Car Reviews

How depreciation calculated and how depreciation works

By TheCarzingTeam August 28, 2019 | Car Reviews

Car Reviews

The car is the most beautiful vehicle that has the craze of the people from all over the world.  There are people that are fond of cars and they always think of taking it for themselves or for their family. But there are many important things that person needs to know about the cars. You need to know each and everything about the cars. Car is said to be the queen of the road. There are thousands of models from different companies that are popular, and people love to have one in their home. There are many things that you need to know before you make the purchase of any car.

 

Some important things in the car

If you are going to make the purchase, then you must see the comfort by driving it. You must read all the things like mileage that it covers per liter, age, and all other features that a car has in it. The pros and cons must be noted. The car is not a thing that comes under small budget and you need to be very careful of making the purchase. You must see how many people can sit comfortably. From all these futures you need to know about the depreciation that is the most important aspect. You must remember that buying can be easy but selling the car is not so easy. If you will not have the understanding about the depreciation of car then it is sure that you might get loss during the time your sale out your car.

 

What is depreciation?

It is the expense that occurs as the value of the car that drops below the value of the car that you purchased, and this drop value is called “DEPRECIATION”. It is important to know how car depreciation is calculated and how it works. Before taking how it works, it is important to know what depreciation all is about. Depreciation is the difference between the value of the car that you made during the purchase and the time you sell. It must be calculated very properly.  It is important to know about what affects depreciation rate of cars. Here are some of the important things that cause some cars that depreciate quickly than other cars:

  1. Mileage: The average mileage is about 10,000 per year. If your car has more mileage, then the value of the car decreases. But there are some cars that have reputation and for that they might have little more value that is above in the depreciation. It is called reliability that is based on the customer satisfaction surveys.
  2. Numbers of owners: It is important to check number of owners of the car. The less the owners the better option is available. You can check the numbers of owners on car’s logbook or that is available in the registration book.
  3. General condition: You must remember that the general condition also matters a lot. The damage done to the body of the car or its interior and interior parts can reduce the value of your car. If you will make the purchase, then make sure that you inspect the car very carefully.
  4. Length of warranty: In most of the cars it is three years that car has the warranty but now days you have the relief of getting the warranty that is for seven years. If you will sell the car then it will be a great bonus that increases that value of your car.
  5. Service history: If the service book of the car is complete then it helps in making clear picture of the car. The time to time service provided to the car can have better value for your car that you are selling.
  6. Size: you must remember that the big luxury car tends to depreciate more than the small car. The luxury big cars have higher billing and they also cost more for maintenance.
  7. Fuel: The more mileage per gallon is the best than others. The more mileage per gallon helps you to drive more with fewer expenses on the fuel.

 

All about depreciation

The value of new car can fall at an alarming rate. This varies or depends on the manufacturers and models. It is important to make sure that you know about all the facts about depreciation to know how well your car is going will going to hold its value. In car depreciation the fuel is likely to be the big expense for day to day expenses. It is said to be the real cash burner during the depreciation time. When the depreciation is calculated then fuel will play important role. It will be three times loss to the owner that will sell his or her car that comes under the depreciation of the car. The more fuel used the less value will be for your car.

In simple words the depreciation is the difference between the value of car during the purchase and the value of the car during you are selling it. The value for your car stands between 15 to 35 percent in the first year and it increases with time. After three or more years the value that you can get is 50 percent. You must know the important factor during the time you are making the purchase of the second-hand car or new car. It is choosing the car that holds the value can provide much saving than the focusing on the fuel efficiency. You need to select the best type of car cost calculator for getting the right type of estimate of the car depreciation.

