Chapter 43
Deducting Car and Truck Expenses

The costs of buying and operating a car, truck, or van for business are deductible under rules hedged with restrictions. Depreciation deductions for most cars, trucks, and vans are subject to annual ceilings. For new cars placed in service in 2017 that are used over 50% for business, the first-year depreciation limit is $11,160 (43.4). For most new light trucks and vans, the 2017 limit is $11,560 (43.4). The annual limits are reduced for personal use. If a vehicle placed in service in 2017 is used 50% or less for business, depreciation must be based on the straight-line method and the maximum deduction is reduced by personal use (43.4).

To avoid accounting for actual vehicle expenses and depreciation, you may claim an IRS mileage allowance. The allowance for 2017 is 53.5 cents per mile. Keep a record of business trip mileage.

If you are self-employed, you deduct your vehicle expenses on Schedule C or Schedule C-EZ if eligible (40.6). Use Form 4562 to compute depreciation if you claim actual operating costs instead of the IRS mileage allowance. If you are an employee, use Form 2106 to claim unreimbursed vehicle expenses, which are deductible only to the extent that together with other miscellaneous itemized deductions they exceed 2% of your adjusted gross income.

If you bought an electric vehicle in 2017 for business and/or personal use, you may be eligible for a tax credit (25.16).

43.1 Standard Mileage Rate

If you start to use your car for business in 2017, you have a choice of either deducting the actual operating costs of your car during business trips or deducting a flat IRS allowance. The allowance is 53.5 cents per mile. The mileage allowance also applies to business trips in a van or pickup or panel truck as if it were a car.

If you placed a car, van, pick-up, or panel truck in service before 2017 and have always used the IRS mileage allowance, you may apply the 53.5 cents-per-mile rate to your 2017 business mileage or deduct your actual operating costs plus straight-line depreciation over the remaining estimated useful life of the vehicle (assuming the vehicle is not considered fully depreciated).

The rate may not be used to deduct the costs of a vehicle used for nonbusiness income-producing activities such as looking after investment property.

Allowance must be elected for the first year. The choice of the allowance must be made in the first year you place the vehicle in service for business travel. If you do not use the allowance in the year you first use the vehicle for business, you may not use the allowance for that vehicle in any other year. Thus, if you bought a car for business in 2016 and on your 2016 return you deducted actual operating costs plus depreciation, you may not use the mileage allowance on your 2017 return or in any later year.

Allowance takes the place of fixed operating costs plus depreciation. If you claim the allowance, you cannot deduct your actual outlays for expenses such as gasoline (including state and local taxes), oil, repairs, license tags, or insurance, nor can you deduct depreciation(if you own the vehicle) or lease payments. Parking fees and tolls during business trips are deductible in addition to the mileage allowance. The IRS will not disallow a deduction based on the allowance even though it exceeds your actual vehicle costs. If you use more than one automobile in your business travel and elect the allowance, total the business mileage traveled in both cars.

Records. You may decide to use the allowance if you do not keep accurate records of operating costs. However, you must keep a record of your business trips, dates, customers or clients visited, business purpose of the trips, your total mileage during the year, and the number of miles traveled on business. An IRS agent may attempt to verify mileage by asking for repair bills near the beginning and end of the year if the bills note mileage readings.

Mileage allowance for leased vehicle. The IRS mileage allowance is also available for leased cars, vans, and pick-up or panel trucks, but it must be used for the entire lease period or not at all. For example, if in 2017 you leased a car for business purposes and you claim the cents-per-mile allowance, you will also have to use it for the remainder of the lease period, including renewals.

Interest on a vehicle loan and taxes. The deduction rules are discussed in the following section (43.2).

Mileage allowance disallowed. You may not claim the cents-per-mile allowance if:

• You have depreciated your vehicle using the ACRS or MACRS method, including straight-line MACRS, or you claimed first-year expensing or first-year bonus depreciation in the year the vehicle was placed in service.
• You use in your business five or more vehicles simultaneously, such as in a fleet operation.

Employer reimbursements. If your employer reimburses your vehicle costs at a rate lower than the IRS allowance, you may use the IRS rate to deduct the excess over your employer’s reimbursement; seeExample 3 at 20.34.

