Main Point: When considering a used car for a company vehicle, the shorter its remaining useful life, the higher the annual depreciation amount. This can make purchasing a used car more financially advantageous compared to buying new due to the accelerated tax deductions from depreciation.
While used cars are not typically favored as company vehicles, they may offer a better return on investment through their depreciation values. LA City Cars can provide expert advice to help you navigate this decision-making process.
When buying a used car for business purposes, it's essential to understand that the official depreciation tables do not apply. Instead, you must estimate the vehicle's remaining useful life based on factors like age and mileage at the time of purchase. For instance, a well-maintained used car with an 8-year expected lifespan and a yearly mileage of 10,000 miles could have a total useful life exceeding 5 years depending on when you buy it and how much it has been driven.
Under the Modified Accelerated Cost Recovery System (MACRS), vehicles fall into a class with a standard useful life of 5 years and a depreciation rate of 20% per year. Taxpayers can claim depreciation on used vehicles if they use them for work-related purposes. Each year, a portion of the vehicle's cost is deducted until the full cost is recovered over the asset's useful life.
The crucial point to note is that the higher the depreciation amount in a shorter period, the more it benefits the buyer in terms of tax savings. A used car might be cheaper upfront but could potentially offer larger depreciation deductions annually if its remaining useful life is short.
In an example where a used car is purchased for $20,000 with 50,000 miles already on it, assuming a remaining useful life of 5 years, the annual depreciation would be calculated as $20,000 divided by 5 years, which equals $4,000 per year. This significant deduction can offset the initial lower purchase price and make the acquisition of a used company car more economically appealing than acquiring a new one.