 

How to minimize depreciation

If you are purchasing the car then you must think about the future results that you can have. You always prefer to take the car that can be sold out with its best value. The less depreciation can provide you more value from your car. If you will buy a new car then you must read about the features. The mileage, length of warranty, condition and service are very important to for the new car or that you make the purchase of second-hand car. If you will buy the second-hand car then you must buy the car that have fewer owners, less mileage, interior and exterior condition is proper and have long time warranty. There are many ways that you can minimize the depreciation. Here are the important things that can help you minimize the depreciation:

  1. You need to have mileage down
  2. Take good care of car every day. You need to check your car and if any repair is required then you must delay but get it repaired soon.
  3. You must not use spoilers, flared wheel arches and wide wheels that are available for the modification of car.
  4. You must sell it during the time it is important to sell out it.
  5. Always have the color luxury color for the body of the car so that during the time you sell can respect the color and might get attractive.
  6. You need to search for the car that can help you giving the value during the time you sell out. For that case you need to know all about the car that can have the value in the future.
  7. Provide the proper service to your car that needs to be done time to time.
  8. Keep maintaining the service record book and all other documents to be maintained very properly. This will help you a lot for minimizing the depreciation during the time of selling it out.
  9. If the new model is about to come that is of your car then it is time to sell it out.
  10. The second model will decrease the value of your model and for that you need to keep alert for watching when the new model is about to come in the market.

 

How depreciation is calculated?

There are three types of system that helps in calculating the depreciation. MACRS depreciation, special depreciation allowance and the section 179 deduction are the main three system that are used for the depreciation for the car. It depends on you to choose one of them. The best way for car depreciation method is the use of tax software like TurboTax. It can calculate car depreciation and other check out for business deductions. The important thing about this software is that you need to file it properly. From all the three methods the section 179 deduction and special depreciation allowance are the optional one and the most common and that is used by maximum people is the MACRS. The full form of MACRS is Modified accelerated cost recovery system. Here are the three systems that are used for depreciation with details:

  1. Special depreciation allowance for cars: It is also known as bonus depreciation system. It is an additional amount of bonus that business owners can have. It can be claimed in the first years of business in use. Its main features are:
    1. Highest first year depreciation as compared to the other two methods.
    2. Only applies to the first year.
    3. It can be applied in the new as well as in second cars also.
    4. In order to qualify special depreciation allowance, drive the car that should be more than half a mile. It must be for business purpose.
    5. The first-year depreciation is effective from 2018 and will end 2027.
    6. If you like to claim special depreciation, then you need to use form 4562 ti claim it.
  1. MACRS depreciation for car: this one is the most common method that helps in spreading the cost of a car in 5 years. In this you need more than 50% of the mile to be driven by the car. It is calculated after taking the special depreciation allowance and section 179. Here are the important features of MACRS:
    1. It has two largest deduction amounts in the first and second years as compared to the straight-line method.
    2. It can be used only if you have used the car that is more than half the time for business.
    3. It is calculated after the special depreciation and section 179 deductions.

The formula to calculate the depreciation is simple and is:

Calculate depreciable (basis like basis of car) x (business use percent).

In order to calculate MACRS depreciation tax deduction then you need to calculate (depreciable basis) x (MACRS depreciation rate)

 

Main information that you need to know about MACRS

In order to calculate your depreciation tax deduction using MACRS method then you need to have the following information:

  1. Depreciable basis: The is the basis that are said to be the purchase price of the car that is after subtracting the special depreciation allowance or section 179 deduction.
  2. Placed in service date: It is the date that is stamped to the car the day you start using it for your business.
  3. Recovery period: There are fivers years of recovery period for the cars.
  4. Method of depreciation:  It is the 200% declining balance (DB) that is suitable for cars.

 

  1. Section 179 deduction: It allows the owners to deduct the 50,000 for cars. In this case the business the car must be used in the business that has the percentage of 50%. In this you have to file the form 4562. The important features of section 179deduction are:
    1. Maximum five years depreciation
    2. It is higher for the heavy truck.
    3. It only applies to the first year of business use.
    4. It is also counted as the method that has special depreciation allowance. The car must be used in the business for more than 50%.

