Depreciation accounts for the declining value of an asset over time. Internal Revenue Service rules strictly govern the way this can be done on accounts prepared for tax purposes. In the case of a taxicab, this must be done under a method known as the five-year, 200 percent declining balance.

Estimate what the value of the taxicab will be when it is no longer useful as a business asset, known as the salvage value. This is likely to be its used retail value once it is no longer in condition for heavy use. You can use guides such as the Blue Book series to find a value based on make, model and age. Your valuation must be considered reasonable by the tax authorities, so don't be tempted to overestimate.

Deduct this value from the purchase price to work out the total depreciation. Divide this by five to work out the straight line value.

Calculate 40 percent of the cab's current listed value at the end of each year. The result is both the amount you can list as an expense for the year and the amount by which you must reduce its listed value on your balance sheet. Ensure you use this newly-reduced value for the following year's calculation.

Compare the 40 percent figure each year against the straight line value that you calculated upon buying the asset. If and when the straight line value is greater than the 40 percent of the current listed value of the cab, switch to deducting the straight line value each year instead.

Do not use the 40 percent calculation or use the straight line value when calculating depreciation in the fifth and final year. Instead, simply reduce the taxicab's listed value to the salvage value and list the amount of this reduction as an expense

Tip

You can use an alternative calculation method known as the alternative depreciation system, or ADS. You must formally elect to do this and then cannot return to the standard system. In most cases, using ADS will mean having a higher taxable income and thus paying higher taxes in the first few years after buying the taxicab.

Warning

If you depreciate the taxicab and use it for personal purposes, you cannot claim the standard mileage allowance on your taxes. This could be relevant if you use the taxicab for moving home, hospital visits or carrying out charity work, situations in which you normally could deduct the mileage allowance on your taxes.