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IRS Provides Safe Harbor Accounting Method for Automobile Depreciation Deductions
(Parker Tax Publishing March 2019)
The IRS has provided 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 Code Sec. 168(k) (as amended by the Tax Cuts and Jobs Act of 2017 (TCJA)) and that are subject to the luxury automobile depreciation limitations under Code Sec. 280F(a) (as amended by the TCJA). According to the IRS, the safe harbor mitigates the anomalous result that occurs in tax years after the placed-in-service year and before the first year succeeding the end of the recovery period for a passenger automobile. Rev. Proc. 2019-13.
Background
The Tax Cuts and Jobs Act of 2017 (TCJA) amended Code Sec. 168(k) to extend and modify the additional first year depreciation deduction (i.e., bonus depreciation) for qualified property acquired and placed in service by a taxpayer after September 27, 2017, and placed in service by the taxpayer before January 1, 2027.
Code Sec. 168(k)(1) provides that, in the case of qualified property, the depreciation deduction allowed under Code Sec. 167(a) for the tax year in which the property is placed in service includes an allowance equal to the applicable percentage of the property's adjusted basis. Under Code Sec. 168(k)(6)(A), the applicable percentage is 100 percent for qualified property acquired and placed in service after September 27, 2017, and placed in service before January 1, 2023 (the "bonus depreciation deduction"). The applicable percentage is phased down by 20 percentage points each year for qualified property placed in service after December 31, 2022, and through December 31, 2026.
Code Sec. 168(k)(7) permits a taxpayer to elect out of the bonus depreciation deduction with respect to any class of property that is qualified property placed in service during the tax year. Code Sec. 168(k)(10) allows a taxpayer to elect to deduct 50 percent, instead of 100 percent, bonus depreciation for all qualified property acquired after September 27, 2017, and placed in service during the taxpayer's first tax year that includes September 28, 2017.
For owners of passenger automobiles, Code Sec. 280F(a), as modified by TCJA, imposes dollar limitations on the depreciation deduction for the year the taxpayer places the automobile in service and for each succeeding year. For a passenger automobile that is qualified property under Code Sec. 168(k) and for which the 100 percent bonus depreciation is allowable, Code Sec. 168(k)(2)(F)(i) increases the first year limitation amount under Code Sec. 280F(a)(1)(A)(i) by $8,000. In April 2018, the IRS issued Rev. Proc. 2018-25, which provided the dollar limitation amounts provided in Code Sec. 280F(a)(1)(A)(i) that apply to passenger automobiles first placed in service by the taxpayer during calendar year 2018.
Under Code Sec. 280F(a)(1)(B), the unrecovered basis of any passenger automobile is treated as an expense for the first tax year after the recovery period, subject to the annual limitation of $5,760 under Code Sec. 280F(a)(1)(B)(ii). Code Sec. 280F(d)(1) provides that any deduction allowable under Code Sec. 179 for a passenger automobile is subject to the limitations of Code Sec. 280F(a) in the same manner as if it were a depreciation deduction allowable under Code Sec. 168. Code Sec. 280F(d)(7) provides that the limitations of Code Sec. 280F(a) will be adjusted for inflation for any passenger automobile placed in service by the taxpayer after 2018.
In mid-February, the IRS issued Rev. Proc. 2019-13, which provides a safe harbor method of accounting for determining depreciation deductions for passenger automobiles that qualify for the bonus depreciation deduction. Rev. Proc. 2019-13 applies to a passenger automobile (other than a leased passenger automobile):
(1) That is acquired and placed in service by the taxpayer after September 27, 2017;
(2) That is qualified property under Code Sec. 168(k) for which the 100 percent additional first year depreciation deduction is allowable;
(3) That has an unadjusted depreciable basis (as defined in Reg. Sec. 1.168(b)-1(a)(3), except that there is no reduction by reason of an election to expense any portion of the basis under Code Sec. 179) exceeding the first year limitation amount under Code Sec. 280F(a)(1)(A)(i); and
(4) For which the taxpayer did not elect to treat the cost (or a portion of the cost) as an expense under Code Sec. 179.
If the unadjusted depreciable basis of a passenger automobile for which the 100 percent additional first year depreciation deduction is allowable exceeds the first year limitation amount under Code Sec. 280F(a)(1)(A)(i), the excess amount is the unrecovered basis of the automobile for purposes of Code Sec. 280F(a)(1)(B)(i) and is therefore treated as a deductible expense in the first tax year succeeding the end of the recovery period subject to the limitation under Code Sec. 280F(a)(1)(B)(ii).
Safe Harbor for Section 280F(a) Limitations on Passenger Automobiles
To mitigate the anomalous result that occurs in the tax years subsequent to the placed in service year and before the first tax year succeeding the end of the recovery period for a passenger automobile within the scope of Rev. Proc. 2019-13, the IRS has provided a safe harbor method of accounting. A taxpayer adopts the safe harbor accounting method by applying it to deduct depreciation of a passenger automobile on the tax return for the first tax year succeeding the automobile's placed in service year.
