Safe Harbor for Luxury Autos and Bonus Depreciation Provided by IRS

The IRS addressed a quirky interaction of bonus depreciation under IRC §168(k) and the luxury auto rules under IRC §280F in Revenue Procedure 2019-13. Absent this safe harbor method, taxpayers who opted not to elect out of §168(k) bonus depreciation for an automobile limited by §280F would find any basis in the automobile in excess of $18,000 would not be deductible until the end of the standard recovery period, which would begin in the seventh year after acquiring the vehicle.

Under the Tax Cuts and Jobs Act, a taxpayer is allowed to deduct 100% of the cost of qualifying assets in the year the asset is placed in service for assets placed in service between September 27, 2017, and January 1, 2023.[1] However, under the provisions most often referred to as the "luxury auto rules" a taxpayer's depreciation and/or §179 deduction for covered vehicles is capped at $10,000 for the first year.[2] This amount is adjusted annually for inflation.

IRC §168(k)(2)(F)(i) provided that the first year amount would be boosted by $8,000 per year for vehicles on which 100% bonus depreciation is allowed. In Revenue Procedure 2018-25 the IRS provided that this first year amount would be $18,000 in total for vehicles subject to bonus depreciation under IRC §168(k).

A problem arises since under IRC §280F(a)(1)(B) any depreciation disallowed under §280F(a)(1) during the regular recovery period (normally six years for an automobile) is treated as an expense in the first year following the recovery period, subject to the limitation amount found at §280F(a)(1)(B)(ii).[3] For automobiles placed in service in 2018 that amount is $5,760.

Thus, if a taxpayer purchased a vehicle for $60,000 in 2018 the allowed depreciation per calendar year would be:

Tax Year Depreciation
2018 18,000
2019 -
2020 -
2021 -
2022 -
2023 -
2024 5,760
2025 5,760
2026 5,760
2027 5,760
2028 5,760
2029 5,760
2030 5,760
2031 1,680

That result would be "surprising" to most taxpayers. The IRS has issued this revenue procedure to provide a safe harbor method that will allow taxpayers to take advantage of bonus depreciation on luxury automobiles without forgoing all other depreciation on the vehicle for five years following the year it is placed in service.

The safe harbor method applies to a passenger automobile (other than a leased automobile):

  • That is acquired and placed in service by the taxpayer after September 27, 2017;
  • That is property for which the 100-percent additional first year depreciation deduction is allowable;
  • That has an unadjusted depreciable basis exceeding the first year limitation; and
  • For which the taxpayer did not elect to treat the cost or a portion of the cost as an expense under § 179.

Under the safe harbor, the remaining basis of the automobile is depreciated for years 2-5 using an amount equal to the lesser of:

  • The basis after the first year deducted amount times the appropriate factor from the 5 years MACRS table found in Table A-1 of Appendix A of Publication 946 or
  • The annual limitation on depreciation for the appropriate year found in the appropriate Revenue Procedure for the year the auto is placed in service. For autos placed in service in 2018 that would be Revenue Procedure 2018-25.

The depreciation per year for autos placed in service in 2018 would be based on the following percentages and limits:

Year Depreciation Percentage Maximum Depreciation Dollar Amount (Rev. Proc. 2018-25)
2019 32.00% 16,000
2020 19.20% 9,600
2021 11.52% 5,760
2022 11.52% 5,760
2023 5.76% 5,760
2023 & later Lesser of balance remaining to recover or $5,760

So in the above example, there would be $42,000 of basis remaining after the first year. Under the safe harbor method the taxpayer would claim the following depreciation on the vehicle in each of the following years:

Year Percentage Depreciation 280F Limit Depreciation Deduction
2019 13,440 16,000 13,440
2020 8,064 9,600 8,064
2021 4,838 5,760 4,838
2022 4,838 5,760 4,838
2023 2,419 5,760 2,419
2024 5,760 5,760
2025 5,760 2,640

[1] IRC §168(k)
[2] IRC §280F(a)(1)(A)
[3] IRC §280F(a)(1)(B)