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Commercial vehicle depreciation
How this unavoidable cost affects your business — and what you can do to manage it.
Understanding how depreciation works can help you reduce its effect on your fleet, calculate your annual expenses more accurately and save money in the long run.
How does depreciation work?
Depreciation is a measure of a vehicle’s reduction in value over time. Commercial vehicles tend to depreciate faster than personal vehicles because they’re subject to ongoing wear and tear.
Most new cars lose about ten percent of their value after they leave the lot, another ten to twenty percent more by the end of the first year and about twenty-five percent every year after that. So when it comes time to sell or account for your asset value, your vehicle could be worth about forty percent less than you originally paid for it.
How do I calculate depreciation for commercial vehicles?
The most accurate way to calculate the cost of depreciation for a fleet is by using the accelerated method. It starts with the large drop in value after the first year, then levels out to a lower depreciation rate in the following years.
To calculate the impact of depreciation, compare an example for a commercial truck worth $100,000. Assume a depreciation rate of 30% after the first year and 20% each consecutive year.
Here, the vehicle you originally paid $100,000 for is worth only $28,672 after five years — not even 30% of its initial value.
|Time||Depreciation rate||Depreciation cost||Value|
|End of year 1||30%||$30,000 ($100,000 x 0.3)||$70,000|
|End of year 2||20%||$14,000 ($70,000 x 0.2)||$56,000|
|End of year 3||20%||$11,200 ($56,000 x 0.2)||$44,800|
|End of year 4||20%||$8,960 ($44,800 x 0.2)||$35,840|
|End of year 5||20%||$7,168 ($35,840 x 0.2)||$28,672|
Which vehicles hold their value best?
Every vehicle depreciates at a different rate. But these vehicles are known to retain their value better than most:
- Honda Civic
- Toyota Camry
- Honda Accord
- Subaru Legacy
- Toyota Tacoma
- Toyota Tundra
- Ram 2500
- GMC Sierra 1500
- Ford Transit
- Mercedes-Benz Metris
- Nissan NV Cargo
- Ram ProMaster Cargo Van
- Toyota 4Runner
- Cadillac Escalade
- Porsche Macan
- Acura RDX
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How do I limit depreciation?
While you can’t prevent depreciation, you can reduce the cost of depreciation on your fleet.
- Lease. Because you don’t own the vehicle, you won’t have to worry about depreciation reducing its value. Plus, 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. Preventive 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 is greater than operating costs.
- Buy used. Because vehicles depreciate most in the first year, consider buying a used vehicle to cut depreciation costs.
- 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 by selling 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.
How do I deduct car depreciation as a business expense?
Businesses have two ways to deduct the cost of depreciation:
- Write off the full purchase price as a one-time expense in the first year.
- Deduct the loss of value each year for the rest of its useful life — which, according to the IRS, is five years.
For example, if your business purchases a vehicle for $100,000, the entire purchase price can be written off in the first year that it’s in service.
If you choose to write off the cost of depreciation each year, you’ll use the modified Accelerated Cost Recovery System (MACRS) to deduct costs. Tables A-1 through A-5 in IRS publication 946 outline depreciation rates that depend on when your vehicle was placed in service.
Talk to a tax specialist to determine the way that most benefits your business.
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.
Find the best way to finance your fleet and talk with a tax specialist to find out how deductions can help you reduce the burden of depreciation.
Frequently asked questions
How do I deduct depreciation on leased vehicles?
Tax deferrals and benefits are available to vehicle owners only, and leases are designed to pay for the cost of depreciation. You may be able to deduct your lease payments as part of your operating expenses, but you’ll need to talk to a tax professional for details.
How can I manage depreciation on my fleet?
Consider implementing a fleet management system to optimize your fleet and reduce operating expenses like depreciation.
What does “in service” mean?
The date that a vehicle is ready for business use — and the date depreciation begins.
How could depreciation affect cash flow?
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. For example, your $50,000 investment in a vehicle could turn into $10,000 by the end of its life.
In a capital lease, you lease the car and you’re considered the owner, leaving you able to deduct depreciation costs.
In an ownership lease, you’ll rent the vehicle in exchange for lease payments. Because you don’t own the vehicle, you can’t deduct depreciation costs.
image from: Shutterstock
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