As time goes by, the depreciation deductions add up. That’s especially true with bonus depreciation. Under current tax law, you can deduct up to 100% of the cost of qualified property that you buy and put in service between September 27, 2017, and January 1, 2023.
Along with other property and equipment, the bonus depreciation rules apply to “luxury” autos—that is, vehicles that have a gross vehicle weight of 6,000 pounds or less—with a few limitations. For example, in 2018, your maximum first-year depreciation deduction for a luxury car is $18,000 when you choose to claim bonus depreciation.
In addition, the rules say that whatever you paid for your vehicle over the $18,000 is not deductible until after the normal depreciation recovery period ends. For luxury vehicles, that’s generally five years. The result: You get a deduction of $18,000 in the first year, and then have to wait until after the five-year period to deduct the rest of what you paid.
Fortunately, the IRS has issued a “safe-harbor” rule. Revenue procedure 2019-13 says you can claim depreciation deductions during the five-year period that you would normally have to wait out. The deduction in this case is still subject to the luxury car limits. (Those limits are $16,000 for the second year, $9,600 for the third year, and $5,760 per year thereafter.)
That means you can continue to deduct the cost of your vehicle even if you claim bonus depreciation in the first year. The amount you can deduct is based on the depreciation table percentages in Appendix A of IRS publication 946, How to Depreciate Property. (Those are 32% in the second year, 19.2% in the third year, 11.52% in the fourth and fifth years, and 5.76% thereafter.)
The safe harbor doesn’t apply if you choose to deduct the cost of the vehicle in the first year under the “immediate expensing” rules known as section 179, or if you decide not to elect to use 100% bonus depreciation.
Got it? Test your skill with these questions.
In 2018, a calendar-year business taxpayer bought and placed in service a new luxury automobile. The car cost $60,000 and the taxpayer uses it 100% for business. The car meets the definition of qualified property and is eligible for 100% bonus depreciation. The taxpayer does not use section 179 depreciation and elects the safe harbor.
Based on the information above, what’s the maximum first-year depreciation deduction?
How much depreciation will the above taxpayer be able to claim for 2019 (year 2)?
Say the above taxpayer chooses section 179 immediate expensing instead of 100% first-year bonus depreciation. The taxpayer is still limited to an $18,000 depreciation deduction in 2018 due to the luxury auto rules.
Will the taxpayer be able to deduct the remaining basis of the vehicle beginning in 2019?
Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions and IRS documents. The full documentation may include facts and issues not presented here. Please use the link provided in the post to read the entire document.
This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.
For 2018, the taxpayer deducts depreciation of $18,000 for the automobile, which is the depreciation limitation for 2018.
For 2019 through 2023, the total depreciation allowable for the automobile for each taxable year is determined by multiplying the annual depreciation rate in the applicable optional depreciation table by the remaining adjusted depreciable basis of $42,000, subject to the luxury car limitation for that year.
NOTE: The $42,000 remaining basis is the cost of $60,000 less the $18,000 first-year depreciation claimed.
Accordingly, for 2019, the total depreciation allowable for the automobile is $13,440 (32% multiplied by the remaining adjusted depreciable basis of $42,000).
Because this amount is less than the depreciation limitation of $16,000 for 2019, the taxpayer deducts $13,440 as depreciation on the federal income tax return for the 2019 taxable year.
If the taxpayer elects to treat $18,000 of the cost of the automobile as an expense under section 179, this automobile is not within the scope of the safe harbor.
Accordingly, the safe harbor does not apply to the automobile. For 2018, the 100% additional first year depreciation deduction and the section 179 deduction for this automobile is limited to $18,000.
Therefore, for 2018, the taxpayer deducts $18,000 for the automobile under section 179.
The taxpayer deducts the excess amount of $42,000 beginning in 2024, subject to the annual limitation of $5,760.