Bonus Depreciation for Vehicles
As discussed in our seminars, the provision that allows 100% bonus depreciation contains a technical glitch related to computing depreciation on bonus-eligible vehicles that weigh 6,000 pounds or less. The glitch affects the allowable depreciation after the first year of the vehicles’ recovery period.
Due to the way the bonus provision was drafted and the way that it interacts with other provisions of the Internal Revenue Code, bonus-eligible vehicles were not eligible for any depreciation during the second through sixth years of their depreciable lives, unless a taxpayer elected out of bonus depreciation for all five-year property placed in service during the tax year.
To address this unintended technical glitch, the IRS recently issued Revenue Procedure 2019-13, which allows taxpayers to take the normal amounts of depreciation for affected vehicles in the second through the sixth year of their depreciable lives, using the optional depreciation table for computing depreciation for passenger automobiles. (This optional deprecation table for passenger automobiles is Table A-1 in Appendix A of IRS Publication 946, and it is illustrated in the example that appears below.)
Taxpayers are automatically eligible for the safe harbor provided in this revenue procedure, and no special election is required.
Of course, each year’s vehicle depreciation is limited to the annual cap on depreciation for passenger automobiles. For taxpayers who placed eligible vehicles in service during 2018, the limit on depreciation in the first year is $18,000 ($10,000 normal depreciation limit plus an additional $8,000 due to the bonus provision). In the 2nd year of the vehicle’s recovery period, depreciation is limited to $16,000; in the 3rd year, depreciation is limited to $9,600, and in each later year, the depreciation is limited to $5,760.
To illustrate the use of the optional depreciation table for vehicle depreciation and the safe harbor rule contained in Revenue Procedure 2019-13, assume that a taxpayer purchases an eligible vehicle in 2018 for $60,000 and uses it 100% for business purposes.
In 2018, even though there is 100% bonus depreciation, the taxpayer is limited to an $18,000 depreciation deduction. This leaves a remaining adjusted basis of $42,000 ($60,000 minus $18,000). For 2019 through 2023, the optional table computes each year’s depreciation as a percentage of this $42,000 remaining basis.
In 2019, the taxpayer computes depreciation as 32% of the $42,000, which is $13,440. Since this is less than the $16,000 cap on depreciation for the second year of the vehicle’s service, the taxpayer’s deduction is $13,440 for 2019.
In 2020, the taxpayer computes depreciation as 19.2% of the $42,000, which is $8,064. Since this is less than the $9,600 cap for the third year of the vehicle’s service, the taxpayer’s deduction is $8,064. In 2021 and 2022, the taxpayer computes depreciation as 11.52% of the $42,000, which is $4,838. Since this is less than the $5,760 cap on depreciation for the fourth and later years of the vehicle’s service, the taxpayer’s deduction is $4,838 for 2021 and 2022.
In 2023, the taxpayer computes depreciation as 5.76% of the $42,000, which is $2,419. Since this is less than the $5,760 cap on depreciation for the fourth and later years of the vehicle’s service, the taxpayer’s deduction is $2,419 for 2023.
In 2024, assuming that the taxpayer still owns and is using the vehicle, the normal recovery period for the vehicle has ended, but due to the cap on depreciation for passenger automobiles, the vehicle still has $8,401 of remaining adjusted basis. (The $8,401 represents the $60,000 original cost minus the depreciation of $18,000 in 2018, $13,440 in 2019, $8,064 in 2020, $4,838 in both 2021 and 2022, and $2,419 in 2023.)
Since the normal depreciable life has ended, the taxpayer is allowed to deduct the remaining adjusted basis of the vehicle, up to the $5,760 cap on depreciation in each year, until the vehicle is fully depreciated.
Therefore, for 2024, the remaining adjusted basis of $8,401 can be deducted, up to the limit of $5,760. In 2025, the remaining basis of the vehicle is $2,641 ($8,401 remaining basis in 2024 minus the $5,760 depreciation in 2024), so the taxpayer is permitted to deduct the entire remaining basis of $2,641, since it is less than the $5,760 cap on depreciation. As a result, the remaining adjusted basis at the end of 2025 is zero.