How Property Type A or T calculates with 168 Allowance

Safe harbour 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 apply to Property Type A and T. The lower of the calculated depreciation amount or the yearly allowed limit. The asset will deduct any remaining unrecovered basis in later years, also subject to the limit.

On February 13, 2019, the IRS issued the safe harbour rules (Revenue Procedure 2019-13). These rules apply 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.

If a vehicle is taking a 100% first-year bonus:

• If there is "unrecovered basis" in the placed-in-service year, determine depreciation for future years. Subtract the 100% bonus (Auto limit) from the asset basis. Apply the correct depreciation rate using the declining balance formula. Don't use table rates.

   

The cap amount varies by placed in service year. See Help, Help Topic Automobile (Type A) or Light Trucks and Vans (Type T) for details.

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)
• How Property Type A or T calculates with 168 Allowance (1/01/2023 – 01/20/2025)

 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. You must 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 2 through 6.

Regulations limit the first-year allowed depreciation to $20,200 in 2025. This is usually less than the bonus amount.

Example with 100% 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.
A $65,000 automobile is placed in service in 2025. 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 $65,000 (100% of $65,000). The annual limit is $20,200. Therefore, $20,200 is the allowed deduction.

From years two to six, multiply the $44,800 depreciable basis by the allowed rate each year. Each year's result falls below the limit, so you can deduct the calculated amount annually.

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

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 a168 amount of $8,000 which is prorated. The company has 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 you can take in the first year.
  
  The only varying factor being the Short year modifier.