IRS Announces 2023 Automobile Depreciation Deduction Limits and Inclusion Amounts

The IRS has announced the 2023 inflation-adjusted Code § 280F “luxury automobile” limits on certain deductions that may be taken by taxpayers using passenger automobiles (including vans and trucks) in a trade or business. For purchased automobiles, the limits cap the taxpayer’s depreciation deduction. For leased automobiles, the limits reduce the taxpayer’s lease expense deduction by an “inclusion amount” that is calculated to make the lease deduction substantially equivalent to the depreciation deduction that would have been available if the automobile had been purchased.

The depreciation limits and inclusion amounts for passenger automobiles that a taxpayer first places in service or first leases during calendar year 2023 are presented in three tables. There are two depreciation-limit tables—one for automobiles acquired after September 27, 2017, that utilize the additional first-year depreciation deduction under Code § 168(k), and another for automobiles for which no additional first-year depreciation deduction will be taken. The third table provides inclusion amounts for leased passenger automobiles with a fair market value exceeding $60,000. This threshold is an increase of $4,000 from the threshold that applied in 2022 (see our Checkpoint article).

EBIA Comment: The cost of acquiring and maintaining a company car for an employee may qualify as a deductible expense for the employer (which, in that case, is the taxpayer for purposes of this revenue procedure). The Tax Cuts and Jobs Act substantially increased the maximum depreciation deductions for passenger automobiles and extended the additional first-year depreciation limit (sometimes referred to as “bonus depreciation”), but the Code’s deduction limits and income inclusion amounts can still significantly reduce an employer’s actual tax deductions. While not mentioned in this guidance, employers providing company cars must also consider the effect of Code § 274(l), which disallows any deduction for expenses relating to travel between an employee’s residence and place of employment (see our Checkpoint article). For more information, see EBIA’s Fringe Benefits manual at Section IV.B (“What Are the Tax Consequences of a Company Car?”).

Contributing Editors: EBIA Staff.