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IRS Provides Luxury Auto Depreciation Limits and Lease Inclusion Amounts for Autos Placed in Service in 2019
(Parker Tax Publishing June 2019)
The IRS issued its annual guidance providing (1) tables of limitations on depreciation deductions for owners of passenger automobiles (which includes trucks and vans), first placed in service by the taxpayer during calendar year 2019, and (2) a table of amounts that must be included in income by lessees of passenger automobiles first leased by the taxpayer during calendar year 2019. The tables detailing these depreciation limitations and lessee inclusion amounts reflect the automobile price inflation adjustments required by Code Sec. 280F(d)(7). Rev. Proc. 2019-26.
Background
For owners of passenger automobiles (defined for purposes of Rev. Proc. 2019-26 to include trucks and vans), Code Sec. 280F(a) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service and for each succeeding year. For passenger automobiles placed in service after 2018, Code Sec. 280F(d)(7) requires the IRS to increase the amounts allowable as depreciation deductions by a price inflation adjustment amount that is determined using the automobile component of the Chained Consumer Price Index for all Urban Consumers (C-CPI-U) published by the Department of Labor.
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 (referred to as the Code Sec. 168(k) additional first year depreciation deduction). 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, and is phased down 20 percent each year for property placed in service through December 31, 2026.
Under Code Sec. 168(k)(8)(B)(i), the applicable percentage is 30 percent for qualified property acquired before September 28, 2017, and placed in service in 2019. For qualified property acquired and placed in service after September 27, 2017, Code Sec. 168(k)(2)(F)(i) increases the first year depreciation allowed under Code Sec. 280F(a)(1)(A)(i) by $8,000. For qualified property acquired by the taxpayer before September 28, 2017, and placed in service by the taxpayer during 2019, Code Sec. 168(k)(2)(F)(iii) increases the first year depreciation allowed under Code Sec. 280F(a)(1)(A)(i) by $4,800. The Code Sec. 168(k) additional first year depreciation deduction does not apply for 2019 if the taxpayer: (1) did not use the passenger automobile during 2019 more than 50 percent for business purposes; (2) elected out of the Code Sec. 168(k) additional first year depreciation deduction pursuant to Code Sec. 168(k)(7) for the class of property that includes passenger automobiles; or (3) acquired the passenger automobile used and the acquisition of such property did not meet the acquisition requirements in Code Sec. 168(k)(2)(E)(ii).
Code Sec. 280F(c)(2) requires a reduction to the amount of deduction allowed to the lessee of a leased passenger automobile. Under Code Sec. 280F(c)(3), the reduction must be substantially equivalent to the limitations on the depreciation deductions imposed on owners of passenger automobiles. Under Reg. Sec. 1.280F-7(a), this reduction requires a lessee to include in gross income an amount determined by applying a formula to the amount obtained from a table provided by the IRS in published guidance.
Rev. Proc. 2019-26
Under Code Sec. 280F(d)(7)(B)(i), the automobile price inflation adjustment for any calendar year is the percentage (if any) by which the C-CPI-U automobile component for October of the preceding calendar year exceeds the automobile component of the CPI (as defined in Code Sec. 1(f)(4)) for October of 2017, multiplied by the amount determined under Code Sec. 1(f)(3)(B). The amount determined under Code Sec. 1(f)(3)(B) is the amount obtained by dividing the new vehicle component of the C-CPI-U for calendar year 2016 by the new vehicle component of the CPI for calendar year 2016, where the C-CPI-U and the CPI for calendar year 2016 means the average of such amounts as of the close of the 12-month period ending on August 31, 2016. Code Sec. 280F(d)(7)(B)(ii) defines "C-CPI-U automobile component" as the automobile component of the Chained Consumer Price Index for All Urban Consumers as described in Code Sec. 1(f)(6).
The product of the October 2017 CPI new vehicle component (144.868) and the amount determined under Code Sec. 1(f)(3)(B) (0.694370319) is 100.592. The new vehicle component of the C-CPI-U released in November 2018 was 101.318 for October 2018. The October 2018 C-CPI-U new vehicle component exceeded the product of the October 2017 CPI new vehicle component and the amount determined under Code Sec. 1(f)(3)(B) by 0.726 (101.318 - 100.592). The percentage by which the C-CPI-U new vehicle component for October 2018 exceeds the product of the new vehicle component of the CPI for October of 2017 and the amount determined under Code Sec. 1(f)(3)(B) is 0.722 percent (0.726/100.592 x 100 percent), the automobile price inflation adjustment for 2019 for passenger automobiles. The dollar limitations in Code Sec. 280F(a) are therefore multiplied by a factor of 0.00722, and the resulting increases, after rounding to the nearest $100, are added to the 2018 limitations to give the depreciation limitations applicable to passenger automobiles for calendar year 2019. This adjustment applies to all passenger automobiles that are first placed in service in calendar year 2019.
Tables 1 through 3 of Rev. Proc. 2019-26 provide the depreciation limitations for passenger automobiles, other than leased passenger automobiles, that are placed in service by the taxpayer in calendar year 2019. These limitations continue to apply for each tax year that the passenger automobile remains in service. Table 1 provides depreciation limitations for passenger automobiles acquired by the taxpayer before September 28, 2017, and placed in service by the taxpayer during calendar year 2019, for which the Code Sec. 168(k) additional first year depreciation deduction applies. Table 2 provides depreciation limitations for passenger automobiles acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer during calendar year 2019, for which the Code Sec. 168(k) additional first year depreciation deduction applies. Table 3 provides depreciation limitations for passenger automobiles placed in service during calendar year 2019 for which no Code Sec. 168(k) additional first year depreciation deduction applies.
Table 4 of Rev. Proc. 2019-26 applies to leased passenger automobiles for which the lease term begins during calendar year 2019. Lessees of these passenger automobiles must use Table 4 to determine the income inclusion amount for each tax year during which the passenger automobile is leased.
For a discussion of the depreciation limitation for passenger automobiles, see Parker Tax ¶94,910. For a discussion of income inclusion amounts on leased passenger automobiles, see Parker Tax ¶94,915.
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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