How Property Type A or T is calculated with 168 Allowance

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

• As of the last update of this article, the IRS hasn’t issued safe harbor rules for luxury vehicles placed in service in 2023 and later. Therefore, tax depreciation for years 2 to 6 for an auto taking an 80% bonus in 2023 is based on the acquisition value of the asset (for example $50,000) less 80% bonus (for example $40,000), even though the luxury vehicle limit caps the allowed bonus in year 1 at a lower amount (for example $20,200 in 2023)

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, and 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)

According to regulations, an unrecovered basis is that amount that isn’t deductible during the normal recovery life and is deferred to years following the last recovery period. In the case of 80% bonus, the depreciable basis of the auto is reduced by the full 80% bonus when calculating depreciation for years 2 to 6. However, the first-year allowed depreciation is limited to $20,200 in 2023, which is usually less than the bonus amount.

Example with 80% bonus:

The table below shows the calculation when 80% first-year bonus (168 Allowance) is taken and there’s unrecovered basis in year 1.
A $65,000 automobile is placed in service in 2023. The recovery life is 5-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), but 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, resulting in a calculated amount that's less than the limit, so the full calculated amount is allowed. In year seven to ten, the annual limit is allowed. And in year 11, the remaining basis of $6,560 is allowed and the asset is fully expensed for tax purposes.

If the bonus isn't applied, the first-year depreciation rate will be 20% of the vehicle’s cost and the first-year annual limit is $8,000 less (that is, $12,200 in 2023). In years two to six, multiply the vehicle’s cost by the shown rate; there’s no modification to each year’s annual limit. The lower of the calculated amount or the annual limit is allowed each year. As above, any unrecovered basis is recovered in year 7 and later.

Depreciation calculation for vehicles PIS in 2024 and later

First-year bonus is scheduled to decline from 80% in 2023 to 60% in 2024, then to 40% in 2025, and to 20% in 2026. The same calculation method can be used for 60%, 40%, and 20% bonus, by substituting the lower rate for the 80% rate. The allowed amounts shown above are for vehicles placed in service in 2023; they’ll be increased for inflation for vehicles placed in service in 2024 and later years.

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 168 Allowance amount isn’t prorated for a short year.
  
  For Example: The 2023 first limit is $20,200 with a 168 amount of $8,000 which is prorated and a short year of July to December which will give 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 can be taken 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.