Contributed by: PhillipB, FreeTaxUSA Agent, Tax Pro
You have been using your car in your business for many years and claiming the standard mileage rate method has been a simple way to deduct business use of your car. This year, you either had enough actual car expenses to make using the actual expense method more advantageous, or you sold the car and now FreeTaxUSA is asking about prior depreciation. So, you may be wondering, do you have prior depreciation?
The answer is yes. There is a portion of standard mileage rate for business each year that is included to account for the depreciation of the car – this is known as equivalent depreciation. You need to account for depreciation for years when you used the standard mileage when either of the following things happen:
- You switch from using the standard mileage rate to using the actual expense method for deducting business use of your vehicle, or
- You sell a car for which you have been using the standard mileage rate to deduct your vehicle expenses.
Switching from standard mileage rate to the actual expense method
When you switch between the standard mileage rate and the actual vehicle expense method, you need to calculate the equivalent depreciation. The equivalent depreciation is a certain number of cents out of the annual mileage rate. The depreciation portion is published in IRS publication 463 each year in the section for the disposition of a car. The table is labeled “Rate of Depreciation Allowed in Standard Mileage Rate”, and it has the equivalent depreciation amount from the year 2000 to the current year.
Example equivalent depreciation calculation
While the following example is geared towards switching between actual and standard mileage rates, you will need to use this method to calculate prior depreciation when you dispose of a vehicle used in your business with expenses deducted using the standard mileage rate.
For example, you have been using your car in your business since 2020 and have used the standard mileage rate each year. This year, you drove a significant number of business and very few personal miles making the business use percentage much higher than in prior years. You reported the following business miles between 2020 and 2024:
2020 – 10,000
2021 – 8,000
2022 – 12,000
2023 – 13,500
As you report your vehicle expenses for 2024, the software asks about your cost basis and prior depreciation. Your cost basis is the smaller of the amount you paid for the car, or the fair market value when you started using it in your business. You’ll calculate the depreciation by taking the following equation for each year and adding the figures together.
- 2020 Depreciation: 10,000 miles X $0.27 depreciation portion of the standard mileage rate = $2,700 for 2020 depreciation
- 2021 Depreciation : 8,000 miles X $0.26 depreciation portion of the standard mileage rate = $2,080 for 2021 depreciation
- 2022 Depreciation: 12,000 miles X $0.26 depreciation portion of the standard mileage rate = $3,120 for 2022 depreciation
- 2023 Depreciation: 13,500 miles X $0.28 depreciation portion of the standard mileage rate = $3,780 for 2023 depreciation.
Total prior depreciation for the 2024 return = $11,680, which you will enter in the software when it asks for prior depreciation.
Be sure to keep a running tally of prior depreciation by adding the depreciation deduction from years when you deduct the actual expenses to the equivalent depreciation you calculate for years when you use the standard mileage rate for your deductions.
