IRS Provides Safe Harbor for Passenger Auto Depreciation

February 15, 2019


On February 13, 2019, IRS issued Rev. Proc. 2019-13, a safe harbor addressing an "anomalous" issue arising when taxpayers apply the new 100 percent bonus depreciation provisions to passenger vehicles.

IRC § 280F and 100 percent bonus have a difficult interplay: if the unadjusted depreciable basis of a passenger automobile for which 100-percent bonus is allowable exceeds the first year limitation amount under IRC § 280F(a)(1)(A)(i), the excess amount is the unrecovered basis of the passenger automobile for purposes of § 280F(a)(1)(B)(i) and, therefore, is treated as a deductible expense in the first taxable year succeeding the end of the recovery period (subject to the limitation under § 280F(a)(1)(B)(ii)).

Example: if a calendar-year taxpayer placed in service in December 2018 a passenger automobile that cost $50,000 and is qualified property for which the 100-percent additional first year depreciation deduction is allowable, the 100-percent bonus depreciation deduction and any § 179 deduction for this property is limited to $18,000 under § 280F(a)(1)(A)(i). The excess amount of $32,000 is recovered by the taxpayer beginning in 2024, subject to the annual limitation of $5,760 under § 280F(a)(1)(B)(ii).

To mitigate this result, IRS issued Rev. Proc. 2019-13. This safe harbor method of accounting applies to a passenger automobile (other than a leased passenger automobile):

  1. That is acquired and placed in service by the taxpayer after September 27, 2017;
  2. That is qualified property under IRC § 168(k) for which the 100-percent additional first year depreciation deduction is allowable;
  3. That has an unadjusted depreciable basis exceeding the first-year limitation amount under IRC § 280F(a)(1)(A)(i); and
  4. For which the taxpayer did not elect to treat the cost or a portion of the cost as an expense under § 179.

The safe harbor works as follows:

  1. The taxpayer must use the applicable optional depreciation table for computing the depreciation deductions for the passenger automobile;
  2. For the placed-in-service year of the passenger automobile, the taxpayer deducts the first year limitation amount under § 280F(a)(1)(A)(i). See Table 2 of Rev. Proc. 2018-25 for calendar year 2018;
  3. For the 12-month taxable year subsequent to the placed-in-service year and for each succeeding 12-month taxable year in the recovery period, the taxpayer determines the depreciation deduction for the passenger automobile by multiplying the remaining adjusted depreciable basis of the passenger automobile by the annual depreciation rate for each taxable year subsequent to the placed-in-service year specified in the applicable optional depreciation table (subject to the limitation amounts under IRC § 280F(a)(1)(A));
  4. The adjusted depreciable basis of the passenger automobile as of the beginning of the first taxable year succeeding the end of the recovery period is treated as a deductible depreciation expense for the first taxable year succeeding the end of the recovery period, subject to the limitation under § 280F(a)(1)(B)(ii). Any excess is treated as a deductible depreciation expense for the succeeding taxable years (subject to the limitation under § 280F(a)(1)(B)(ii)) and
  5. If § 280F(b) applies to the passenger automobile in a taxable year subsequent to the placed-in-service year, the safe harbor method of accounting ceases to apply beginning for the first year in which § 280F(b) applies. Any passenger automobile that is not predominantly used in a qualified business use, as defined in § 280F(d)(6)(B) and (C), for any taxable year is subject to § 280F(b) for such taxable year and any subsequent taxable year.

Example from the Revenue Procedure

In 2018, Xavier, a calendar-year taxpayer, purchased and placed in service for 100 percent business use a new passenger automobile that costs $60,000.

Xavier does not claim a § 179 deduction, but depreciates the passenger automobile under the general depreciation system by using the 200-percent declining balance method, a 5-year recovery period, and the half-year convention. Xavier adopts the safe harbor, which means:

 (a) Xavier must use the applicable optional depreciation table that corresponds with the 200-percent declining balance method of depreciation, a 5-year recovery period, and the half-year convention, for determining the depreciation deductions for the passenger automobile (see Table A-1 in Appendix A of IRS Publication 946).

(b) For 2018, Xavier deducts depreciation of $18,000, the depreciation limitation for 2018 under § 280F(a)(1)(A)(i). As a result, the remaining adjusted depreciable basis of the passenger automobile as of January 1, 2019, is $42,000.

(c) For 2019 through 2023, the total depreciation allowable for the passenger 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 limitation under § 280F(a)(1)(A) for that year. Accordingly, for 2019, the total depreciation allowable for the passenger automobile is $13,440 (32 percent multiplied by the remaining adjusted depreciable basis of $42,000). Because this amount is less than the depreciation limitation of $16,000 for 2019, X deducts $13,440 as depreciation on its federal income tax return for the 2019 taxable year. For 2020, the total depreciation allowable for the passenger automobile is $8,064 (19.20 percent multiplied by $42,000). Because this amount is less than the depreciation limitation of $9,600 for 2020, X deducts $8,064 as depreciation on its federal income tax return for the 2020 taxable year.

(d) As of January 1, 2024 (the beginning of the first taxable year succeeding the end of the recovery period), the adjusted depreciable basis of the passenger automobile is $8,401. Accordingly, for the 2024 taxable year, X deducts depreciation of $5,760 for the passenger automobile (the lesser of the adjusted depreciable basis of $8,401 as of January 1, 2024, or the § 280F(a)(1)(B)(ii) limitation of $5,760).

(e) As of January 1, 2025, the adjusted depreciable basis of the passenger automobile is $2,641 ($8,401 adjusted depreciable basis as of January 1, 2024, less the depreciation claimed of $5,760 for 2024). Accordingly, for the 2025 taxable year, X deducts depreciation of $2,641 for the passenger automobile (the lesser of the adjusted depreciable basis of $2,641 as of January 1, 2025, or the § 280F(a)(1)(B)(ii) limitation of $5,760).

Safe Harbor Adoption

The revenue procedure states that a taxpayer adopts this safe harbor by applying it to deduct depreciation of its passenger automobile on its federal tax return for the first taxable year succeeding the placed-in-service year of the passenger automobile. If a taxpayer's taxable year is less than 12 months, the depreciation deductions determined under the revenue procedure must be adjusted for a short taxable year.

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