Special Rule for Passenger Automobiles

Words you may need to know (see Glossary):

• Placed in service
• Recovery period

For passenger automobiles, the total depreciation deduction (including the section 179 deduction) you can claim is limited.

Passenger automobile defined. A passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (6,000 pounds or less of gross vehicle weight for trucks and vans). It includes any part, component, or other item physically attached to the automobile or usually included in the purchase price of an automobile.

The following vehicles are not considered passenger automobiles for these purposes.

• An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business.
• A vehicle used directly in the trade or business of transporting persons or property for pay or hire.

Maximum deductions for 2000. Determine the maximum depreciation deduction you can claim for a passenger automobile based on the date you place the automobile in service. The maximum deduction for 2000, based on the year the automobile is placed in service, is shown in the following table.

You must reduce these limits further if your business/investment use is less than 100%.

Example. On April 15, 2000, Virginia Hart buys a car for $10,000. She uses the car only in her business. She files her tax return based on the calendar year. She does not elect a section 179 deduction. Under MACRS, a car is 5-year property. Because she placed her car in service on April 15 and used it only for business, she uses the percentages in Table A-1 to figure her depreciation on the car. Virginia multiplies the unadjusted basis of her car ($10,000) by 0.20 to get her depreciation of $2,000 for 2000. This $2,000 is below the maximum deduction of $3,060 for passenger automobiles placed in service in 2000. She can deduct the full $2,000.

Exceptions for clean-fuel vehicles. There are two exceptions to the depreciation limits for passenger automobiles. These exceptions are effective after August 5, 1997, for automobiles that run on clean fuel.

The first exception is a higher maximum depreciation deduction for clean-fuel vehicles. The maximum deduction for 2000, based on the year the clean fuel vehicle is placed in service, is shown in the following table.

The second exception is for any costs you pay to retrofit parts and components to modify an automobile to run on clean fuel. These costs are not subject to the limits on depreciation for automobiles. Only the cost of the automobile excluding this modification is subject to the limit.

For more information on clean-fuel vehicles, see chapter 12 in Publication 535, Business Expenses.

Proof of business/investment use. You cannot take any depreciation or section 179 deduction for the use of listed property (including passenger automobiles), regardless of the date you placed the property in service, unless you can prove business/investment use with adequate records or with sufficient evidence to support your own statements. See What Records Must Be Kept, later.

Fully depreciated automobile. If you have fully depreciated a car that you are still using in your business, you can continue to claim your other operating expenses for the business use of your car. Continue to keep records, as explained later.

Listed Property Worksheet for Passenger Automobiles

To assist you in computing your maximum depreciation deduction, the following worksheet is provided.

The following example shows how to figure your maximum deduction using the worksheet.

Example. On September 26, 2000, Donald Banks bought a car for $18,000. He used the car 60% for business during 2000. He files his tax return based on the calendar year. Under GDS, his car is 5-year property. Donald is electing a section 179 deduction of $1,000 on the car. The unadjusted basis of his car is $9,800, [($18,000 x 60%) - $1,000]. He multiplies his unadjusted basis ($9,800) by the rate in Table A-1 (0.20) to get his tentative depreciation deduction of $1,960. Because he used the passenger automobile only 60% for business, his depreciation deduction (including the section 179 deduction) is limited to $1,836 ($3,060 x 60%). Because Donald is claiming a section 179 deduction of $1,000 in 2000, his depreciation deduction is limited to $836.

For a detailed discussion of passenger automobiles, including leased passenger automobiles, see Publication 463.

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