The IRS released guidance to help taxpayers determine the proper treatment for depreciating passenger automobiles subject to 100 percent bonus depreciation.
Rev. Proc. 2019-13 provides a safe harbor method of accounting for determining depreciation deductions for passenger automobiles that qualify for the 100 percent additional first year depreciation deduction under section 168(k), and that are subject to the depreciation limitations under section 280F(a).
Section 280F limits deductions for depreciation for passenger automobiles used in a trade or business, with a schedule of limits for each year. Recent tax law changes (commonly referred to as the Tax Cuts and Jobs Act, or TCJA) changed the yearly limits. Section 280F establishes a $10,000 limit for depreciation in the year the vehicle is placed in service, then allows $16,000 in year two, $9,600 for year three, and $5,760 for year four and any remaining years. When bonus depreciation is available, section 168(k)(2)(F)(i) increases the first year limitation amount under section 280F(a)(1)(A)(i) by $8,000. Rev. Proc. 2018-25 provides tables for taxpayers’ use in determining the permitted yearly depreciable deductions.
The new guidance addresses situations in which a taxpayer is limited in its first year depreciation and then cannot begin depreciating the remaining basis until after the recovery period. The IRS offers the example of a $50,000 passenger automobile placed in service in 2018. Section 280F(a)(1)(A)(i) limits the first year depreciation deduction plus section 179 deduction to $18,000. The excess amount of $32,000 cannot be recovered until 2024, subject to the annual limitation of $5,760 under section 280F(a)(1)(B)(ii).
Accordingly, the IRS introduces a safe harbor method to allow recovery on a more tenable schedule. Under the safe harbor method, taxpayers take the full deduction allowed by section 280F(a)(1)(A)(i) in the year an auto is placed in service. For each subsequent year in the recovery period, the taxpayer multiplies the remaining adjusted depreciable basis of the passenger automobile by the annual depreciation rate for each subsequent taxable year (subject to the limits in section 280F(a)(1)(A)). Note that depreciation deductions must be adjusted for short taxable years.
The adjusted depreciable basis of the passenger automobile as of the first taxable year following the recovery period is treated as a deductible depreciation expense for that taxable year–subject to the limitation under section 280F(a)(1)(B)(ii). Any excess would be carried into the succeeding tax year(s) and deductible subject to the yearly limitations.
The safe harbor method does not apply in any year that section 280F(b) applies (i.e., business use of the property is 50 percent or less).
While the safe harbor method may be very favorable, it does not apply to all passenger automobiles. Rev. Proc. 2019-13 applies to a passenger automobile (other than a leased passenger automobile):
- Acquired and placed in service after Sept. 27, 2017
- That is qualified property under section 168(k) for which bonus depreciation is allowable
- That has an unadjusted depreciable basis greater than the limitation amount in section 280F(a)(1)(A)(i)
- For which the taxpayer did not elect to use section 179 expensing
The new safe harbor method smooths out the unusual results for some vehicles, and allows a continuous schedule of depreciation. While advantageous, it is important to plan to use the method, as it is not available where section 179 expensing is taken for any portion of the property in question. It is also important to note that IRS will release guidance with new limitation amounts for section 280F(a)(1) for years after 2018. Taxpayers are encouraged to consult a tax professional when acquiring vehicles.