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 has not 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 80% bonus in 2023 is based the acquisition value of the asset (e.g. $50,000) less 80% bonus (e.g. $40,000), even though the luxury vehicle limit caps the allowed bonus in year 1 at a lower amount (e.g. $20,200 in 2023)

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.

For more information on prior year vehicles see:

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

According to regulations, unrecovered basis is that amount that is not 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 below example illustrates how the calculation is made when 80% 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 calculated amount is $52,000 (80% of $65,000), but the annual limit is $20,200, so $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 is 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 bonus has not been applied, the first-year depreciation rate would be 20% of the vehicle’s cost and the first-year annual limit is $8,000 less (i.e., $12,200 in 2023). In years two to six, multiply the vehicle’s cost by the shown rate; there is 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. Note that the allowed amounts shown above are for vehicles placed in service in 2023; they will 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 is applied to the limit, the value of the asset is not a part of the calculation. The 168 Allowance amount is not prorated for a short year.
  
  For Example: The 2023 first year limit is $20,200 with a 168 amount of $8,000 which is not 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 * .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.