IRS allowance includes depreciation. When you use the IRS mileage allowance, you may not claim a separate depreciation deduction. The IRS mileage allowance includes an estimate for depreciation. For purposes of figuring gain or loss on a disposition, you must reduce the basis of the vehicle by the following depreciation amounts: 23 cents per mile in 2010, 22 cents per mile in 2011, 23 cents per mile in 2012 and 2013, 22 cents per mile in 2014, 24 cents per mile in 2015 and 2016, and 25 cents per mile in 2017.

Depreciation when switching from allowance to actual costs. If you use the IRS mileage allowance in the first year, you may switch to the actual-cost method in a later year, but depreciation must be based on the straight-line method over the remaining estimated useful life. However, no depreciation may be claimed if basis has been reduced to zero under the annual cents-per-mile reduction rule in the preceding paragraph.

43.2 Expense Allocations

If you do not claim the IRS mileage allowance, you may deduct car, truck, or van expenses on business trips such as the cost of gas and oil (including state and local taxes), repairs, parking, and tolls, in addition to depreciation for your car (43.3–43.5).

If you use your vehicle exclusively for business, all of your operating expenses are deductible. However, if you are an employee, the deduction is limited by the 2% of adjusted gross income (AGI) floor (19.1).

Apportioning vehicle expenses between business and personal use. For a vehicle used for business and personal purposes, deduct only the expenses and depreciation allocated to your business use of the vehicle.

The business portion of vehicle expenses is determined by the percentage of mileage driven on business trips during the year.

Interest on vehicle loan. If you are an employee, all of the interest is considered personal interest and is not deductible even if you use the vehicle 100% of the time for your job. If you are self-employed, the allocated business percentage of the interest is fully deductible on Schedule C; the personal percentage is not deductible.

Taxes paid on your car. The business portion of sales taxes paid on your vehicle is not deductible whether you are an employee or self-employed; the tax is added to the basis of the vehicle for depreciation purposes (43.3).

If you are an employee, state and local vehicle registration and license fees may be deducted as personal property taxes if you itemize deductions on Schedule A, but only if they are based on the value of the vehicle (16.8). If you are self-employed, deduct the business portion of the personal property taxes on Schedule C and the personal percentage on Schedule A if you itemize.

Leased vehicle. If you lease a car, truck, or van for business use and do not claim the IRS mileage allowance (43.1), you deduct the lease payments plus other costs of operating the vehicle. If the vehicle is also used for personal driving, the lease payments must be allocated between business and personal mileage. The rules requiring the reporting of extra income attributable to the lease are discussed later in this chapter (43.12).

43.3 Depreciation Restrictions on Cars, Trucks, and Vans

The law contains restrictions on so-called “listed property” that limit and, in some cases, deny depreciation deductions for a business car, truck, or van. Employees may be unable to claim any deduction at all under an employer convenience test. Employees meeting that test and self-employed individuals must determine if they can use accelerated MACRS rates or must use straight-line rates. Finally, regardless of which depreciation method is used, the annual deduction may not exceed a ceiling set by law for passenger cars and certain light trucks and vans; details on the annual ceilings are in 43.4.

Employee must satisfy employer convenience test. If you are an employee and use your own vehicle for work, you must be ready to prove that you use it for the convenience of your employer who requires you to use it in your job. If you do not meet this employer convenience test, you may not claim depreciation or first-year expensing. A letter from your employer stating you need the vehicle for business will not meet this test.

The facts and circumstances of your use of the vehicle may show that it is a condition of employment. For example, an inspector for a construction company uses his automobile to visit construction sites over a scattered area. The company reimburses him for his expenses. According to the IRS, the inspector’s use of the car is for the convenience of the company and is a condition of the job. However, if a company car were available to the inspector, the use of his own car would not meet the condition of employment and convenience of the employer tests.

More-than-50%-business-use test for claiming expensing or accelerated MACRS depreciation. Automobiles and other vehicles used to transport persons or goods are considered “listed property” (42.10), whether you are an employee or are self-employed, but there are exceptions for ambulances, hearses, and trucks or vans that are qualified non-personal-use vehicles (43.4). Unless the vehicle is excepted from the listed property rules, you must use the vehicle more than 50% of the time for business in the year you place it in service in order to claim bonus depreciation, first-year expensing or accelerated MACRS (43.5). The annual ceiling, if applicable (43.4), applies to the total of any bonus allowance, first-year expensing and MACRS depreciation.

