IRS Issues Safe Harbor for Business Vehicles that Qualify for First-Year Bonus Depreciation by Cherry Laufenberg, CPA
Under the Tax Cuts and Jobs Act (TCJA), businesses have an opportunity to claim larger depreciation deductions beginning in 2018 for qualifying new and used property, including passenger vehicles, they acquire and place into service between Sept. 28, 2017, and Dec. 31, 2026. However, it is critical that businesses pay particular attention to recent IRS guidance to determine deductions when vehicles are eligible for a 100 percent additional first-year bonus-depreciation deduction and subject to depreciation limitations.
In general, Section 179 and depreciation deductions for passenger automobiles are subject to dollar limitations for the year the taxpayer places the passenger automobile in service and for each succeeding year. A new or used passenger car, SUV or truck used by a taxpayer at least 50 percent of the time for business purposes can also qualify for an additional first-year depreciation deduction, which the TCJA increased to a maximum of $18,000 for tax year 2018.
Under prior law, the allowance for a new passenger vehicle was limited to $11,160 in the first year or $3,160 for a used car. According to the IRS, this generous provision of the new tax law could result in irregularities in tax years after the placed in service year and before the first tax year succeeding the end of the recovery period. The safe harbor method of accounting recently issued by the IRS aims to mitigate situations in which the depreciable basis of a passenger automobile for which the 100-percent additional first-year depreciation deduction exceeds the first-year limitation.
If the depreciable basis of a passenger automobile for which the 100-percent additional first-year depreciation deduction is allowable exceeds the first-year limitation, the taxpayer may apply the safe harbor accounting method to deduct the excess amount of depreciation deductions on their income tax returns in the first tax year after the end of the recovery period. Doing so requires taxpayers to use the IRS applicable depreciation tables.
Excluded from the benefit of the safe harbor are passenger vehicles that taxpayers place in service after 2022 or those automobiles for which a taxpayer elected out of the 100-percent additional first-year bonus depreciation deduction or elected under Section 179 to expense all of a portion of the cost of the vehicle.
The advisors and accountants with Berkowitz Pollack Brant work closely with businesses of all sizes and across virtually all industries to implement strategies intended to minimize tax liabilities, maintain regulatory compliance, improve efficiencies and achieve long-term growth goals.
About the Author: Cherry Laufenberg, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she works with corporations, pass-through entities, trusts and foreign entities. She can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
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