IRS Released Safe Harbor Guidance for Vehicle Deductions

The IRS recently released a safe harbor method that harmonizes 100% bonus depreciation with the annual depreciation limits for passenger automobiles (other than leased vehicles). Passenger automobiles are defined as four-wheeled vehicles driven on public roads, having a gross vehicle weight of $6,000 lbs or less.

If a vehicle is acquired and placed in service after September 27, 2017 and before January 1, 2027, the Tax Cuts and Jobs Act (TCJA) allows a taxpayer to deduct 100% of the cost of qualified property in the year it is placed in service. Most vehicles used for business purposes are qualified property.

The TCJA also increased the first-year limitation amount by $8,000 to $18,000 for a passenger automobile that qualifies for the 100% additional first-year depreciation deduction.

Here’s where the really good news comes in: The safe harbor now allows vehicle owners to deduct depreciation in each year during the recovery period when they also claim bonus depreciation.

Generally, under the Sec. 179 depreciation deductions for passenger vehicles, taxpayers are subject to dollar limitations during the placed-in-service year and each succeeding year.

The following shows the depreciation deduction limits for vehicles placed in service in 2018.

• $18,000 for the first year,
• $16,000 for the second year,
• $9,600 for the third year, and
• $5,760 per year beginning with the fourth year

Prior to the safe harbor method, taxpayers were required to wait to deduct the excess dollar amount of allowable depreciable property until the first tax year after the end of the recovery period if the depreciable basis of a passenger automobile exceeded the first-year limitation in Rev. Proc. 2018-25.

The new safe harbor guidance permits the excess depreciation amount to be deducted during the recovery period subject to the depreciation limits applicable to passenger automobiles.

The safe harbor method does not apply to passenger automobiles placed in service after 2027. The safe harbor also does not apply to a taxpayer who opts out of the 100% additional first year bonus depreciation deduction or elects to expense all or part of the automobile’s cost under Sec. 179.

If you have any questions on the new IRS-issued safe harbor method for vehicle deductions, please contact me at dwitt@bpw.com or (805) 963-7811.