If you meet the more-than-50%-business-use test in the year you place the vehicle in service but in a later year within the recovery period your business use falls to 50% or less, you must use straight-line depreciation and recapture “excess” deductions for prior years; see the Caution on this page and 43.10.

If business use is 50% or less in the year the vehicle is placed in service, bonus depreciation, first-year expensing and accelerated MACRS are barred; depreciation must be claimed over a six-year period under the straight-line method. Technically, the recovery period is five years but the period is extended to six years because, in the first year, a convention rule limits the deductible percentage. SeeTables 43-6 and 43-7 (43.6). The straight-line method must be used for the entire recovery period, even if business use in the years after the first year exceeds 50%.

If a vehicle is used for both business and investment purposes, only business use is considered in determining whether you meet the more-than-50%-business-use test and therefore qualify for MACRS. However, investment use is added to business use in determining your actual deduction.

Do your employees use the vehicle? In certain cases, an employer who provides a vehicle to employees as part of their compensation may be unable to count the employee’s use as qualified business use, thereby preventing the employer from meeting the more-than-50%-business-use test for claiming MACRS. An employer is allowed to treat the employee’s use as qualified business use only if: (1) the employee is not a relative and does not own more than 5% of the business and (2) the employer treats the fair market value of the employee’s personal use of the vehicle as wage income and withholds tax on that amount. If such income is reported, all of the employee’s use, including personal use, may be counted by an employer as qualified business use.

If an employee owning more than a 5% interest is allowed use of a company-owned vehicle as part of his or her compensation, the employer may not count that use as qualified business use, even if the personal use is reported as income. The same strict rule applies if the vehicle is provided to a person who is related to the employer.

43.4 Annual Ceilings on Depreciation

Annual ceilings limit the amount of depreciation you may deduct for passenger cars and certain light trucks and vans. The ceilings apply both to self-employed individuals and employees. As a result of the ceilings, the actual write-off period for your car may be several years longer than the MACRS recovery period of six years (43.5).

Passenger cars. The ceiling on depreciation for a pre-owned car placed in service in 2017 is generally $3,160, reduced by personal use. If the car is new and used more than 50% for business in 2017, the first-year dollar limit is increased by the bonus depreciation allowance to $11,160, reduced by personal use. For purposes of the annual depreciation ceilings, a car is any four-wheeled vehicle that is manufactured primarily for use on public thoroughfares and that is weight-rated by the manufacturer at 6,000 pounds or less when unloaded (without passengers or cargo). However, these vehicles are excluded from the car category and are thus exempt from the annual depreciation limits: (1) an ambulance, hearse, or combination ambulance-hearse used directly in a business, and (2) a vehicle such as a taxi cab used directly in the business of transporting persons or property for compensation or hire.

Year-by-year limits for cars placed in service in 2017 and prior years can be found in Table 43-2.

Light trucks, vans, and SUVs. A light truck, van, minivan, or SUV (sport utility vehicle) built on a truck chassis that is weight-rated by the manufacturer at 6,000 pounds or less when fully loaded (gross vehicle weight rating) is generally subject to annual depreciation ceilings.

However, the depreciation limits do not apply to trucks and vans that are qualified non-personal-use vehicles. These include moving vans, flatbed trucks, and delivery trucks with seating only for the driver (or driver seat plus folding jump seat). Also included are specially modified trucks and vans that are unlikely to be used more than a minimal amount for personal purposes. An example would be a van that has been painted to display advertising or the company’s name and which has permanent shelving for carrying merchandise or equipment.

Where an exception does not apply, the deduction limit for light trucks, vans, and SUVs placed in service in 2017 is $3,560, but if the vehicle is new and used over 50% for business in 2017, the limit is increased by bonus depreciation to $11,560. The applicable limit must be reduced for personal use. Table 43-3 shows the year-by-year limits for trucks and vans.

Heavy trucks, vans, and SUVs. Trucks, vans, and SUVs built on a truck chassis that are weight-rated by the manufacturer at more than 6,000 pounds gross vehicle weight are not subject to the annual depreciation ceilings. However, first-year expensing (42.3) for the vehicle may be limited to $25,000 rather than the general expensing limit, which for 2017 is $510,000 (42.3). The vehicle must be used more than 50% for business to qualify for first-year expensing. If first-year expensing is not or cannot be elected (42.3), a full depreciation deduction using the MACRS rate (43.5) is allowed with no dollar limit. Further, if bought new and placed in service in 2017 and used over 50% for business, 50% bonus depreciation can be used.

