Depreciation calculation for vehicles PIS in 2023 (80% bonus)

• Use the asset's acquisition cost minus the 80% bonus to calculate tax depreciation for years 2–6. The luxury vehicle limit caps the year 1 bonus at a lower amount. This cap doesn’t affect the depreciation base for years 2 to 6

Tax law under IRC Section 280F limits the annual recovery amount for luxury passenger vehicles, applying to Property Type A and T. Each year, taxpayers can deduct the lower of the depreciation amount or the limit. They deduct any remaining basis in later years, subject to the same limit.

For more information on prior years, see:

• How Property Type A or T calculates with 168 Allowance (1/1/2008-9/27/2017)
• How Property Type A or T calculates with 168 Allowance (9/28/2017-12/31/2022)

 NOTE: If you take a Section 179 Deduction on an asset, you can’t claim depreciation for years 2 through 6. The asset can then take depreciation again starting in year 7. 

Regulations define an unrecovered basis as the non-deductible amount during the asset’s recovery life. Defer this amount to years after the final recovery period. When using a 100% bonus, reduce the auto’s depreciable basis by the full bonus amount. Use this reduced basis to calculate depreciation for years from 2 to 6.

Regulations limit the first-year allowed depreciation to $20,200 in 2023. This is usually less than the bonus amount.

Example with 80% bonus:

The table below shows the calculation when the asset is taking a 100% first-year bonus (168 Allowance) with unrecovered basis in year 1. You place a $65,000 automobile in service in 2023. The recovery life is five years, the method is MA200, and the averaging convention is HY (half-year).

In year one, the calculated amount is $52,000 (80% of $65,000). The annual limit is $20,200. Therefore, $20,200 is the allowed deduction.

In years two to six, the depreciable basis of $13,000 ($65,000 - $52,000) is multiplied by the rate allowed each year. This results in a calculated amount that's less than the limit, so you're allowed to take the full calculation. In year seven to 10, you're allowed to take the annual limit. And in year 11, you take the remaining basis of $6,560. This fully expenses the asset for tax purposes.

If you skip the bonus, apply a 20% depreciation rate to the vehicle’s cost in year one. The first-year annual limit drops by $8,000, making it $12,200 in 2023. For years two to six, multiply the vehicle’s cost by the applicable rate. Use the lower of the calculated depreciation or the annual limit each year. The asset recovers any remaining basis starting in year seven and beyond.

Depreciation calculation for vehicles PIS in 01/01/2024 - 01/20/2025

First-year bonus declined from 80% in 2023 to 60% in 2024. In 2025, this amount returned to 100% for assets placed-in-service after 1/1/2025. You can use the same calculation method for 60%, 40%, and 20% bonus. Do this by substituting the lower rate for the 80% rate. The allowed amounts shown above are for vehicles placed-in-service in 2023. 

Note: The Short year calculation

• The Short year calculation for the Safe Harbor rules applies to the limit. The value of the asset isn’t a part of the calculation. The system doesn't prorate the 168 Allowance amount for a short year.
  
  For Example: The 2023 first limit is $20,200 and it includes a prorated 168 amount of $8,000. The company has a short year of July to December. This gives a Short year modifier of 6/12 or 0.5.
  
  The formula will be (Auto Limit * the short year modifier) + $8,000 the 168 amount
  
  (12,200 * 0.5) + 8,000 = $14,100
   the total amount of depreciation which you can take in the first year.
  
  The only varying factor being the Short year modifier.

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.