Understanding how vehicle depreciation works can help you reduce its effect on your fleet, calculate your annual expenses more accurately and save you money in the long run.
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“Depreciation” is the word used to describe the way something loses value over time, in this case, vehicles. Commercial vehicles tend to depreciate faster than personal vehicles because they’re used more heavily.
Most new cars lose about 10% percent of their value as soon as they’re driven off the lot. They lose another 10-20% more by the end of the 1st year and about 25% every year after that.
So if you decide you want to sell your car 3 years after you bought it brand new, you might be surprised to find that it’s lost around 3/4 of it’s value!
How do I calculate commercial vehicle depreciation?
The most accurate way to calculate the cost of vehicle depreciation for a fleet is by using the accelerated method. This method is so named because it recognizes the large drop in a vehicle’s value that occurs during its first year and then levels off in subsequent years.
To calculate the impact of depreciation, let’s look at an example. You buy a commercial truck for your business for $100,000. Assume that its value will depreciate 30% after the first year and 20% each year after that.
Here, the vehicle you originally paid $100,000 for is worth only $28,672 after five years — a loss of $71,328 or about 71% of its original value! At this point, the truck isn’t even worth 30% of its purchase price.
*To obtain these results, CanadianBlackBook.com measured 2015-model-year vehicles in 23 categories. The value of vehicles were tracked over a four-year period, with analysts scouring hundreds of thousands of sales transactions and other data points from live auctions, online auctions, dealership and other proprietary sources. Prizes were awarded to those vehicles that held the highest percentage value of their original MSRP.
Other vehicles that are known to hold their value well over time include the following:
GMC Sierra 1500
Nissan NV Cargo
Ram ProMaster Cargo Van
Ready to trade in for a new vehicle?
How do I limit vehicle depreciation?
While you can’t prevent depreciation, you can reduce the cost of depreciation on your fleet of vehicles.
Lease. Because you don’t own the vehicle, you won’t have to worry about depreciation reducing its value. The CRA also allows you to deduct lease payments for commercial vehicles from your income, so that’s huge plus. (Note: there are some limitations to lease payment deductions depending on the class of the vehicle. See FAQ below for more info.) Additionally, if the resale value at the end of the lease is higher than the end-of-term purchase price in your contract, you can purchase the vehicle and potentially resell it for a profit.
Maintenance. Preventative and routine maintenance can help your vehicles retain more value, especially if you have the service records to prove it.
Replacement cycle. Aim to replace your vehicles with newer models when the market value of those vehicles is greater than the cost of operating them.
Buy used. Because vehicles depreciate most in the first year, consider buying a used vehicle to cut depreciation costs. Vehicles that are 1 or 2 years old still have much of their functional value but have already suffered the steepest bulk of depreciation, leaving you with an almost-new car that you can buy at a much-lower-than-new price.
Avoid customization. Try to avoid customization or modifications that can increase the cost but not the resale value. This could include aftermarket parts, engine modifications and so on.
Employee purchase program. Consider letting employees buy vehicles approaching the end of their useful life. They can buy used fleet vehicles at a lower rate than they might find at a retailer, and you’ll earn more than you would if you sold the vehicles to a wholesaler.
Timing. Monitor market data to find out when prices and demand are high for vehicles you’re looking to upgrade.
Limit suppliers. The more vehicles you purchase from a supplier, the more bargaining power you tend to have.
Can I deduct car depreciation as a business expense?
Yes. The CRA allows business owners to deduct the cost of depreciation, but not the cost of purchasing vehicles.
If you use your vehicle for both personal and business use, you can only claim expenses related to your use of the vehicle for business purposes.
Say, for example, you drive your car 40 km during a work day, but 15 km of that is spent running personal errands and the remaining 25 km is spent attending business meetings and picking up office supplies. In this case, you can only claim vehicle expenses associated with 25km of driving. It’s very important, therefore, to keep track of how you use your vehicle so that you can easily separate which costs are deductible and which are not.