The $25,000 limit on first-year expensing applies to SUVs rated at more than 6,000 pounds but not more than 14,000 pounds gross vehicle weight. For purposes of the $25,000 expensing limit, an SUV means any four-wheeled vehicle primarily designed or which can be used to carry passengers over public thoroughfares. Trucks and vans as well as SUVs can be covered by this definition, but the law allows certain exceptions. Exceptions are allowed for vehicles with seating for more than nine passengers behind the driver, for pickup trucks with an interior cargo bed at least six feet long that is an open area or is enclosed by a cap and not readily accessible to passengers, and cargo vans without rear seating and with no body sections protruding more than 30 inches ahead of the windshield. For these excepted vehicles, the $25,000 limit on first-year expensing does not apply.

43.5 MACRS Rates for Cars, Trucks, and Vans

Business autos, trucks, and vans are technically in a five-year MACRS class (42.4), but because of the half-year or mid-quarter convention, the MACRS recovery period for five-year property is six years, and because of the annual deduction ceilings (43.4, and Tables 43-2 and 43-3 below),the actual writeoff period may be years longer.

Accelerated MACRS rate allowed only if business use in the first year exceeds 50%. To use accelerated MACRS rates, you must meet the more-than-50%-business-use test (43.3) in the year the vehicle is placed in business service. Generally, the accelerated MACRS rate is based on the 200% declining balance method, but as shown on Table 43-4 (half-year convention) or Table 43-5 (mid-quarter convention), a 150% declining balance rate may be elected, which may be advantageous when you are subject to the alternative minimum tax (23.2).

The deduction allowed under Table 43-4or Table 43-5 using accelerated MACRS rates applies only to the extent it does not exceed the annual depreciation ceiling shown in Table 43-2 or Table 43-3. Bonus depreciation increases the first-year ceiling for vehicles that are purchased new and used over 50% for business, unless you elect on your return not to claim bonus depreciation; seeTable 43-2 and Table 43-3.The limits from the tables must be further reduced for personal use.

If you do not meet the more-than-50%-business-use test in the year the vehicle is placed in service, you must compute your depreciation deductions using the straight-line rates shown in 43.6, subject to the annual depreciation limit.

Deductions for later years in the recovery period. For years two through six of the recovery period, the MACRS rate from Table 43-4or Table 43-5is used unless business use for a year falls to 50% or less (43.10). However, the deduction figured under the MACRS table is allowed only if it does not exceed the annual depreciation ceiling (43.4) shown in Table 43-2 or Table 43-3; seethe Bill Johnston Example at the end of this section. Seebelow for details on using the MACRS tables.

Caution: If you used the 100% bonus depreciation rule for vehicles placed in service after September 8, 2010, and before 2012 to increase your first-year depreciation deduction and you still own this vehicle, you must use an IRS safe harbor to figure your deductions starting in the second recovery year, as explained in Revenue Procedure 2011-26.

Deduction for year of disposition. If you dispose of your vehicle before the end of the six-year MACRS recovery period, a partial-year deduction is allowed for the year of disposition under the half-year or mid-quarter convention (43.7).

Use of vehicle after end of recovery period. If you continue to use the vehicle for business after the end of the recovery period, and the annual deduction ceilings prevented you from deducting your full unadjusted basis during the recovery period, you generally may deduct depreciation in the succeeding years up to the annual ceiling (43.8).

Business use falls to 50% or less after the first year. What if business use exceeds 50% in the year the vehicle is placed in service but in a later year within the recovery period business use drops to 50% or lower? In that case, the right to use accelerated MACRS (200% or 150% declining balance method) terminates. You must use the straight-line method and recapture the benefit of the accelerated deductions claimed for the prior years (43.10).

Straight-line election for vehicle if business use exceeds 50%. If business use of your vehicle exceeds 50% in the year you place it in service, you may elect to write off your cost under the straight-line method (43.6) instead of using the regular MACRS 200% declining balance method. The straight-line deduction is limited by the annual ceilings shown in Tables 43-2 and 43-3. By electing straight-line depreciation, you avoid the recapture of excess MACRS deductions if business use drops to 50% or less in a later year (43.10). If the election is made, you must also use the straight-line method for all other five-year property placed in service during the same year as the vehicle.