How to calculate section 179 deduction

There are two processes that are used for calculating the section 179 deduction for the car. The first process includes the business portion of the car’s purchase price that is also called as depreciable basis. In the second process we will be comparing the amount to the maximum limit for the cars. For calculating section 179 car depreciation are:

(Basis of the car) x (business use percent) = depreciable basis

 

Documents that are important for car depreciation

You need to keep all the important documents for your car depreciation. It is IRS that requires business owners to have good records of their car expenses. You need to provide everything that you have used the car for the business.  The IRS requires the following documents:

  1. Proof purchase for showing the cost of the car
  2. Mileage log in which all the records must be maintained with proper date, destinations and for other businesses that you used the car.
  3. Total miles for the year are also very important because in this you will be mentioning all the records that the car is used for business as well as for the personal purposes.
  4. You need to have receipts for repairs and improvement that you have provided to your car.

If you find that the deprecation calculating is complicated, then there is nothing to worry because you have professionals in this line. They use TurboTax software that is specially designed for the depreciation. There is a lot of need of calculating the depreciation of the car. The depreciation is calculated because in this method the expense is recognized and is reported when an asset is placed. It reduces the assets value and accounting period income. There are many different types of ways that you can calculate car depreciation. Here are the methods that are used for calculating the depreciation for car:

 

Method No.1: Based on age of the car

It is based on the purchase price of the car and its current age and its estimate yearly depreciation rates. As you know that the price and the age is known to us and depreciation rates vary between the making and the models in this method the depreciation an average 24% in the first years and 15% in the rest of the years. For the first year you can multiply the purchase price with the first-year depreciation rates and after that subtract the result from the price. For the rest of the years you need to multiply the reduced value in the previous year with the current year depreciation rates and then subtract the result from the previous year’s value. Here is the example that is given below:

First year ending value = 30000-(3000×0.24) = 30000-7200 = 22800

Second year ending value = 22800-(22800×0.15) = 22800-3420 = 19380

Third year ending value = 19380- (19380×0.15) ==19380-2907 = 16473

Like this you can calculate for next years.

 

Method No2: based on cost per mile

It is the method in which the study based on the miles that are driven per year. In this the same case of first year that is 0.24 percent is the depreciation and for rest of the years it is 0.15 percent. In this for calculating the depreciation are having the calculator for making the calculations easy. In calculator you need to feel the average of annual cost, miles per year and depreciation percent of annual cost that will be 40%. You will also have the driving cost per mile, depreciation cost per mile, depreciation cost per annual miles and trip depreciation cost.

 

Method No3: based on straight line depreciation

In this method you need to subtract the expected salvage value from the purchase price of the car. In this you can use the calculator that is specially designed for the straight-line method. In such calculator you need to provide purchase price, salvage value, depreciation expense depreciation percent and annual depreciation.

The research has shown the luxury cars that are top on the list lose their value faster. There are two main reasons for loss of their value. The first thing is the government incentives applied on their purchasing price. It is the point that makes their resale value gets lower. Secondly today the advance technology is making lots of models and the older models gets outdated and this is the main and second reason that the car gets resale value very lower. There is different depreciation for different models and brands. If you need to have greater value that is the price that you can get more from your car during the time you like to sell then you must not forget that there are many things that you need to see before the purchase and after the purchase until you are using it. If you are going for the purchase, then you must remember that there are two types of liquid gas that are needed for moving the car on the road. The first one is the petrol and second is diesel. The petrol cars are not expensive, but it is the petrol that is very expensive. The diesel car can be little expensive but fuel like diesel is not having high rates as compare to the petrol.

If you will buy the diesel car then you can have more mileage, then little use of the diesel. The cars that are designed for the petrol have less mileage. It is better to opt diesel car than going for the patrol car. After the purchase you need to provide the best care for your car in case of maintenance and other things like washing the car checking the tires daily, checking the fuel, checking the seats, maintaining the log book of service and mileage and more. If you will provide the proper service to your car then it is sure that you are going to have good value for your car after few years. The depreciation will be very less if you keep in mind the important things that are required for maintaining your car. You can have same thing for buying second hand car also.

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