Modified Accelerated Cost Recovery System (MACRS)

Gregory J. Cook, EA, CPA+ Accredited Tax Advisor Past President Alabama Society of Enrolled Agents Past President Alabama Association of Accountants

Depreciation methods. You can use one of the following methods to depreciate your car.

*The 200% declining balance method (200% DB) over a 5-year recovery period that switches to the straight line method when that method provides an equal or greater deduction.

*The 150% declining balance method (150% DB) over a 5-year recovery period that switches to the straight line method when that method provides an equal or greater deduction.

*The straight line method (SL) over a 5-year recovery period.

Before choosing a method, you may wish to consider the following facts.

*Using the straight line method provides equal yearly deductions throughout the recovery period.

*Using the declining balance methods provides greater deductions during the earlier recovery years with the deductions generally getting smaller each year.

Depreciation Limits

There are limits on the amount you can deduct for depreciation of your car, truck, or van, or electric car. The section 179 deduction is treated as depreciation for purposes of the limits. The maximum amount you can deduct each year depends on the year you place the car in service. Trucks and vans. For 2006, the maximum depreciation deductions for trucks and vans and passenger vehicles such as minivans and sport utility vehicles that are built on a truck chassis are generally higher than those for cars.

Exceptions for clean-fuel cars. There are two exceptions to the depreciation limits for cars. They are effective after August 5, 1997, for cars that run on clean fuel. The exceptions follow.
*Amounts you pay for retrofit parts and components to modify a car to run on clean fuel are not subject to the depreciation limit on cars. Only the cost of the car before modification is subject to the limit.

*If you place a car in service after August 5, 1997, that was produced to run on electricity, your depreciation limit is increased.

Car used less than full year. The depreciation limits are not reduced if you use a car for less than a full year. This means that you do not reduce the limit when you either place a car in service or dispose of a car during the year. However, the depreciation limits are reduced if you do not use the car exclusively for business and investment purposes. See Reduction for personal use, later.

Example. Marie purchased a car in June 2006 for $20,000 to use exclusively in her business. She does not claim the section 179 deduction and she chooses the 200% DB method of depreciation.

Marie's MACRS depreciation is $4,000 ($20,000 x 20%). However, the maximum amount she can deduct for depreciation is $2,960.

Reduction for personal use. The depreciation limits are reduced based on your percentage of personal use. If you use a car less than 100% in your business or work, you must determine the depreciation deduction limit by multiplying the limit amount by the percentage of business and investment use during the tax year.

Example. In April 2006, Karl, an outside dental supply salesman, purchased a new car for $25,400 to make sales calls in a territory that extends 200 miles around his home base. He uses his car 85% for his business. Karl does not claim the section 179 deduction and he chooses the 200% DB method to figure his depreciation deduction.


In 2006, Karl figures his MACRS depreciation deduction to be $4,318 (($25,400 x 85%) x 20%). However, Karl's deduction is limited to $2,516. This is the depreciation limit ($2,960) multiplied by the business use percentage (85%).

Karl continues to use his car 85% for business. Depreciation in the next four years continues to be subject to deduction limits.

In 2011, Karl's MACRS deduction is $1,244 (($25,400 x 85%) x 5.76%). Since that amount is less than the depreciation limit of $1,509 ($1,775 x 85%), Karl's depreciation deduction for 2011 is $1,244.

If Karl continues to use his car for business after 2011, he can continue to claim a depreciation deduction for his unrecovered basis. However, he cannot deduct more than $1,775 multiplied by his business use percentage. See Deductions in years after the recovery period, later.

Section 179 deduction. The section 179 deduction is treated as a depreciation deduction. If you place a car that is not a truck, van, or electric vehicle in service in 2006, use it only for business, and choose the section 179 deduction, the combined section 179 and depreciation deduction for that car for 2006 is limited to $2,960.

Deductions in years after the recovery period. If the depreciation limits apply to your car, you may have unrecovered basis in your car at the end of the recovery period. If you continue to use your car for business, you can deduct that unrecovered basis (subject to depreciation limits) after the recovery period ends.

Unrecovered basis. This is your cost or other basis in the car reduced by any clean-fuel vehicle deduction, alternative motor vehicle credit, electric vehicle credit, and depreciation and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use.

The recovery period. For 5-year property, your recovery period is 6 calendar years. A part year's depreciation is allowed in the first calendar year, a full year's depreciation is allowed in each of the next 4 calendar years, and a part year's depreciation is allowed in the 6th calendar year.

Under MACRS, your recovery period is the same whether you use declining balance or straight line depreciation. You determine your unrecovered basis in the 7th year after you placed the car in service.

How to treat unrecovered basis. If you continue to use your car for business after the recovery period, you can claim a depreciation deduction in each succeeding tax year until you recover your full basis in the car. The maximum amount you can deduct each year is determined by the date you placed the car in service and your business-use percentage. For example, no deduction is allowed for a year you use your car 100% for personal purposes.