Depreciation is the accounting process by which businesses recognize the gradual loss in value of assets through wear and tear or obsolescence. Businesses and their owners do not generally deduct the full purchase price of capital assets, including motor vehicles, in the year in which they are purchased; rather, they seek to gradually deduct their costs over the useful life of the property. In the case of motor vehicle, the IRS assumes a useful life of five years. There are, however, exceptions that allow purchasers of motor vehicles to take an accelerated depreciation.
Without a process for depreciation, a business would have an inaccurate balance sheet that did not reflect the true profits and losses for the company during the accounting period. While the depreciation of property is frequently invisible, the costs of replacing worn out or obsolete equipment are real. The process of taking depreciation allows the business to account for the eventuality of having to replace the equipment, while also ensuring that the balance sheet reflects the value of the property.
MACRS is the Modified Accelerated Cost Recovery System, which is the set of accounting rules and procedures the Internal Revenue Service has adopted to govern deductions for depreciation. MACRS assigns a specific useful life to all kinds of capital equipment, including automobiles, and specifies the number of years over which the property is depreciated. Under MACRS, automobiles are considered "five-year property," meaning that unless accelerated depreciation rules such as Section 179 apply, the cost of the vehicle is gradually written off over five years.
Section 179 of the Internal Revenue Code provides for the acceleration of deductions for certain kinds of capital equipment, frequently including vehicles. Specifically, Section 179 allows business to deduct the full price of up to $2 million of new leased or purchased equipment as of 2011, including qualifying motor vehicles. The vehicles must be placed into service during the year.
Section 179 Limitations
For certain kinds of passenger vehicles, the rules limit your Section 179 deduction to $11,060 for cars and $11,160 for trucks and vans, as of 2011. The remainder of the purchase price of these vehicles is deducted over five years.