Electing 150% declining balance method. Depreciation rates under the half-year and mid-quarter conventions are generally based on the 200% declining balance method. You may instead make an irrevocable election to apply the 150% declining balance method. The 150% method may be advantageous when you are subject to the alternative minimum tax. For alternative minimum tax (AMT) purposes (23.2), vehicle depreciation is based on the 150% declining balance method unless you use the straight-line method for regular tax purposes. If you are subject to AMT and use the 150% declining balance method instead of the 200% declining balance method for regular tax purposes, you do not have to report an AMT adjustment on Form 6251.

An election to use the 150% declining balance method is irrevocable and must be applied to all depreciable assets placed in service in the same year, except for nonresidential real and residential rental property.

MACRS Tables Applying the Half-Year Convention or Mid-Quarter Convention if Business Use Exceeds 50%

For the year you place the vehicle in service and the year (within the recovery period) you dispose of the property, you may not claim a full year’s worth of depreciation. The deduction is limited by either the half-year convention or the mid-quarter convention, depending on the month in which the vehicle was placed in service and the other business assets, if any, placed in service during that year.

The applicable convention determines the rate table you will use to figure your depreciation deduction for the entire six-year recovery period, assuming that your business use each year exceeds 50%. The half-year and mid-quarter convention rates shown in Table 43-4or Table 43-5 reflect the 200% or 150% declining balance method, with a switch to the straight-line method when that method provides a larger deduction; the switch to straight line is built into the tables.

Rate applied to unadjusted basis. For each year in the recovery period, the rate from MACRS Table 43-4or Table 43-5 is applied against the business use percentage of your unadjusted basis for the vehicle. The deduction figured using the table rate may be claimed to the extent that it does not exceed the annual depreciation ceiling (Table 43-2 or Table 43-3); seethe Bill Johnston Example on the next page. Investment use may be added to the business use percentage, but keep in mind that the MACRS table may be used only if business use by itself exceeds 50% (43.3).

Unadjusted basis is your cost minus any first-year expensing deduction as well as any special first-year bonus depreciation (for a vehicle placed into service after September 10, 2001, and before January 1, 2005, and during 2008 through this year). The basis reduction for bonus depreciation applies if you were eligible for the special allowance (vehicle purchased new and used over 50% for business) even if you did not claim it, unless on your return you “elected out” of the special allowance for the vehicle and all other five-year property placed in service during the same year.

Basis for vehicle converted from personal to business use. The basis for depreciation is the lower of the fair market value of the vehicle at the time of conversion or its adjusted basis, which is your original cost plus any substantial improvements and minus any deductible casualty losses or diesel fuel tax credit claimed for the vehicle. In most cases, the value of the vehicle will be lower than adjusted basis, and thus the value will be your depreciable basis. For a vehicle converted to business use in 2017, the MACRS rate is applied to basis allocated to business travel. Unless you have mileage records for the entire year, you should base your business-use percentage on driving after the conversion. For example, in April 2017, you started to use your car for business and in the last nine months of the year you drove 10,000 miles, 8,000 of which were for business. This business percentage of 80% is multiplied by the fraction ⁹/₁₂ (months used for business divided by 12) to give you a business-use percentage for the year of 60% (⁹/₁₂ of 80%).

Deter mining whether the half-year convention or mid-quarter convention applies. If you bought a vehicle for use in your business in 2017, and it was the only business equipment placed in service during the year, then the half-year convention applies, unless you bought the vehicle in the last quarter of 2017 (October, November, or December). Under the half-year convention, the vehicle is treated as if it were placed in service in the middle of the year. Use Table 43-4 below to determine your deduction under the half-year convention.

If the only business equipment bought in 2017 was a vehicle bought in the last quarter (October, November, or December), the mid-quarter convention applies. Under Table 43-5 for the mid-quarter convention, a 5% rate applies under the 200% declining balance method for a vehicle purchased in the fourth quarter, subject to the deduction ceiling in 2017 (Table 43-2 or Table 43-3).

If you bought other business equipment in addition to the vehicle, you must consider the total cost basis of property placed in service during the last quarter of 2017. If the total bases of such acquisitions (other than realty) exceed 40% of the total bases of all property placed in service during the year, then a mid-quarter rate applies to all of the property (other than realty). The mid-quarter rate for each asset then depends on the quarter the asset was placed in service, and that quarter determines the mid-quarter rates for each year of the recovery period; see Table 43-5. If the 40% test is not met, then the half-year convention (Table 43-4)applies to all the property acquisitions.

