February 15, 2019 IRS establishes safe harbor accounting method for depreciating passenger automobiles that qualify for bonus depreciation Under Revenue Procedure 2019–13, the IRS established a safe harbor accounting method for taxpayers to use in determining depreciation deductions for passenger automobiles that qualify for the 100% additional first–year depreciation deduction (bonus depreciation) under Section 168(k) and are subject to the depreciation limitations under Section 280F(a) (hereinafter referred to as the Safe Harbor). Revenue Procedure 2019–13 is effective February 13, 2019. General rule Section 280F(a)(1)(A)(i) limits the amount of depreciation that owners may claim on passenger automobiles in a given tax year. To the extent that 280F limits otherwise allowable depreciation, the owner may deduct that depreciation, but not until the recovery period for the automobile has ended. Further, when the recovery period ends, Section 280F(a)(1)(B)(ii) limits the owner's deduction for unclaimed bonus depreciation to $5,760 per year.1 As a result of Section 280F(a)'s limitations, to the extent 100% bonus depreciation applies to a passenger automobile, its owner could claim a limited amount of depreciation on the automobile in Year 1 but not receive any additional depreciation deductions on the automobile until after the last year of its recovery period (i.e., the sixth year following the year the automobile was placed in service). Revenue Procedure 2019–13 provides a brief example to illustrate this result. In the example, a calendar–year taxpayer places a passenger automobile in service in December 2018. The automobile costs $50,000 and is qualified property to which 100% bonus depreciation applies. Under Section 280F(a)(1)(A)(i), the taxpayer may claim only $18,000 as a depreciation deduction under Section 280F(a)(1)(A)(i) (as provided in Table 2 of Revenue Procedure 2018–25) and may not recover the remaining $32,000 in basis in the automobile until 2024. Section 280F(a)(1)(B)(ii), however, limits recovery of the $32,000 to per year. Thus, in this example, the taxpayer gets a depreciation deduction of $18,000 in the year the automobile is placed in service, no depreciation deductions for the next five years, $5,760 of depreciation deductions in years 2024–2028, and a final depreciation deduction of $3,200 in 2029, 11 years after the automobile was first placed in service. Scope of Safe Harbor To avoid the result previously described and allow limited depreciation deductions to be claimed during the recovery period, Revenue Procedure 2019–13 establishes the Safe Harbor for passenger automobiles (other than leased passenger automobiles):
Adoption of Safe Harbor To adopt the Safe Harbor, a taxpayer must deduct depreciation of its passenger automobile on its federal tax return for the first tax year after the passenger automobile's placed–in–service year. If a taxpayer's tax year is less than 12 months, the taxpayer must adjust depreciation for a short tax year. When applying the Safe Harbor, a taxpayer must use the applicable optional depreciation table for calculating depreciation for the passenger automobile. If the passenger automobile is placed in service in calendar year 2018, the taxpayer must deduct the first–year limitation amount under Section 280F(a)(1)(A)(i) as indicated in Table 2 of Revenue Procedure 2018–25. For passenger automobiles placed in service after 2018, the IRS will issue further guidance on the limitation amounts under Section 280F(a)(1) for the applicable placed–in–service year. For the 12–month tax year following the placed–in–service year and for each succeeding 12–month tax year in the recovery period, Revenue Procedure 2019–13 requires a taxpayer to determine depreciation for the passenger automobile by multiplying the passenger automobile's remaining adjusted depreciable basis (i.e., the original basis of the passenger automobile reduced by the first–year limitation amount under Section 280F(a)(1)(A)) 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 Section 280F(a)(1)(A) limitations. Revenue Procedure 2019–13 treats the passenger automobile's adjusted depreciable basis as of the beginning of the first tax year following the end of the recovery period as a deductible depreciation expense for the first tax year following the end of the recovery period, subject to the Section 280F(a)(1)(B)(ii) limitation. It treats the excess amount as a deductible depreciation expense for the succeeding tax years, subject to the Section 280F(a)(1)(B)(ii) limitation. Under Revenue Procedure 2019–13, the Safe Harbor will not apply to the first year in which Section 280F(b) applies to the passenger automobile (i.e., the first year in which the passenger automobile is not primarily used for a qualified business use). Revenue Procedure 2019–13 provides a primary example and two ancillary examples to illustrate how these provisions apply. Implications The Safe Harbor generally provides taxpayer–favorable guidance on the cost recovery of certain automobiles for which 100% bonus depreciation and Section 280F apply, and further represents a departure from historic determinations made by the IRS specific to the application and interplay of Section 168 (specifically, Section 168(k)) and Section 280F, as described within Section 4.01 of Revenue Procedure 2019–13. Further, the Safe Harbor is substantially different than the safe harbor method of accounting described in Section 3.03(5)(c) of Revenue Procedure 2011–26, which applied to certain automobiles acquired after September 8, 2010, and before January 1, 2012, and placed in service by the taxpayer before January 1, 2012 (i.e., the prior 100% bonus depreciation period). As the Safe Harbor provides taxpayers with accelerated depreciation deductions when compared to not employing the Safe Harbor, taxpayers seeking to maximize depreciation deductions should employ the Safe Harbor to the extent available, which will necessitate the use of the optional depreciation tables set forth in Appendix A to Publication 946. Interestingly, the Safe Harbor mandates the use of the optional depreciation tables, but does not detail how to apply such tables to the extent a taxpayer utilizing the Safe Harbor incurs a short tax year (beyond stating that the depreciation deductions determined under the Safe Harbor would need to be adjusted for the short tax year in accordance with the provisions of Revenue Procedure 89–15). Publication 946 specifically states that a taxpayer may not use the optional depreciation tables to compute depreciation for a short tax year. As the application of Section 280F is generally taxpayer–unfavorable even with application of the Safe Harbor, taxpayers seeking to maximize their depreciation deductions should first determine if they fit within an exception to the application of Section 280F (e.g., automobile is held by a company regularly engaged in the business of leasing automobiles, etc.), as fitting within an exception may provide the taxpayer with the ability to take an annual depreciation deduction on vehicles well over the limits imposed by Section 280F. ———————————————
——————————————— 1 Revenue Procedure 2018-25 sets forth the passenger automobile depreciation limits under Section 280F for 2018 generally. An annual revenue procedure is generally issued to update the Section 280F depreciation limits for inflation. | |||||||||
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