For 1099 Contractors and Rideshare drivers, the two type of tax deductions that are available to you are: Standard Mileage Deduction or Actual Costs. Generally speaking, most individuals go with the Standard Milage Deduction because its easier to compute. However, often times the Actual Costs is a greater tax benefit, but more difficult to calculate. To assist 1099 Contractors with depreciating your car, we have outlined this issue below:
The IRS has a very generous provision for vehicle purchases known as Section 179. Under Section 179, you can deduct the cost of your vehicle as an expense if your vehicle was placed in service in 2015 and it was used predominantly for business (more than 50%). For 2015, the maximum Section 179 expense deduction is $25,000.
You may claim a Section 179 deduction only in the year that the vehicle was placed in service and deduction may not be greater than the taxable income that you’ve earned from working as an Uber driver.
Depreciable property that is not eligible for a Section 179 deduction is still deductible over a number of years through MACRS depreciation.
Modified Accelerated Cost Recovery System (MACRS)
The Modified Accelerated Cost Recovery System (MACRS) is the system that is used by the IRS for tax depreciation. The Modified Accelerated Cost Recovery System (MACRS) is applicable to vehicles placed in service after 1986. Under MACRS, cars are classified as 5-year property. This means that you can depreciate the cost of a car, truck, or van over 5 years and you can use one of the following methods to depreciate your car:
1. 200% Declining Balance Method (200% DB). This method provides greater deductions during the early recovery years. When this method provides an equal or greater deduction, you must switch to the straight line method.
2. 150% Declining Balance Method (150% DB). This method provides greater deductions during the early recovery years. When this method provides an equal or greater deduction, you must switch to the straight line method.
3. Straight Line. This method provides equal yearly deductions throughout the 5-year recovery period.
If you use your own personal car for business, you may also to deduct mileage at the standard rate for business use. For 2016, the standard mileage rate for the use of a car (also vans, pickups or panel trucks) is 54 cents per mile for business miles driven. However, if you have used any other method for claiming a deduction than straight line, you may not use the standard mileage rate.
Special Depreciation Allowance
For vehicles placed in service in 2015, you can take an additional 50% special depreciation allowance. This is an additional deduction that you are allowed to take after any section 179 deduction and before you figure regular depreciation under MACRS. The special depreciation allowance is calculated by multiplying the depreciable basis of the vehicle by 50%.
There are limits on the amount you can deduct for depreciation of your car, truck, or van.
For passenger vehicles, trucks, and vans that are used more than 50% of the time for business use, the total deduction for depreciation including both the Section 179 expense deduction, as well as, special depreciation allowance is limited to $11,160 for cars and $11,460 for trucks and vans for 2014. The Maximum Depreciation Deduction tables for 2015 will be available by February 2016.
These deductions are generally reported on Schedule C (Form 1040) Line 13. You must also complete and attach Form 4562.
If you have any questions or you are confused about depreciating your car, please feel free to contact us.