Rev Proc 2019-13, 2019-9 IRB; IR 2019-14, 2/13/2019
In a Revenue Procedure and accompanying information release, IRS has created a safe harbor for determining depreciation deductions for passenger automobiles that qualify for the 100% additional first year depreciation deduction under Code Sec. 168(k) and that are subject to the depreciation limitations for passenger automobiles in Code Sec. 280F(a).
Background. Code Sec. 168(k)(1) provides that, in the case of qualified property, the depreciation deduction allowed under Code Sec. 167(a) for the tax year in which the property is placed in service includes an allowance equal to the applicable percentage of the property’s adjusted basis. Pursuant to Code Sec. 168(k)(6)(A), the applicable percentage is 100% for qualified property acquired and placed in service after Sept. 27, 2017, and placed in service before Jan. 1, 2023 (hereinafter, referred to as “100% additional first year depreciation deduction”). The applicable percentage is phased down by 20 percentage points each year for qualified property placed in service after Dec. 31, 2022, through Dec. 31, 2026.
Code Sec. 168(k)(7) provides that a taxpayer may elect out of the additional first year depreciation deduction with respect to any class of property that is qualified property placed in service during the tax year.
For owners of passenger automobiles, Code Sec. 280F(a) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service and for each succeeding year. For a passenger automobile that is qualified property under Code Sec. 168(k) and for which the 100% additional first year depreciation deduction is allowable, Code Sec. 168(k)(2)(F)(i) increases the first year limitation amount under Code Sec. 280F(a)(1)(A)(i) by $8,000.
Rev Proc 2018-25, 2018-18 IRB 543, provides the dollar limitation amounts provided in Code Sec. 280F(a)(1)(A)(i) that apply to passenger automobiles first placed in service by the taxpayer during calendar year 2018. Under that Revenue Procedure, the depreciation limits for passenger automobiles acquired by the taxpayer after Sept. 27, 2017, and placed in service by the taxpayer during calendar year 2018, for which the bonus first year depreciation deduction applies, are:
… $18,000 for the placed in service year;
… $16,000 for the second tax year;
… $9,600 for the third tax year; and
… $5,760 for each succeeding year.
Under Code Sec. 280F(a)(1)(B), the unrecovered basis of any passenger automobile is treated as an expense for the first tax year after the recovery period, subject to the limitation under Code Sec. 280F(a)(1)(B)(ii). Under that section, the unrecovered basis that may be treated as an expense in any succeeding tax year may not exceed $5,760.
illustration: A calendar-year taxpayer places in service in Dec. 2018 a passenger automobile that costs $50,000 and is qualified property for which the 100% additional first year depreciation deduction is allowable. The 100% additional first year depreciation deduction and any Code Sec. 179 deduction for this property is limited to $18,000 under Code Sec. 280F(a)(1)(A)(i), and the excess amount of $32,000 is recovered by the taxpayer beginning in 2024, subject to the annual limitation of $5,760 under Code Sec. 280F(a)(1)(B)(ii).
New safe harbor. “To mitigate the anomalous result that occurs in the tax years subsequent to the placed-in-service year and before the first tax year succeeding the end of the recovery period,” IRS has created a safe harbor method for computing passenger automobile depreciation.
…Qualifying for the safe harbor. The safe harbor applies to a passenger automobile (other than a leased passenger automobile):
(1) That is acquired and placed in service by the taxpayer after Sept. 27, 2017;
(2) That is qualified property under Code Sec. 168(k) for which the 100% additional first year depreciation deduction is allowable;
(3) That has an unadjusted depreciable basis exceeding the first year limitation amount under Code Sec. 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 Code Sec. 179.
