Looking at Vehicle Depreciation and Expensing under the New Tax Law
The Tax Cuts and Jobs Act (TCJA) made significant changes impacting the depreciation and expensing of vehicles used in a trade or business.[i] In this post, we review the current law.
2017 Limits for "Passenger Automobiles"
IRC §280F(a) imposes dollar limitations on the depreciation and IRC § 179 expensing deductions that can be taken for passenger automobiles. This limitation is often referred to as the “luxury automobile depreciation limitation,” even though it applies to vehicles not commonly considered “luxury automobiles.” Passenger automobiles, by definition, weigh 6,000 pounds gross vehicle weight or less. Cars, trucks and vans falling within these weight limits are subject to the 280F limitation. SUVs are treated as trucks for the purpose of applying the limitation. The 280F limitation is indexed for inflation, and IRS has traditionally applied a different inflation adjustment for cars than for those vehicles on a truck chassis, including light-duty trucks and vans. Consequently, two tables have emerged for the IRC §280F(a) limitation. IRS Rev. Proc. 2017-29 set the 2017 limits as follows.
Limits for light-duty trucks and vans placed in service in 2017 for which bonus does not apply:
- 1st Tax Year $ 3,560
- 2nd Tax Year $ 5,700
- 3rd Tax Year $ 3,450
- Each Succeeding Year $ 2,075
Limits for passenger cars placed in service in 2017 for which for which bonus does not apply:
- 1st Tax Year $ 3,160
- 2nd Tax Year $ 5,100
- 3rd Tax Year $ 3,050
- Each Succeeding Year $ 1,875
For passenger automobiles eligible for bonus depreciation in 2017, the first-year limitation is increased by an additional $8,000. For vehicles acquired and placed into service after September 27, 2017, the TCJA eliminated the requirement that the original use of qualifying property must commence with the taxpayer. As such, new and used automobiles qualify for bonus depreciation. The TCJA has retained the IRC § 280F bonus depreciation limitation of $8,000 for 2017 and beyond. IRC § 168(k)(2)(F)(i).
Taxpayers can elect out of bonus for any class of property for a given tax year. This election must be made by attaching a statement to a timely filed return or by filing an amended return within six months of the due date of the return (excluding extensions). The taxpayer must write “Filed pursuant to section 301.9100-2” on the amended return. Once made, the election cannot be revoked without IRS consent.
2018 Limits for "Passenger Automobiles"
For passenger automobiles placed into service after December 31, 2017, section 13202 of the TCJA significantly increases the dollar limitations on depreciation and expensing for passenger automobiles. For 2018, the amount of the depreciation and expensing deduction for a passenger car or light duty truck or van shall not exceed—
- $10,000 for the 1st taxable year in the recovery period,
- $16,000 for the 2nd taxable year in the recovery period,
- $9,600 for the 3rd taxable year in the recovery period, and
- $5,760 for each succeeding taxable year in the recovery period.
These numbers shall be adjusted for inflation after 2018. As such, for 2018, the limits for light-duty trucks, vans, and passenger cars are the same.
The TCJA retained the $8,000 limit for additional first-year depreciation for passenger automobiles. So in 2018, the maximum amount a taxpayer can deduct for a passenger automobile in the first year is $18,000.
The Unusual Interplay of 100 Percent Bonus and IRC § 280F
Note: On February 13, 2019, IRS issued Rev. Proc. 2019-13, a safe harbor to address this issue.
Taxpayers who purchase a passenger automobile subject to the IRC § 280F limitations must consider the impact of taking bonus depreciation on future depreciation deductions. The last time we had 100 percent bonus, Rev Proc. 2011-26 stated that If the unadjusted depreciable basis of a passenger automobile exceeded the first-year limitation amount under § 280F(a)(1)(A)(i), the excess amount was the unrecovered basis of the passenger automobile for purposes of § 280F(a)(1)(B)(i) and, therefore, not deductible until the first taxable year succeeding the end of the recovery period. And then it was subject to the limitation under § 280F(a)(1)(B)(ii).In other words, under this interpretation, if a taxpayer buys a $45,000 car in 2018, he or she can immediately depreciate $18,000, but the remaining $27,000 would not be depreciable until year 2024.
Rev. Proc. 2011-26 provided a safe harbor work around for this problem in 2011. For years after the first-year deduction, the guidance generally allowed taxpayers to determine the unrecovered basis of the passenger automobile for its placed-in-service year as though the taxpayer claimed 50-percent, instead of the 100-percent, bonus depreciation. This was a complex “solution” and until IRS guidance issues further guidance, we won’t be sure how it will handle the current issue.
As noted above, the TCJA increased bonus depreciation to 100 percent for qualifying property acquired and placed into service after September 27, 2017, and before January 1, 2023. It also extended bonus depreciation to used property acquired and placed into service after September 27, 2017.
SUVs with a gross vehicle weight rating above 6,000 lbs. are not subject to depreciation limits. They are, however, limited to a $25,000 IRC §179 deduction. IRC § 179(b)(5)(A). No depreciation or §179 limits apply to SUVs with a GVW more than 14,000 lbs. Trucks and vans with a GVW rating above 6,000 lbs. but not more than 14,000 lbs. generally have the same limits: no depreciation limitation, but a $25,000 IRC §179 deduction. These vehicles, however, are not subject to the §179 $25,000 limit if any of the following exceptions apply:
- The vehicle is designed to have a seating capacity of more than nine persons behind the driver's seat;
- The vehicle is equipped with a cargo area at least 6 feet in interior length that is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment; or
- The vehicle has an integral enclosure, fully enclosing the driver compartment and load-carrying device, does not have seating behind the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.
Although SUVs purchased after September 27, 2017, remain subject to the $25,000 IRC § 179 limit, they are eligible for 100% bonus depreciation if they are above 6,000 lbs. This is true for both new and used vehicles. For a taxpayer’s first taxable year ending after Sept. 27, 2017, taxpayers may elect to apply a 50 percent allowance instead of the 100 percent allowance. To make the election, they must attach a statement to a timely filed return (including extensions) indicating they are electing to claim a 50% special depreciation allowance for all qualified property. Once made, the election cannot be revoked without IRS consent. As noted above, taxpayers may also elect out of bonus entirely for any class of property by filing an election on a timely filed return. Once filed, that election can also not be revoked without IRS consent.
A Few Examples
James acquired and placed into service an SUV in February of 2017 (bought for $45,000) as his primary farming vehicle. He is able to document 100 percent business use through travel logs. The SUV has a GVW of 8,000 lbs.
In 2017, James could expense $25,000 under IRC § 179 and then apply 50 percent bonus depreciation ($10,000). He could then use MACRS to begin depreciating the balance.
James acquired and placed into service the same SUV in October of 2017. He is now able to depreciate the entire amount in 2017 using 100 percent bonus depreciation. This would now be true even if the SUV were not new property.
Libby acquired and placed into service a used light-duty pickup truck for 100 percent business use in March of 2017 for $16,000. In this case, her 2017 first year deduction was limited to $3,560 because used vehicles were not eligible for bonus depreciation.
Now suppose Libby acquired and placed into service her used light-duty pickup truck for $16,000 in January 2018. In this case, her purchase is eligible for bonus depreciation, and Libby is able to deduct her entire purchase since the 2018 IRC § 280F first-year limitation is $18,000, more than her purchase.
[i] Taxpayers can only take these deductions to the extent of qualified business use. If the business use is 50 percent or less, the taxpayer is not eligible for IRC §179 or additional first-year depreciation. Straight line depreciation over a 5-year life must be used for the portion allocable to business use. All calculations in this article assume 100 percent business use.
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