The IRS is working on safe harbor relief that coordinates the 100% bonus depreciation deduction with the annual luxury car depreciation caps. A spokesperson from the IRS Chief Counsel’s Office informally confirmed the expected safe harbor to CCH editors.
The relief is expected to allow taxpayers to claim depreciation deductions during all years of a vehicle’s regular depreciation period. However, the spokesperson did not provide details on computational rules or an expected release date of the guidance.
Interaction of 100 Percent Bonus Depreciation and Depreciation Caps
The depreciation caps normally limit depreciation deductions for “luxury vehicles.” The first-year cap for vehicles placed in service during 2018 is $18,000 if bonus depreciation is claimed.
Luxury vehicles include all passenger cars, as well as trucks, vans, and SUVs with a gross vehicle rating of 6,000 pounds or less.
Without safe harbor relief, depreciation that exceeds the first-year cap can only be deducted at the end of the vehicle’s five-year recovery period. This is because regular depreciation ignores the depreciation caps. Thus, a taxpayer who claims 100% bonus depreciation has to treat the vehicle as fully depreciated for the rest of its recovery period– even though the cap limited the actual depreciation deduction to $18,000.
Uncertain Timing for Safe Harbor Relief
The IRS provided no timeframe for issuing the relief. However, the issue only arises for taxpayers beginning with the second year of a vehicle’s recovery period. The second year is when the denial of depreciation deductions begins.
The 100% bonus depreciation applies to vehicles acquired after September 27, 2017. So the IRS needs to have the relief ready for the 2018 filing season.
History Repeats Itself
Some readers may recall that the identical problem arose in 2011 when a 100% bonus rate also applied. The IRS responded with a safe harbor in 3.03(5)(c) of Rev. Proc. 2011-26. That safe harbor generally allowed taxpayers to compute depreciation after the first tax year as if the bonus rate in the first-year was 50%.
The IRS advised, however, that the specifics of the new relief will likely differ in some respects.
By Ray G. Suelzer, J.D., LL.M.