Auto Depreciation and mileage

[dtlee]

At one time they wanted us to use 4 years or 60,000 miles for "straight-line" and wanted us to use "units of consumption" depreciation (that was back before they eliminated the two mileage rate method, one (with depreciation) for the first 15000 and a different rate for additional miles (and, no, the post 15000 rate was not equal to the rate with depreciation minus the depreciation component). They likely prefer us to use MACRS 5 Year Straight Line Recovery (though my cars have all lasted over 12 years recently).

[TaxGuyBill]

After thinking about it, I have a question. I have NOT yet looked at things in this regard, but when exactly does the 3 year "useful life" start (let's assume you are supposed to use a 3 year "useful life").

1st year, Standard Mileage Rate.
2nd year, Actual Expenses, using 3 years and Salvage.
3rd year, Standard Mileage Rate.
4th year, Actual Expenses.

So let's say we are now in year 4. Does the "3 years" start in year 1, 2, 3 or 4?

[dtlee]

Presumably in the fourth year you could completely depreciation whatever remaining basisvtherevis, subject to the percentage business use because it would have less that a year of useful life. Then you could go back to the standard mileage rate and keep depreciating it.

As I recall, when using straight line, both business and personal portions are depreciated based on the full year or gross mI'lles) but only the business portion is allowed as a deduction. This is another reason no one does this.

[TaxGuyBill]

As I recall, when using straight line, both business and personal portions are depreciated based on the full year or gross mI'lles) but only the business portion is allowed as a deduction. This is another reason no one does this.

I realize you are probably too busy to look for it during tax season, but if/when(after tax season) you could track down a citation for that, I would really appreciate it (it is not for this scenario, but for another situation that I've wondered about).

[dtlee]

I will try. I have a bunch of stuff on another computer.

While we are waiting for the neverending season to end, you may want to look at how they compute trade-ins of vehicles, you may want to look at the way the IRS handles trade-ins (or used to handle trade-ins) where they compute the basis as if 100% of the vehicle was used for business before apportioning gain. Hopefully I will have some time in the late summer.

[Rapid Robert]

I haven't digested all the discussion since my last post in this thread, but so far I have two take-aways, (Disclaimer: for entertainment purposes only, as I already observed, not a real world issue).

1) I think there is a logical flaw in the tax law/regs. If I make an irrevocable election out of MACRS by using standard mileage rate in my first year, then how can I switch to SL depreciation in a later year, if SL is strictly MACRS? It seems there are two types of SL depreciation: one under MACRS, and one that is not under MACRS (because you elected out). How do you tell the difference, and if you can't then is there really any difference? Has this ever been taken to court?

2) Literally, "straight line" means that if you plot it on a graph, the line is straight, neither accelerated or decelerated (curved). So, in the first year, what if I use actual cost method, and also elect out of MACRS by using a SL depreciation rate of $0.27/mile? (the depreciation component of the 2020 standard mileage rate). Why then could I not switch to standard mileage in a later year? (Which TaxGuyBill said I absolutely could not do).

This (using actual costs including cents per mile depreciation in first year) could actually make sense if the vehicle is old, let's say FMV of $3K (so MACRS depreciation is not worth much anyway), but now I can deduct a percent of all repairs, insurance, gas, etc. If it's an older car, repairs could be significant, and if I'm a bad driver, insurance could be significant, and if I live in California, gas could be significant. All I need is low total mileage and high percent of business use (say, 4,000 total miles and 2,000 business, which could include travel to a tax professional CE seminar).

[TaxGuyBill]

1) It seems there are two types of SL depreciation: one under MACRS, and one that is not under MACRS (because you elected out).

How do you tell the difference, and if you can't then is there really any difference?


2) So, in the first year, what if I use actual cost method, and also elect out of MACRS by using a SL depreciation rate of $0.27/mile?

1a) Yes, SL can be in MACRS (§168) or non-MACRS (§167). However, see my comment about #2.

1b) Just looking at the tax return, it is not easy. However, see my comment about #2.

2) You can't do that. You are required to use MACRS unless you qualify to to use the elect-out in paragraph "f" (which includes the Standard Mileage Rate). So if you are using Actual Expenses in the first year, you must use MACRS and almost all 'normal' depreciation is MACRS. There is no provision to randomly choose to a depreciation rate of $0.27/mile as part of Actual Expenses. You either use the Actual Expenses, or you use the Standard Mileage Rate.