IRS Issues Bonus Depreciation Safe-Harbor Rules for Passenger Autos
The Tax Cuts and Jobs Act (TCJA) increased the amount of first-year bonus depreciation on qualified property, including passenger autos, to 100%. Sound too good to be true?
Of course it’s too good to be true! The amount of a depreciation deduction on passenger autos is still subject to the Luxury Auto limitations. (As a practical matter, most every auto is a luxury auto.) The good news is that the TCJA increased the first-year limitation to $18,000. The bad news is that if the depreciable basis of the passenger auto exceeds the first-year limitation, the excess amount is deductible in the first year after the recovery period, subject to the Luxury Auto limitations.
In 2018 taxpayer buys a $60,000 auto that qualifies for 100% first-year bonus depreciation. The annual depreciation deductions would be:
- 2018 - $18,000
- 2019-2023 - $0
- 2024 and each year thereafter - $5,760
To mitigate the anomalous results of this situation, the IRS issued Rev. Proc. 2019-13 on February 13, 2019. It provides a safe-harbor method of accounting for determining depreciation deductions for passenger autos that qualify for the 100% additional first-year depreciation deduction. Without getting too deep into the weeds, the Rev. Proc. allows depreciation deductions that look like the following:
Example 2 - Under Rev. Proc. 2019-13
In 2018, a taxpayer buys a $60,000 auto that qualifies for 100% first-year bonus depreciation. The annual depreciation deductions would be:
- 2018 - $18,000
- 2019 - $13,440
- 2020 - $8,064
- 2021 - $4,838
- 2022 - $4,838
- 2023 - $2,419
- 2024 - $5,760
- 2025 - $2,641
To adopt this safe-harbor method, taxpayers merely apply it to their depreciation deduction for the passenger auto on their return following the year it is placed in service.
This revenue procedure is not applicable if the taxpayer elects to expense the passenger auto (subject to the Luxury Auto limitations) under IRC Section 179, or if the taxpayer elects out of bonus depreciation for all assets in the property class that would include the passenger auto.
As always, all of this will change as we move into the future. Luxury Auto limitations are adjusted annually for inflation, the bonus depreciation percentage will begin to decrease after 2022, and many of the provisions of the TCJA will expire after 2026.