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Safe harbor issued for passenger automobile depreciation

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Tax Hot Topics newsletter The IRS has provided a safe harbor (Rev. Proc. 2019-13) to determine depreciation deductions for passenger automobiles that are qualified for 100% bonus depreciation and are subject to luxury automobile depreciation limitations under Section 280F. Taxpayers may adopt this safe harbor simply by applying it.

Section 280F(a) imposes dollar limitations on the depreciation deduction for certain passenger automobiles, which were increased by the Tax Cuts and Jobs Act (TCJA) to $10,000 for the year the vehicle is placed in service, $16,000 for year two, $9,600 for year three, and $5,760 for any remaining years. The IRS annually updates and publishes tables that specify the limitation amounts, and Rev. Proc. 2018-25 provides the amounts for 2018.

The TCJA provides 100% bonus depreciation for qualified property, such as passenger automobiles, acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. Without the safe harbor, a taxpayer claiming 100% bonus depreciation on a passenger automobile is subject to an $18,000 depreciation limit for the year it’s placed in service under Section 280F. Further, no depreciation deduction is allowed throughout the rest of its recovery period until the year after the recovery period, at which point the $5,760 annual limitation is applied. Under the safe harbor, a taxpayer can obtain depreciation deductions throughout the Modified Accelerated Cost Recovery System (MACRS) five-year recovery period, rather than waiting until after the end of the recovery period, in addition to the $18,000 of depreciation allowable in the first year.

The tables below show examples of the interaction between Section 179 expensing and the Section 280F limitation with bonus depreciation under the safe harbor or with the election out of bonus depreciation. Under the following scenarios, assume that the taxpayer purchased a $60,000 passenger automobile that was acquired and placed in service in 2018. Table A illustrates the amount of cost recovery allowable throughout its MACRS five-year recovery period under the Appendix A depreciation tables in Publication 946:

Safe harbor issued for passenger automobile depreciation

If the Section 179 election is made for any portion of the passenger automobile, no depreciation is allowable until after the end of the recovery period. Additionally, the Section 179 column illustrates what the result would have been if the IRS had not provided the Section 280F safe harbor for bonus depreciation property. Thus, the Section 280F safe harbor allows a depreciation deduction for a passenger automobile with 100% bonus depreciation throughout the recovery period, which otherwise would not have been available. Under all three scenarios, the automobiles are not fully depreciated during the recovery period. See Table B below for the remaining adjusted tax depreciable basis, which is recovered beginning in 2024 up to $5,760 each year until the property is fully depreciated.

Safe harbor issued for passenger automobile depreciation

This safe harbor is even more taxpayer favorable than the one provided under Rev. Proc. 2011-26 when 100% bonus depreciation was last available. That safe harbor allowed taxpayers to compute depreciation in the placed in service year with 100% bonus depreciation and compute unrecovered basis in the placed in service year as if the taxpayer claimed 50% instead of 100% bonus depreciation.

As illustrated by the example, making the Section 179 election for a passenger automobile that is limited by Section 280F provides the least amount of cost recovery over the MACRS five-year recovery period. Taxpayers wishing to elect out of bonus depreciation for all passenger automobiles must also elect out of bonus depreciation for all other 5-year property. Taxpayers should consider tax depreciation modeling and planning when purchasing passenger automobiles.

Contacts:
Sharon Kay
Partner
Washington National Tax Office
T +1 202 861 4140

John Suttora
Managing Director
Washington National Tax Office
T +1 202 521 1523

Debbie Shi
Manager
Washington National Tax Office
T +1 202 521 1501

Caleb Cordonnier
Manager
Washington National Tax Office
T +1 202 521 1555

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