IRS Agrees That “Bonus” Depreciation On “Luxury” Autos Results in No Depreciation in Years 2-6, But Then Offers Safe Harbor; Other “Bonus” Depreciation Guidance Offered

March 30, 2011 | Roger McEowen

 

On March 29, the IRS released Rev. Proc. 2011-26.  The Rev. Proc. offers guidance on the bonus depreciation rules enacted in 2010, and creates a safe harbor applicable to luxury automobiles.  Here are the 2011 depreciation numbers for vehicles first placed in service in 2011:

2011 - (Rev. Proc. 2011-21)

Passenger Vehicles

  • 1st Tax Year:  $3,060 ($11,060 if bonus depreciation applies)
  • 2nd Tax Year: $4,900
  • 3rd Tax Year:  $2,950
  • Each Succeeding Tax Year:  $1,775

Trucks and Vans

  Bonus Claimed Bonus Not Claimed
1st Tax Year $11,260 $3,260
2nd Tax Year $5,200 $5,200
3rd Tax Year $3,150 $3,150
Each Succeeding Tax Year: $1,875 $1,875

2010 - (Rev. Proc. 2010-18)

Passenger Vehicles

  • 1st Tax Year:  $3,060 ($11,060 if bonus depreciation applies)
  • 2nd Tax Year: $4,900
  • 3rd Tax Year:  $2,950
  • Each Succeeding Tax Year:  $1,775

As we have previously noted (as has Joe Kristan – fellow lecturer at CALT’s Farm Income Tax Schools and Des Moines CPA), the Congress botched the drafting of the statute with respect to the new bonus provision such that as applied to "luxury autos" placed in service after September 8, 2010, IRS could have eliminated any depreciation in years 2 through 6.  That could result from IRS taking the position that bonus depreciation only applies in year 1 unless the taxpayer elects out of bonus depreciation for all assets in the class (i.e., all five-year property).   In year 7, depreciation would be allowed under the I.R.C. Sec. 280F "catch-up" rule.  In addition, the statue was not clear as to whether a taxpayer could elect I.R.C. Sec. 179 (expense method depreciation) up to the $11,060 limit and elect out of bonus for the balance.  In Rev. Proc. 2011-21, IRS left the question open and said that they intended to issue guidance that addresses how bonus depreciation interacts with I.R.C. Sec. 280F for years 2-6.  They have now done so in Rev. Proc. 2011-26.

IRS has agreed that the statute technically results in zero depreciation in years 2-6 if bonus depreciation is claimed in year one (and it’s automatic unless an election out is made), and has created a safe harbor which allows a taxpayer to claim depreciation in years 2-6 via a special computation that is set forth in the Rev. Proc.  Basically, the computation allows the entire amount of depreciation allowed in years 2-6 under I.R.C. §280F for autos that cost (in 2011) $18,450 and up.  A different computation is used for cars that cost less, but it still results in depreciation being able to be claimed in years 2-6. 

Rev. Proc. 2011-26 also allows taxpayers to elect 50 percent bonus depreciation for assets that qualify for 100 percent bonus, but only if the tax year at issue includes September 9, 2010.  So, there can be a different result in applying that rule for a fiscal year taxpayer as opposed to a calendar year taxpayer.  Also, projects that began by January 1, 2008 can qualify for 100 percent bonus depreciation if the assets involved were placed in service after September 8, 2010 through 2011.  That is good news for assets with a significant time-lag between the beginning of construction and the placed in service date.   

The effective date of Rev. Proc. 2011-26 is March 29, 2011.

Oh…and we still don’t know what the depreciation rules for 2010 will be for Iowa returns (concerning expense method and bonus depreciation).  But, it’s only March 30.  What’s the rush?