Safe harbor rules for vehicles PIS 9/28/2017 to 12/31/2022 (100% bonus)

Tax law (under IRC Section 280F) places a limit on the annual recovery amount for passenger vehicles that meet the definition of ‘luxury’ vehicles. These limits are applied to Property Type A and T. The lower of the calculated depreciation amount or the limit is allowed each year. Any remaining unrecovered basis is deducted in later years, also subject to the limit.

On February 13, 2019, the IRS issued the safe harbor rules (Revenue Procedure 2019-13) for taxpayers claiming 100% first-year bonus depreciation on vehicles purchased and placed in service 09/28/2017 and later. (The safe harbor rules issued in Revenue Procedure 2011-26 apply to vehicles placed in service before 9/28/2017, see the Additional Information) If 100% first-year bonus is taken on the vehicle, then:

• If there is 'unrecovered basis' in the placed-in-service year, determine depreciation for future years by subtracting the amount of the 100% bonus (the Auto limit) from the asset basis and determine depreciation by applying the appropriate depreciation rate (using the declining balance formula, table rates cannot be used)

The cap amount varies by placed in service year, please see Help, Help Topic Automobile (Type A) or Light Trucks and Vans (Type T) for details of the maximum allowable depreciation.

Note: The change for Rev Proc 2019-13 is implemented in Service Update 2019.1.2. Below are outcomes that are dependent on the actions taken:

1. Depreciation is not re-run for a prior period. Going forward, depreciation will calculate correctly based on Rev Proc 2019-13.
2. Depreciation needs to be re-run for prior periods, but vehicles were previously depreciated under Rev Proc 2011-26 and there is no desire to apply the Rev Proc 2019-13 rules for vehicles to prior periods. Set up a Period Close (See How to do a Period Close for details) or force the depreciation amount using the Beginning Date fields (See How to force depreciation for details) just for these assets. By either method, prior depreciation will not be changed, but going forward the Rev Proc 2019-13 updates will be applied.
3. Depreciation is re-run for a prior period and Period Close is not used for the vehicles, the new safe harbor rules will be applied beginning with the prior period depreciation dates, provided the vehicle has been PIS after 09/28/2017 or later.
4. Force Recalculation on the Depreciate screen to apply the new safe harbor rules to qualifying assets previously placed in service.
5. Select or Group all A and T assets and reset depreciation to the PIS Date.
   
   Options #1 and #2 will not result in a change to prior depreciation. Options #3-#5 will result in changes to prior calculated tax depreciation and may require the need for an amended tax return.

According to regulations, unrecovered basis is that amount which is not deductible and has to be pushed out to years following the last recovery period. In the case of 100% bonus, since you would normally get 100% of the cost in year 1 - before applying auto limits - this would mean the entire remaining basis after applying the first-year limits would have to be pushed out to Year 7 and beyond.

With Rev Proc 2019-13, the IRS now let’s you take the 100% bonus deduction directly against the asset basis for calculating depreciation for purposes of determining any unrecovered basis beginning in the second year that otherwise have had to be pushed out to Year 7 and beyond.

The below example illustrates how the calculation is made when 100% first-year bonus (168 Allowance) is taken and there is unrecovered basis in year 1.
A $65,000 automobile is placed in service in 2019. The recovery life is 5-years, the method is MA200, and the averaging convention is HY (half-year).

In year one, the acquisition value is reduced-by the 100% 168 Allowance rate. The annual limit is lower than the acquisition value, so the $18,100 limit is the allowed deduction. If bonus has not been applied, the rate would be 20% of the value and the limit is reduced by $8,000 in the first year. (If not for Rev-Proc 2011-26, deduction of the entire unrecovered basis of $46,900 would have been deferred to year 7 and later.)

For years 2 thru 6, the depreciable basis is calculated as the Value less the limit taken in the first year, thus the basis is $46,900 ($65,000 cost – $18,100). The basis is then multiplied by the 5-year table rate each year.

Years 7 and 8 are simply the lesser of the actual remaining basis, or the annual limit of $5,860.

For further examples: See the SageCity post New Safe Harbor Rules for 100% Bonus on Luxury Autos

Note:

Auto limits with the 168 allowance for the time period of this article:

If you elect out of the 168 Allowance for the automobile, subtract the $8,000 depreciation increase from the Year 1 amount in the table.