Deduction from MACRS Tables Cannot Exceed Annual Ceiling

If the deduction figured under the half-year or mid-quarter convention MACRS table (Table 43-4 or 43-5), or the straight-line table (Table 43-6 or 43-7), exceeds the annual deduction ceiling (Table 43-2 or 43-3), your deduction is limited to the annual ceiling, reduced by the percentage of your personal use; seethe Bill Johnston Example below.

Keep in mind that if you were eligible for the special first-year depreciation allowance (bonus depreciation) for a vehicle placed in service after September 10, 2001, and before January 1, 2005 and during 2008 through 2017, basis for MACRS purposes is reduced by the special allowance unless you elected on your return not to claim it.

If you used bonus depreciation for a vehicle placed in service after September 8, 2010, and before 2012, and you still own the vehicle, you cannot claim any deduction in years two through six unless you use an IRS safe harbor explained in Revenue Procedure 2011-26.

43.6 Straight-Line Method

You may not use first-year expensing (Section 179 deduction), bonus depreciation, or accelerated MACRS (43.5) if your business use of your car, truck, or van is 50% or less in the year you place it in service; only business use is considered here, not investment use. Mandatory straight-line recovery rates for business use of 50% or less using the half-year or mid-quarter convention are shown below. These straight-line rates are also used if your business use exceeds 50% and you elect straight-line recovery instead of the regular MACRS method. Seethe preceding section (43.5) for determining whether the half-year or mid-quarter convention applies.

For each year of the six-year recovery period, apply the straight-line rate from the applicable table against your unadjusted basis, which is the business part of your cost minus any first-year expensing deduction or special bonus depreciation allowance (43.5). Investment use may be added to the business use part of cost when figuring the straight-line deduction for each year. The deduction from the table is allowed only to the extent that it does not exceed the annual deduction ceiling (Table 43-2 or Table 43-3).

If business use initially exceeds 50% and accelerated MACRS is claimed but business use drops to 50% or less before the end of the six-year recovery period, a recapture rule applies a straight-line computation retroactively (43.10).

*The deduction may not exceed the annual deduction ceiling (Table 43-2 or 43-3).

43.7 Depreciation for Year Vehicle Is Disposed of

If you dispose of your car, truck, or van before the end of the six-year recovery period, you are allowed a partial depreciation deduction for the year of disposition. The deduction depends on the depreciation method and convention being used.

If you were depreciating the vehicle under the half-year convention (43.5), you may claim for the year of disposition 50% of the deduction that would be allowed for the full year under the 200% or 150% declining balance method (Table 43-4), or the straight-line method (Table 43-6).

If you were depreciating the vehicle under the mid-quarter convention (43.5), your deduction for the year of disposition depends on the month of disposition. You deduct 87.5% of the full-year mid-quarter convention deduction (from Table 43-5 or Table 43-7) if the disposition occurred in October–December. If the disposition is in July–September, 62.5% of the full year’s deduction is allowed. Your deduction is 37.5% of the full-year deduction if the disposition is in April–June, or 12.5% of the full-year deduction if the disposition is in January–March.

43.8 Depreciation After Recovery Period Ends

If your business use of a car, truck, or van throughout the six-year recovery period is 100% and your deductions are limited by the annual ceilings (43.4), any remaining basis that was not deducted because of the ceilings, called “unrecovered basis”, may be depreciated in the years after the end of the recovery period. The maximum you can deduct each year will be the deduction ceiling for that year multiplied by your business use percentage.

If the vehicle was used less than 100% for business during the recovery period, your “unrecovered basis” is deductible in later years, but to determine unrecovered basis, original basis must be reduced by the depreciation that would have been allowed had the vehicle been used 100% for business.

43.9 Trade-in of Business Vehicle

No gain or loss is recognized when you trade in your old car, truck, or van for a new one where you opt to treat the disposition as tax free (different rules apply if you do not make this election, as explained in IRS Publication 946). However, the trade-in affects the basis of the new vehicle for purposes of depreciation. The basis adjustment depends on whether the car you traded in was used solely or partially for business.

Old vehicle used entirely for business. The basis of the new vehicle acquired in the trade-in is the adjusted basis of the old vehicle (its cost reduced by depreciation deductions), plus any cash you had to pay.

