes?

His answer: Truck cost me $60,000 and I put another $2,000 in a new liner.

My question (again): How many miles did you drive for business purposes?

His answer: Burns a lot of gas. Only 9 miles to the gallon.

My question (again): How many miles did you drive for business purposes?

His answer: Dunno. Should I keep a log?

[[[ The saga continues - year after year ]]]

"Great, or Good, or Kind, or Fair
I will ne'er the more despair
For if she be not thus to me
What care I from whom she be?" -- George Wither

[RLymanC]

Sad situation

on a driving school.
Because he had 4 vehicles he was told he had to depreciate. He drives each car about 45,000 each year. I'm trin to get him to trade or sell, no luck so far

[AJsTax]

driving school

on a driving school.
Because he had 4 vehicles he was told he had to depreciate. He drives each car about 45,000 each year. I'm trin to get him to trade or sell, no luck so far

is not incorporated? that is rather risky if he is not, I would not want to run a driving school as a sole proprietor and a corp may not use standard mileage.

Just my first reaction when I read your post and a possible reason why he was told that.?

[erchess]

Cool ty bees

I took a tax course in the fall of 1992 where I was taught that if you take actual expenses in the first year you are stuck then until you get rid of the vehicle but that having taken standard mileage you may change year to year depending on which is greater as long as you remember that some of the SMR taken in earlier years WAS depreciation.

I don't think I have ever had a client who had any idea what his or her actual expenses were. The often had some receipts but expressed confidence that they had lost more than they had kept and when I explained that in any event only the business portion of actual would be deductible they have been happy to take SMR.

This thread has enlightened me in one respect. I have never done so but I have for a long time been under the impression that if I wanted I could use Pre 1981 Straight Line or Sum of the Year's Digits or a host of other methods just because I felt like it and the client agreed.

[Black Bart]

RLymanC,

on a driving school.
Because he had 4 vehicles he was told he had to depreciate. He drives each car about 45,000 each year. I'm trin to get him to trade or sell, no luck so far

I think it takes FIVE cars to disqualify him -- see TMI 10-5 (1040 Edition/Automobiles Listed Property).

[joanmcq]

What year was it? Used to be two cars..

[Bees Knees]

What year was it? Used to be two cars..

The five or more vehicle rule began in 2004. Prior to 2004, two or more vehicles disqualified the standard mileage rate.

[joanmcq]

thanks Bees. the details of these things tend to fade into foggy memory, and doing taxes and tax audits it becomes increasingly difficult to remember what year is what!

[AuditorTurnedGood]

saw a client

last year when I swung by for some documentation hooking up the boat to the 100% business use, Section 179 deduction in the drive way. I asked them not to let me see that again.