The safe harbor method operates as follows:
(1) The taxpayer must use the applicable optional depreciation table for computing the depreciation deductions;
(2) For the placed in service year, the taxpayer deducts the first year limitation amount under Code Sec. 280F(a)(1)(A)(i) (see Table 2 of Rev. Proc. 2018-25 for the first year limitation amount for a passenger automobile placed in service in calendar year 2018 for which the 100 percent additional first year depreciation deduction is allowable. Further guidance will be issued to provide the limitation amounts for passenger vehicles placed in service after 2018);
(3) For the 12 month tax year subsequent to the placed in service year, and for each succeeding 12 month tax year in the recovery period, the taxpayer determines the depreciation deduction by multiplying its remaining adjusted depreciable basis by the annual depreciation rate for each tax year subsequent to the placed-in-service year specified in the applicable optional depreciation table, subject to the limitation amounts under Code Sec. 280F(a)(1)(A);
(4) The adjusted depreciable basis of the passenger automobile as of the beginning of the first tax year succeeding the end of the recovery period is treated as a deductible depreciation expense for the first tax year succeeding the end of the recovery period, subject to the limitation under Code Sec. 280F(a)(1)(B)(ii). Any excess is treated as a deductible depreciation expense for the succeeding tax years, subject to the limitation under Code Sec. 280F(a)(1)(B)(ii); and
(5) If Code Sec. 280F(b) applies in a tax year subsequent to the placed in service year, the safe harbor method of accounting ceases to apply beginning for the first year in which Code Sec. 280F(b) applies. Any passenger automobile that is not predominantly used in a qualified business use for any tax year is subject to Code Sec. 280F(b) for such tax year and any subsequent tax year.
Example 1: In 2018, Tom, a calendar year taxpayer, purchased and placed in service for use in his business a new passenger automobile that costs $60,000. The automobile is five-year property and qualified property for which the bonus depreciation deduction is allowable. The automobile is used 100 percent in Tom's trade or business. Tom depreciates the automobile under the general depreciation system by using the 200 percent declining balance method, a five-year recovery period, and the half-year convention. Tom adopts the safe harbor method of accounting provided in Rev. Proc. 2019-13. As a result, Tom must use the applicable optional depreciation table that corresponds with the 200-percent declining balance method of depreciation, a five-year recovery period, and the half-year convention for determining depreciation deductions (Table A-1 in Appendix A of IRS Publication 946). For 2018, Tom deducts $18,000, the depreciation limitation for 2018. The remaining adjusted depreciable basis of the automobile as of January 1, 2019, is $42,000 ($60,000 unadjusted depreciable basis less $18,000 depreciation deduction claimed for 2018). For 2019 through 2023, the total depreciation allowable for each tax year is determined by multiplying the annual depreciation rate by the remaining adjusted depreciable basis of $42,000, subject to the annual limitation. Accordingly, for 2019, the total depreciation allowable is $13,440 (32 percent of $42,000). Because this amount is less than the depreciation limitation of $16,000 for 2019, Tom deducts $13,440 as depreciation on his 2019 tax return. For 2020, the total depreciation allowable is $8,064 (19.2 percent of $42,000). Because this amount is less than the 2020 depreciation limitation of $9,600, Tom deducts $8,064 as depreciation on his 2020 tax return. As of January 1, 2024 (the beginning of the first tax year succeeding the end of the recovery period), Tom's adjusted depreciable basis in the automobile is $8,401 ($60,000 unadjusted depreciable basis less the total depreciation allowable of $51,999 for 2018-2023). Accordingly, for the 2024 tax year, Tom deducts depreciation of $5,760 (the lesser of the adjusted depreciable basis of $8,401 as of January 1, 2024 or the limitation amount of $5,760). As of January 1, 2025, the adjusted depreciable basis of the automobile is $2,641 ($8,401 adjusted depreciable basis as of January 1, 2024, less the $5,760 of depreciation claimed for 2024). Accordingly, for the 2025 tax year, Tom deducts depreciation of $2,641 (the lesser of the adjustable depreciable basis in the automobile or the limitation amount of $5,760).
Example 2: The facts are the same as in Example 1 except Tom elects to treat $18,000 of the cost of the automobile as an expense under Code Sec. 179. As a result, the automobile is not within the scope of Rev. Proc. 2019-13 and the safe harbor method does not apply. For 2018, the 100 percent bonus depreciation deduction and the Code Sec. 179 deduction is limited to $18,000. For 2018, Tom deducts $18,000 for the automobile and deducts the excess amount of $42,000 beginning in 2024, subject to the $5,760 annual limitation.
For a discussion of the bonus depreciation rules, see Parker Tax ¶94,240.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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