If you claimed first-year expensing, or bonus depreciation, you must make additional adjustments to basis (see IRS Publication 463).

Old vehicle used partially for business. There is a special “trade-in adjustment” for cars, trucks, or vans used for both personal and business use. This adjustment reduces the basis of the new vehicle (but not below zero) by the amount of depreciation you would have claimed if you had used the old vehicle entirely for business. To figure the basis of the new vehicle, including the trade-in adjustment, start with the adjusted basis of the old vehicle (see previous example). Add any cash you pay to acquire the new vehicle. Then subtract the excess, if any, of the depreciation you could have claimed had you used the old vehicle entirely for business over your actual depreciation for the old vehicle (the trade-in adjustment).

43.10 Recapture of Deductions on Business Car, Truck, or Van

If you use your car, truck, or van more than 50% for business in the year you place it in service, you may use MACRS accelerated rates (43.5). If business use drops to 50% or less in the second, third, fourth, fifth, or sixth year, earlier MACRS deductions must be recaptured and reported as ordinary income. In the year in which business use drops to 50% or less, you must recapture excess depreciation for all prior years. Excess depreciation is the difference between: (1) the MACRS deductions allowed in previous years, including the first-year expensing deduction and bonus first-year depreciation allowance (43.4), if any, and (2) the amount of depreciation that would have been allowed if you claimed straight-line depreciation (43.6)based on a six-year recovery period.

The recapture rules do not apply if you elected straight-line recovery instead of applying accelerated MACRS rates.

Recapture is reported on Form 4797, which must be attached to Form 1040. Under the listed property rules, the 50%-business-use test and recapture rule apply to cars, trucks, vans, boats, airplanes, motorcycles, and other vehicles used to transport persons or goods, but there are exceptions for ambulances, hearses, and other trucks and vans that are considered qualified non-personal-use vehicles (43.4).

Any recaptured amount increases the adjusted basis of the property for purposes of figuring gain or loss when you dispose of the vehicle. To compute depreciation for the year in which business use drops to 50% or less and for later years within the six-year straight-line recovery period, you apply the straight-line rates (43.6) to your original cost (unadjusted basis) and business use percentage, but the deduction may be limited by the annual ceiling for that year (Table 43-2 or Table 43-3); see the Example above in this section.

43.11 Keeping Records of Business Use

Keep a log or diary or similar record of the business use of a car. You can also find an app for your smartphone or other mobile device to keep track of your business mileage. Record the purpose of the business trips and mileage covered for business travel. In the record book or electronic record, also note the odometer reading for the beginning and end of the taxable year. You need this data to prove business use. If you do not keep written records of business mileage and your return is examined, you will have to convince an IRS agent of your business mileage through oral testimony. Without written evidence, you may be unable to convince an IRS agent that you use the car for business travel or that you meet the business-use tests for claiming MACRS. You may also be subject to general negligence penalties for claiming deductions that you cannot prove you incurred.

Unless you are electing the standard mileage rate (43.1), mileage records are not required for vehicles that are unlikely to be used for personal purposes, such as delivery trucks with seating only for the driver.

Employees using company cars are not required to keep mileage records if (1) a written company policy allows them to use the car for commuting and no other personal driving other than personal errands while commuting home or (2) a written company policy bars all personal driving except for minor stops, such as for lunch, between business travel. Owners, directors, and officers of the company generally do not qualify for exception.

43.12 Leased Business Vehicles: Deductions and Income

If you lease rather than purchase a car, truck, or van for business use, you may deduct the lease charges as a business expense deduction if you use the vehicle exclusively for business. If you also use the vehicle for personal driving, you may deduct only the lease payments allocated to business travel. Also keep a record of business use; see43.11.

Added income. If in 2017 you lease a vehicle for 30 days or more, you may have to indirectly report as income an amount based on an IRS table. This income rule applies if you deduct the business portion of your lease payments plus other operating costs; it does not apply if you claim the standard mileage allowance (43.1). On Schedule C (if self-employed) or Form 2106 (if an employee), the income inclusion amount reduces your deduction for lease payments similar to the way your depreciation deductions would have been limited if you had bought the vehicle outright. The income amount is reduced where you leased the vehicle for less than the entire year or business use is less than 100%.

The lease tables, which are in IRS Publication 463, show income amounts for each year of the lease. Publication 463 also has tables showing income amounts for vehicles leased before 2017.