Depreciation is the book-keepers' way to account for asset usage. That is, it is a way for businesses to account for the wear and tear on an asset over time. It is also a better way to match revenues with expenses, an important accounting quality standard. Depreciation on a car is calculated in the same way as most other assets, and the Internal Revenue Service (IRS) provides guidance on the best methodology to use from their perspective.
Determine that portion of the car usage is for business vs. personal. Only the business portion of the car can be depreciated on your tax return. For example, if you use your car 70 per cent for personal use, depreciation can be claimed on 30 per cent of the cost.
Use the Modified Accelerated Cost Recovery System (MACRS) to calculate depreciation. While there are several other depreciation methods, this is the one the IRS advises. You will need to know the original cost of the car, and the life of the car (how long can you use it). This will allow you to look up the rate to depreciate your car. Tables are located in Publication 946, How to Depreciate Property.
Multiply the value of the car by the depreciation rate given to you by the MACRS chart. Let's say you purchased a used car for £3,250. You think you can get a good three years of usage out of it. According to MACRS the yearly depreciation percentages are: 33.33 per cent, 44.45 per cent, 14.81 per cent and 7.41 per cent, respectively. There are 4 percentages in case you begin depreciation in the middle of the first year.
Begin with year 1 for 33.33. Multiply this by the cost of the car ($5,000). Year 1 depreciation is £1,083.20 ($5,000 x .3333). Year 2 depreciation is £963.10 (($5,000 - £1,083.20) x .4445). Continue this process with the depreciation expense for Year 3 and 4 until the car is completely written off.
Things you need
- Calculator or spreadsheet