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Auto Depreciation Safe Harbor Offered by IRS

Bonus Depreciation for Passenger Autos Just Got Easier

Passenger autos are one class of business asset that have unfavorable depreciation rules. These vehicles are subject to strict dollar limits each year of the recovery period if they have a gross vehicle weight of 6,000 pounds or less. So, even with 100% bonus depreciation and Sec. 179 expensing deductions, taxpayers are not allowed to completely write off the cost of business cars in the first year of use like they can for other classes of business assets. However, the deduction limits on passenger autos were significantly increased by the Tax Cuts and Jobs Act (TCJA) from approximately $5,000 per vehicle per year to:

  • $10,000 for the year in which the vehicle is placed in service;
  • $16,000 for the second year;
  • $9,600 for the third year;
  • $5,760 for the fourth and later years in the recovery period.

If “additional first-year depreciation” (bonus depreciation) also is claimed, another $8,000 is deductible in the first year. So, the maximum deduction for the year a passenger auto is placed in service is $18,000. These higher limits apply to passenger automobiles acquired and placed in service after September 27, 2017, and before January 1, 2027.

New Safe Harbor Allows Earlier Deductions

After the $18,000 first-year write-off, TCJA provides that the amount of unrecovered basis of passenger autos will not be deducted until the first taxable year after the 5-year recovery period, subject to a limit of $5,760 for each succeeding taxable year. However, the IRS’s new safe harbor in Rev. Proc. 2019-13 offers an alternative depreciation schedule which allows a more rapid write-off of remaining basis during the 5-year recovery period. Here’s how these rules work.

Without the Safe Harbor:

If a calendar-year taxpayer places in service in December 2018 a passenger automobile that costs $50,000 and takes bonus depreciation of $18,000, the excess amount of $32,000 would be recovered by the taxpayer beginning in 2024, subject to an annual limitation of $5,760.

With the Safe Harbor:

In 2018, X, a calendar-year taxpayer, purchased and placed in service a new passenger automobile that costs $60,000. The auto has a 5-year recovery period. For 2018, X deducts the $18,000 allowed as bonus depreciation. Under the safe harbor, X then would use the 200-percent declining balance method to recover the remaining $42,000 in depreciable basis of the auto ($60,000 – $18,000 = $42,000). To apply the safe-harbor method, the taxpayer must use the applicable depreciation table in Appendix A of IRS Publication 946. The yearly deductions must be within the regular yearly deduction limits for passenger autos for the subsequent years of the recovery period (shown on the left side of the table below).

Taxable
year
Depreciation limitations under
Table 2 of Rev. Proc. 2018-25
Depreciation deduction
under the safe harbor
2018 $18,000 $18,000
2019 $16,000 $13,440 ($42,000 x .32)
2020 $ 9,600 $ 8,064 ($42,000 x .1920)
2021 $ 5,760 $ 4,838 ($42,000 x .1152)
2022 $ 5,760 $ 4,838 ($42,000 x .1152)
2023 $ 5,760 $ 2,419 ($42,000 x .0576)

TOTAL

$51,599

As of January 1, 2024, there is another $8,401 of depreciable basis remaining. X can deduct the remaining basis at the rate of $5,760 per year. So, for 2024, the deduction will be $5,750 and for 2025, the final amount of $2,641 will be deducted.

Taxpayers adopt the safe harbor method by applying it to deduct depreciation on their return for the first taxable year following the placed-in-service year. In other words, just start claiming the deduction on the safe harbor schedule.

Note that the safe harbor method does not apply to:

  • a passenger automobile placed in service by the taxpayer after 2022.
  • a passenger automobile for which the taxpayer elected out of 100-percent bonus depreciation.
  • an auto that is expensed under Sec. 179.

Observation

This safe harbor appears to correct an unintended result of the TCJA rules. The Revenue Procedure states that its purpose is to “..mitigate the anomalous result that occurs in the taxable years subsequent to the placed-in-service year and before the first taxable year succeeding the end of the recovery period for a passenger automobile within the scope of this revenue procedure…” The speed with which the Tax Cuts and Jobs Act was enacted caused a number of glitches, but the IRS has done a good job identifying them and issuing corrective guidance.

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