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If you purchased a car after September 10, 2001, for use in your business (or as an employee) and figure your deductible expenses using the actual car expense method, new law contains provisions that may affect your depreciation deduction for that car.
Publication 463, Travel, Entertainment, Gift, and Car Expenses, contains information on figuring depreciation on your car. However, Publication 463 does not contain the new provisions because it was printed before the law was enacted. The new provisions are in the Supplement to Publication 463, which is reprinted below.
This supplemental publication is for taxpayers who purchased a car for business purposes after September 10, 2001, and figure their deductible expenses, including a deduction for depreciation, using the actual car expense method.
After Publication 463 was printed, the Job Creation and Worker Assistance Act of 2002 was signed into law by the President. Certain provisions of this new law may reduce your taxes for 2001. The new law contains the following provisions.
A new depreciation deduction, the special depreciation allowance.
An increase in the limit on depreciation for any car for which you claim the new special depreciation allowance.
If you have already filed your 2001 return, you may wish to file an amended return to claim any of these benefits. See Amended Return, later.
If you used the actual car expense method to figure your deduction for a car you own and use in your business (or as an employee), you generally can claim a depreciation deduction. However, there is a limit on the depreciation deduction you can take for your car each year. See Depreciation Limit later.
The new law allows you to claim a special depreciation allowance. This special allowance is a deduction equal to 30% of the depreciable basis of qualified property. You figure the amount of the special depreciation allowance after any section 179 deduction you choose to claim, but before figuring your regular depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS). See Depreciation Deduction under Actual Car Expenses in chapter 4 of Publication 463 for information about MACRS.
You can claim the special depreciation allowance only for the year the qualified property is placed in service.
You bought it new.
You bought it after September 10, 2001. (But a car is not qualified property if a binding written contract for you to buy the car was in effect before September 11, 2001.)
You began using it for business after September 10, 2001, and used it more than 50% in a qualified business use.
Bob bought a new car on October 15, 2001, for $20,000 and placed it in service immediately, using it 75% for business. Bob's car is qualified property.
Bob chooses not to take a section 179 deduction for the car. He does claim the new special depreciation allowance. Bob first must figure the car's depreciable basis, which is $15,000 ($20,000 × .75). He then figures the special depreciation allowance of $4,500 ($15,000 × .30).
The remaining depreciable basis of $10,500 ($15,000 - $4,500) is depreciated using MACRS (200% declining balance method, half-year convention) and results in a deduction of $2,100 ($10,500 × .20), for a total depreciation deduction for 2001 of $6,600 ($4,500 + $2,100). However, Bob's depreciation deduction is limited to $5,745 ($7,660 × .75), as discussed next.
The limit on your depreciation deduction for 2001 is increased to $7,660 for a car that is qualified property (defined above) and for which you claim the special depreciation allowance. The limit is increased to $23,080 if the car is an electric car. The section 179 deduction is treated as depreciation for purposes of this limit.
If you use a car less than 100% in your business or work, the limit is $7,660 (or $23,080 for an electric car) multiplied by the percentage of business and investment use during the year.
For cars that do not qualify for (or for which you choose not to claim) the special depreciation allowance, the limit remains $3,060 ($9,280 for electric cars).
If you filed your 2001 calendar year return before June 1, 2002, and did not claim the new special depreciation allowance for a qualified car, you can claim it by filing an amended return on Form 1040X, Amended U.S. Individual Income Tax Return, by April 15, 2003. At the top of the Form 1040X, print “Filed pursuant to Revenue Procedure 2002–33.” If you are an employee, attach Form 2106, Employee Business Expenses (revised March 2002). If you are self-employed, attach Form 4562, Depreciation and Amortization (revised March 2002).
Or, you can claim the special depreciation allowance by filing Form 3115, Application for Change in Accounting Method, with your 2002 return. For details, see Revenue Procedure 2002–33. (But, filing Form 1040X for 2001 enables you to claim the special allowance earlier than attaching Form 3115 to your 2002 return.)
You cannot claim the special depreciation allowance on an amended return (or by using Form 3115) if you made, or are treated as having made, the election not to claim it described later.
The facts are the same as in the previous example except that Bob filed his original 2001 income tax return on April 15, 2002, and claimed a $3,000 ($20,000 x .75 x .20) depreciation deduction for his new car using MACRS.
Bob now wishes to claim the special depreciation allowance for his new car on an amended 2001 return. Bob, who is an employee, files Form 1040X, by April 15, 2003, with an updated Form 2106 (revised March 2002) attached, increasing his total depreciation deduction to $5,745, as figured in the earlier example.
Bob's new filled-in Form 2106 is shown later.
You can elect not to claim the special depreciation allowance for a car by making a statement attached to, or written on, your return indicating that you are electing not to claim the special depreciation allowance for 5-year property. As a general rule, you must make this election by the due date (including extensions) of your return.
You can have an automatic extension of 6 months from the due date of your return (excluding extensions) to make the election with an amended return. To get this extension, you must have filed your original return by the due date (including extensions). At the top of the statement, print “Filed pursuant to section 301.9100–2.”
If you elect not to claim the special depreciation allowance for a car, you cannot claim it for any other 5-year property placed in service during the same year.
Unless you elect (or are treated as electing) not to claim the special depreciation allowance, you must reduce the car's adjusted basis by the amount of the allowance, even if the allowance was not claimed.
You filed your 2001 return before June 1, 2002.
You claimed depreciation on your return but did not claim the special depreciation allowance.
You did not file an amended 2001 return by April 15, 2003, or a Form 3115 with your 2002 return, to claim the special depreciation allowance.
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