IRS has released the Code Sec. 280F depreciation limits for business passenger automobiles placed in service by the taxpayer in 2018, taking into account the changes made by the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017). IRS has also released the annual income inclusion amounts for such vehicles first leased in 2018.
Background. For owners of passenger automobiles, Code Sec. 280F(a), as modified by the TCJA, imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service and for each succeeding year.
The TCJA modified Code Sec. 168(k) to extend the additional (bonus) first-year depreciation deduction for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2027.
Under the TCJA, a 100% bonus first-year deduction of the adjusted basis is generally allowed for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 (for certain property with longer production periods, the end date is increased by one year). In later years, the first-year bonus depreciation deduction phases down, as follows:
…80% for property placed in service after Dec. 31, 2022 and before Jan. 1, 2024.
…60% for property placed in service after Dec. 31, 2023 and before Jan. 1, 2025.
…40% for property placed in service after Dec. 31, 2024 and before Jan. 1, 2026.
…20% for property placed in service after Dec. 31, 2025 and before Jan. 1, 2027.
For the first tax year ending after Sept. 27, 2017, a taxpayer can elect to claim 50% bonus first-year depreciation (instead of claiming a 100% first-year depreciation allowance). (Code Sec. 168(k))
In the case of a passenger automobile, for qualified property acquired by the taxpayer before Sept. 28, 2017, and placed in service by the taxpayer during 2018, Code Sec. 168(k)(2)(F)(iii) increases the first-year depreciation allowed under Code Sec. 280F by $6,400. For qualified property acquired and placed in service after Sept. 27, 2017, Code Sec. 168(k)(2)(F)(i) increases the first-year depreciation allowed under Code Sec. 280F by $8,000.
Guidance. The following are the annual depreciation dollar caps for vehicles that are subject to the luxury auto limits of Code Sec. 280F and are placed in service by the taxpayer in calendar year 2018. As Code Sec. 280F(a), as amended by the TCJA, provides the limits on depreciation for passenger automobiles placed in service during calendar year 2018, no adjustment for inflation applies to calendar year 2018.
The depreciation limits for passenger automobiles acquired by the taxpayer before Sept. 28, 2017, and placed in service by the taxpayer during calendar year 2018, for which the Code Sec. 168(k) bonus first-year depreciation deduction applies, are:
… $16,400 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.
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 Code Sec. 168(k) 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.
The depreciation limits for passenger automobiles placed in service during calendar year 2018 for which no Code Sec. 168(k) bonus first-year depreciation deduction applies are:
… $10,000 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.
Lease income inclusion tables. A taxpayer that leases a business auto may deduct the part of the lease payment representing business/investment use. If business/investment use is 100%, the full lease cost is deductible. So that lessees can’t avoid the effect of the luxury auto limits, however, they must include a certain amount in income during each year of the lease to partially offset the lease deduction, if the vehicle’s fair market value (FMV) exceeds certain dollar limits. (Code Sec. 280F(c)) The income inclusion amount varies with the initial FMV of the leased auto and the year of the lease, and is adjusted for inflation each year.
Rev Proc 2018-25 carries the income inclusion tables for passenger autos for which the lease term begins during calendar year 2018 and the vehicle has a FMV over $50,000. Lessees of these passenger automobiles must use these tables to determine the inclusion amount for each tax year during which the passenger automobile is leased.
References: For business auto depreciation limits, see FTC 2d/FIN ¶L-10001 ; United States Tax Reporter ¶280F4. For income inclusion amounts for business auto lessees, see FTC 2d/FIN ¶L-10200; United States Tax Reporter ¶280F4.