The Canada Revenue Agency often uses the terms depreciation and “Capital Cost Allowance (CCA)” interchangeably for the purpose of determining tax claim eligibility. Deductible vehicle expenses are calculated the same way for sole proprietorships, partnerships and corporations, however, each entity reports these expenses differently to the CRA.
Tax reporting for sole proprietorships and partnerships Sole proprietorships report business vehicle depreciation on line 9936 (“Capital cost allowance (CCA)”) of Tax Form T2125 Statement of Business or Professional Activities.
Partnerships report depreciation on line 9943 (“Other amounts deductible from your share of net partnership income (loss)”) in part 6 of form T2125.
Being in a partnership does not mean you can claim more deductibles on an asset than if one person operated the same business alone. The sum of vehicle expenses – depreciation as well as other eligible costs – collectively claimed by all partners in a partnership must equal what a single individual would claim for the same vehicle(s). In other words, the amount that the CRA allows you to claim for a single vehicle’s expenses is the same regardless of whether 1 person uses that vehicle or 101 people use it.
Sole proprietors and business partners can use Chart A (“Motor vehicle expenses”) of form T2125 to calculate the amount of vehicle expenses that can be claimed on their tax returns.
Tax reporting for corporations Corporations report vehicle depreciation on of form T2 Corporate Income Tax Return (see Income Tax Folio S3-F4-C1 General Discussion of Capital Cost Allowance).
Calculating vehicle depreciation Your commercial vehicle expenses claim should be based on your business year not the calendar year. You will need to calculate the capital cost of your vehicle, determine which class of depreciable property it falls under according to CRA regulations and then apply the yearly depreciation rate for that class to the vehicle’s capital cost. The result is the capital cost allowance (CCA) for that vehicle, which you can deduct from your taxes.
Talk to either a tax accountant or a tax lawyer to know exactly what you’re eligible to claim and how to go about claiming it.
Vehicle depreciation is an unavoidable expense that can soak up a large chunk of your operating costs. While you aren’t able to avoid depreciation, you can take advantage of tax benefits and other tactics to limit the cost and impact on your fleet.
Consider implementing a fleet management system to optimize your fleet and reduce operating expenses like depreciation.
You can begin to calculate capital cost allowance (CCA) for vehicles whenever you first begin using the vehicle for income or alternatively, at “the time the property [vehicle] is delivered or made available to you and is capable of producing a saleable product or service.” See this page on the Government of Canada’s website to find out how to calculate the deduction for capital cost allowance (CCA).
No. While depreciation is generally the largest cost of owning a vehicle, it’s not something you will physically need to pay.
Instead, your vehicle drops in value each year, which adds to the cost of replacing the vehicle sometime in the future when its value is zero and it’s no longer usable. You may need to set aside money equal to depreciation in order to pay for a new vehicle when the time comes, but this is just preparing for the future. Depreciation itself is not an expense you have to pay to anyone.
Yes. Vehicle lease payments are tax deductible for businesses. However, there may be limits to the amount you can claim depending on the class that your vehicle falls into as defined by CRA regulations.
If you own a vehicle, on the other hand, you can deduct capital cost allowance (depreciation) as well as interest payments if the car was financed.
Click here to learn more about how leased vehicles affect your business taxes.
Besides capital cost allowance (depreciation) and leasing costs, CRA rules allow you to deduct the following expenses from your business taxes:
fuel (gas, propane, oil)
maintenance and repairs
license and registration fees
eligible interest on loans to finance the vehicle(s)
Stacie Hurst is an editor at Finder, specializing in loans, banking products and money transfers. She has a Bachelor of Arts in Psychology and Writing, and she completed one year of law school in the United States before deciding to pursue a career in the publishing industry. When not working, she can usually be found messing around with games, photography or floral arrangements in memory of her former days as a flower shop assistant.
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