EBIA Weekly Newsletter

IRS Announces 2016 Automobile Depreciation Deduction Limits and Inclusion Amounts; Revises 2015 Limits and Amounts

   April 7, 2016

Rev. Proc. 2016-23 (Apr. 1, 2016)

The IRS has announced the inflation-adjusted “luxury automobile” limits required under Code § 280F on certain deductions that may be taken by taxpayers using passenger automobiles (including vans and trucks) in a trade or business. If the automobile is purchased, the limits cap the taxpayer’s depreciation deduction. If the automobile is leased, and its value exceeds an inflation-adjusted threshold, an additional amount based on the automobile’s value must be included in the taxpayer’s income. This “inclusion amount” effectively reduces the value of the taxpayer’s lease expense deduction and makes the lease deduction substantially equivalent to the depreciation deduction that would have been available if the automobile had been purchased. Both limits are affected by legislation enacted in December 2015 extending the additional first-year depreciation deduction to qualified property placed in service generally before January 1, 2020.

Revenue Procedure 2016-23 provides tables that establish depreciation limits and inclusion amounts for passenger automobiles that a taxpayer first places in service or first leases during calendar year 2016. The revenue procedure also revises the tables that appeared in Revenue Procedure 2015-19 for automobiles first placed in service or first leased during 2015 (see our Checkpoint article). Revisions were needed because the original tables did not reflect the retroactive extension of the additional first-year depreciation deduction that was included in the December 2015 legislation. Revenue Procedure 2016-23 directs taxpayers to use the revised 2015 depreciation limit tables for any automobiles that are subject to the additional first-year depreciation. The depreciation limit tables in Revenue Procedure 2015-19 continue to apply to automobiles that do not qualify for the additional depreciation deduction. The income inclusion tables in Revenue Procedure 2015-19 for passenger automobiles first leased in 2015 are also revised for all taxpayers so that the tables only apply to vans or trucks with fair market values of more than $19,500 and other passenger automobiles with fair market values of more than $19,000.

EBIA Comment: Generally, the cost of acquiring and maintaining a company car for an employee may qualify as a deductible expense for the employer (who, in that case, is the taxpayer for purposes of this revenue procedure). While the Code’s deduction limits and income inclusion amounts can significantly reduce an employer’s actual tax deductions, those deductions should increase for some employers as a result of the December 2015 legislation. 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.