…Operation of the safe harbor. The safe harbor method of accounting operates as follows:
(1) The taxpayer must use the “applicable optional depreciation table” for computing the depreciation deductions for the passenger automobile. The applicable optional depreciation table is based on the depreciation system, depreciation method, recovery period, and convention applicable to the passenger automobile for its placed-in-service year, as provided in section 8 of Rev Proc 87-57, 1987-2 CB 687;
(2) For the placed-in-service year of the passenger automobile, the taxpayer deducts the first year limitation amount under Code Sec. 280F(a)(1)(A)(i). See Table 2 of Rev Proc 2018-25 for the first year limitation amount under Code Sec. 280F(a)(1)(A)(i) for a passenger automobile placed in service in calendar year 2018 for which the 100% additional first year depreciation deduction is allowable. For a passenger automobile placed in service after 2018, further guidance will be issued to provide the limitation amounts under Code Sec. 280F(a)(1) for the applicable placed-in-service year;
(3) For the 12-month tax year subsequent to the placed-in-service year and for each succeeding 12-month tax 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 tax year subsequent to the placed-in-service year specified in the applicable optional depreciation table, subject to the limitation amounts under Code Sec. 280F(a)(1)(A);
(4) The adjusted depreciable basis of the passenger automobile as of the beginning of the first tax year succeeding the end of the recovery period is treated as a deductible depreciation expense for the first tax year succeeding the end of the recovery period, subject to the limitation under Code Sec. 280F(a)(1)(B)(ii). Any excess is treated as a deductible depreciation expense for the succeeding tax years, subject to the limitation under Code Sec. 280F(a)(1)(B)(ii); and
(5) If Code Sec. 280F(b) (“Limitation where business use of listed property not greater than 50%”) applies to the passenger automobile in a tax year subsequent to the placed-in-service year, the safe harbor method of accounting ceases to apply beginning for the first year in which Code Sec. 280F(b) applies. Any passenger automobile that is not predominantly used in a qualified business use, as defined in Code Sec. 280F(d)(6)(B) and Code Sec. 280F(d)(6)(C), for any tax year, is subject to Code Sec. 280F(b) for such tax year and any subsequent tax year.
…Illustration. IRS provides the following illustration:
illustration: In 2018, X, a calendar-year taxpayer, purchased and placed in service for use in its business a new passenger automobile that costs $60,000. The passenger automobile is 5-year property under Code Sec. 168(e), is qualified property under Code Sec. 168(k) for which the 100% additional first year depreciation deduction is allowable, and is used 100% in X’s trade or business. X does not claim a Code Sec. 179 deduction for the passenger automobile and does not make an election under Code Sec. 168(b), Code Sec. 168(g)(7), or Code Sec. 168(k). X depreciates the passenger automobile under the general depreciation system by using the 200% declining balance method, a 5-year recovery period, and the half-year convention. X adopts the safe harbor method. As a result:
(a) X must use the applicable optional depreciation table that corresponds with the 200% declining balance method of depreciation, a 5-year recovery period, and the half-year convention, for determining the depreciation deductions for the passenger automobile;
(b) For 2018, X deducts depreciation of $18,000 for the passenger automobile, which is the depreciation limitation for 2018 under Code Sec. 280F(a)(1)(A)(i). As a result, the remaining adjusted depreciable basis of the passenger automobile as of Jan. 1, 2019, is $42,000 ($60,000 unadjusted depreciable basis less $18,000 depreciation deduction claimed for 2018);
(c) For 2019 through 2023, the total depreciation allowable for the passenger automobile for each tax 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 Code Sec. 280F(a)(1)(A) for that year. Accordingly, for 2019, the total depreciation allowable for the passenger automobile is $13,440 (32% 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 tax year. For 2020, the total depreciation allowable for the passenger automobile is $8,064 (19.20% 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 tax year.
(d) As of Jan. 1, 2024 (the beginning of the first tax year succeeding the end of the recovery period), the adjusted depreciable basis of the passenger automobile is $8,401 ($60,000 unadjusted depreciable basis less total depreciation allowable of $51,599 for 2018-2023). Accordingly, for the 2024 tax year, X deducts depreciation of $5,760 for the passenger automobile (the lesser of the adjusted depreciable basis of $8,401 as of Jan. 1, 2024, or the Code Sec. 280F(a)(1)(B)(ii) limitation of $5,760).
…Other rules. A taxpayer adopts this safe harbor method of accounting by applying it to deduct depreciation of its passenger automobile on its federal tax return for the first tax year succeeding the placed-in-service year of the passenger automobile.
If a taxpayer’s tax year is less than 12 months, the depreciation deductions determined under the Revenue Procedure must be adjusted for a short tax year.
Effective date. The Revenue Procedure is effective on Feb. 13, 2019.
References: For business auto depreciation limits, see FTC 2d/FIN ¶L-10001; United States Tax Reporter ¶280F4.
