The IRS has provided a safe-harbor method to determine depreciation deductions for passenger automobiles that qualify for the 100% additional first-year depreciation deduction and that are subject to the depreciation limitations for passenger automobiles under Sec. 280F ( Rev. Proc. 2019-13 ).
The law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, permits additional first-year depreciation (bonus depreciation) for qualified property, which includes passenger automobiles, acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2027.
Deductions under Sec. 179, which provides an election to expense certain depreciable business assets, are also subject to Sec. 280F when they involve passenger automobiles. The safe harbor does not apply when the taxpayer elects Sec. 179 treatment.
For a passenger automobile that qualifies for the 100% additional first-year depreciation deduction, the TCJA increased the first-year limitation amount by $8,000 to $18,000. If the depreciable basis of a passenger automobile for which the 100% additional first-year depreciation deduction is allowed exceeds the first-year limitation in Rev. Proc. 2018-25, the excess amount is deductible in the first tax year after the end of the recovery period.
The safe harbor allows depreciation deductions for the excess amount during the recovery period subject to the depreciation limitations that apply to passenger automobiles. To implement the safe-harbor method, the taxpayer must use the depreciation table in Appendix A of IRS Publication 946, How to Depreciate Property. The safe-harbor method does not apply to a passenger automobile placed in service after 2022, one for which the taxpayer elected out of the 100% bonus depreciation, or one for which the taxpayer elected under Sec. 179 to expense all or part of the automobile’s cost.
To adopt the safe-harbor method in the revenue procedure, taxpayers apply it to their depreciation deduction for a passenger automobile on their return for the first tax year following the placed-in-service year.
New Safe Harbor . “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”, IRS has created a safe harbor method for computing passenger automobile depreciation.
- Qualifying for the safe harbor. The safe harbor applies to a passenger automobile (other than a leased passenger automobile):
- That is acquired and placed in service by the taxpayer after Sept. 27, 2017;
- That is qualified property under Code Sec. 168(k) for which the 100% additional first year depreciation deduction is allowable;
- That has an unadjusted depreciable basis exceeding the first year limitation amount under Code Sec. 280F(a)(1)(A)(i); and
- For which the taxpayer did not elect to treat the cost or a portion of the cost as an expense under Code Sec. 179.
Safe Harbor Example
A calendar year taxpayer purchases a vehicle in 2018 for $60,000. The vehicle is MACRS five-year property subject to the half-year convention. The vehicle is not exempt from the caps because its gross vehicle weight rating is 6,000 pounds or less.
Under the safe harbor, the taxpayer’s 2018 100 percent bonus deduction is limited to the $18,000 first-year cap. The remaining basis for purposes of computing subsequent depreciation deductions is $42,000 ($60,000 – $18,000).
In 2019 the taxpayer deducts $13,440 ($42,000 × 32% second year table percentage) because this amount is less than the $16,000 second-year cap.
In 2020 the taxpayer deducts $8,064 ($42,000 × 19.20% third-year table percentage) because this amount is less than the $9,600 third-year cap.
In 2021 and 2022 the taxpayer deducts $4,838 ($42,000 × 11.52% fourth and fifth-year table percentage) because this amount is less than the $5,760 fourth and fifth-year cap.
In 2023, the last year of the vehicle’s recovery period, the taxpayer deducts $2,419 ($42,000 × 5.76% sixth-year table percent) because this amount is less than the $5,760 sixth-year cap.
At the end of 2023, the unrecovered basis of the vehicle is $8,401. That is the total of $8,401 of disallowed depreciation deductions. This amount is recovered beginning in 2024 at the rate of $5,760 per year. Thus, $5,760 is deducted in 2024 and $2,641 is deducted in 2025.
If the safe harbor did not apply, the taxpayer is allowed an $18,000 first-year deduction and must recover the remaining $42,000 basis at the rate of $5,760 per year beginning in 2024.
- How to Elect the Safe Harbor
The election is made by using the safe harbor in the second year of the vehicle’s recovery period. At first glance this seems odd – but remember that the safe harbor does not affect depreciation calculations until the second year of the recovery period. With or without the safe harbor a taxpayer claiming 100 bonus depreciation in 2018 may only claim an $18,000 deduction.
For more information on the additional first year depreciation deduction, see TCJA, Depreciation . For information about other TCJA provisions, visit IRS.gov/taxreform.