Depreciation Recapture Rule for Cars

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Depreciation Recapture Rule

What to do if business use drops to 50% or less:

To qualify for accelerated MACRS, business use of your vehicle must be more than 50%.

Using accelerated MACRS allows you to deduct a higher amount of depreciation in the early years of the recovery period than you could deduct using the straight-line method of depreciation.

In the year business use drops to 50% or less you must stop using accelerated MACRS and start using straight-line depreciation for that year and all remaining years of the asset's recovery period.

As a result of this drop in business use to 50% or less, all that extra depreciation deducted in the early years for the asset by accelerated MACRS has to be recaptured, meaning, included in your income in the year business use dropped.

Recapturing depreciation:

Figure out, for the same time period:
- Depreciation claimed using accelerated MACRS (200% or 150% Declining balance methods), and
- Depreciation you could have claimed using straight-line depreciation.
Then:
- Subtract total straight-line depreciation from total accelerated MACRS depreciation.
The difference is the amount of MACRS depreciation in excess of straight-line depreciation.
Include the excess MACRS depreciation in your gross income (as other income). This is the recaptured depreciation.

Add the amount you included in your income to the adjusted basis of the property for figuring gain or loss when the asset is eventually disposed of.

Example:

Business use drops to 50%

In June 2007, Jerry purchased and placed in service a pickup truck that cost $18,000. (Gross vehicle weight over 6,000 pounds, so it was not subject to the annual ceilings for cars and light trucks)
His business use from 2007 through 2010 was 100%.
Jerry claimed a section 179 deduction of $10,000.
He began depreciating the remaining $8,000 using the 200% declining balance method over a 5-year GDS (General Depreciation System) recovery period.
During 2011, he used the truck 50% for business and 50% for personal use.

Excess depreciation (the recaptured amount) is $4,018, figured as follows:

Total Section 179 Deduction: $10,000

PLUS

Depreciation Claimed From 2007 Through 2010: $6,618, (using 200% MACRS, half-year convention)

EQUALS

$16,618

MINUS

Depreciation Using the Straight-Line Method: $12,600
(from 2007 through 2010),

EQUALS

$4,018: Recaptured Depreciation

Form 4797:

Report the recaptured amount, $4,018, in Part II of Form 4797, Sales of Business Property and attach it to Form 1040.

Reporting Income:

Report the recaptured amount as income on the same form or schedule you used to take the depreciation deduction.

So, if you're self-employed and used Schedule C to deduct the depreciation, just add the $4,018 on the Other income line of Schedule C.

Employees:

If you were an employee and used Form 2106, report the recaptured amount as Other income on Form 1040.

Basis Adjustment:

Add the recaptured amount to the adjusted basis of the property for figuring gain or loss when the property is eventually disposed of.

When the Recapture Rule Does Not Apply:

The recapture rule does not apply if you had always been using straight-line depreciation for the property (there would not be any excess depreciation involved).

Car Expenses-Depreciation: Six Points to Keep in Mind Before Choosing a Depreciation Method

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