The IRS issued Revenue Procedure 2019-13, which provides a safe harbor method for determining depreciation deductions for passenger automobiles that qualify for the 100% additional first year depreciation deduction under section 168(k) and that are subject to the depreciation limitations for passenger automobiles under section 280F.
Section 280F limits the amount of depreciation that may be deductible on luxury automobiles. For instance, the amount of depreciation that may be deducted is as follows: $10,000 in the first taxable year, $16,000 in the second taxable year, $9,600 in the third taxable year, and $5,760 in each succeeding taxable year. For taxpayers electing bonus depreciation under section 168(k), the amount of deduction for the first year is increased to $18,000.
Under section 280F any disallowed depreciation due to the above limitations is carried forward and allowed as a deduction, subject to the $5,760 limit above, in the years subsequent to the recovery period of the automobile, which is generally five years. Without the Revenue Procedure, unless the taxpayer elects out of bonus depreciation, every luxury automobile would be subject to this limitation.
Example: In 2018 taxpayer purchases a luxury automobile for $60,000. Taxpayer is entitled to $60,000 of bonus depreciation. However, due to the limitations under section 280F, the taxpayer will only be allowed to deduct $18,000 of depreciation. Furthermore the $42,000 of disallowed depreciation deduction ($60,000 bonus less $18,000 allowed) will carry forward and will be allowed as a deduction beginning in 2024.
The IRS issued the Revenue Procedure to provide relief to taxpayers limited to the amount of depreciation under the above example. The safe harbor within the Revenue Procedure will allow depreciation deductions during the recovery period for the excess depreciation which exceeds the first-year limitation amount.
Example: In 2018 taxpayer purchases a luxury automobile for $60,000. Taxpayer is entitled to $60,000 of bonus depreciation. However, due to the limitations under section 280F, the taxpayer will only be allowed to deduct $18,000 of depreciation. By applying the safe harbor under Revenue Procedure 2019-13, the taxpayer will be able to depreciate the remaining adjusted basis of $42,000 ($60,000 cost less $18,000 depreciation allowed) in 2019 and subsequent years. The safe harbor will allow the taxpayer to depreciate much quicker than allowed under the previous example.
Taxpayers may adopt the safe harbor method of accounting by applying it to depreciation of a passenger automobile on their return for the first tax year following the placed-in-service year.
The safe harbor method does not apply to a passenger automobile for which the taxpayer elected out of the 100% additional first year depreciation deduction or elected under section 179 to expense all or a portion of the cost, or one placed in service after 2022.
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