The IRS has released the IRC Section 280F depreciation limits for business passenger automobiles placed in service by the taxpayer in 2018, taking into account the changes made by the recently enacted Tax Cuts and Jobs Act (TCJA). The IRS has also released the annual income inclusion amounts for such vehicles first leased in 2018.
For owners of passenger automobiles, IRC section 280F, as modified by the TCJA, imposes dollar limitations on the depreciation deduction for the year in which the taxpayer places the automobile in service and each succeeding year.
The TCJA modifies IRC section 168(k) to extend the additional bonus first-year depreciation deduction for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2027.
Under the TCJA, a 100% bonus first-year deduction of the adjusted basis of qualified property is generally allowed for property acquired and placed in service after September 27, 2017 and before January 1, 2023 (for certain property with longer production periods, the end date is December 31, 2023). In later years, the first-year bonus depreciation deduction phases down 20% per year until it reaches 20% for property placed in service after December 31, 2025 and before January 1, 2027.
Note that for the first tax year ending after September 27, 2017, a taxpayer can elect to claim 50% bonus first-year depreciation it he or she prefers (rather than claiming a 100% first-year depreciation allowance).
In the case of a passenger automobile acquired by the taxpayer before September 28, 2017 and placed in service by the taxpayer during 2018, the first-year depreciation allowed under IRC section 280F is increased by $6,400. For qualified property acquired and placed in service after September 27, 2017, the first-year depreciation allowed is increased by $8,000.
The following are the annual depreciation dollar limits for vehicles that are subject to the luxury auto limits of IRC section 280F and are placed in service by the taxpayer in calendar year 2018.
The depreciation limits for passenger automobiles acquired by the taxpayer BEFORE September 28, 2017, and placed in service by the taxpayer during calendar year 2018, for which bonus first-year depreciation deduction applies are: (1) $16,400 for the placed in service year; (2) $16,000 for the second tax year; (3) $9,600 for the third tax year; and (4) $5,760 for each succeeding year.
The depreciation limits for passenger automobiles acquired by the taxpayer AFTER September 27, 2017, and placed in service by the taxpayer during calendar year 2018 (for which bonus first year depreciation deduction) applies are: (i) $18,000 for the placed in service year; (ii) $16,000 for the second tax year; (iii) $9,600 for the third tax year; and (iv) $5,760 for each succeeding year.
The depreciation limits for passenger automobiles placed in service during calendar year 2018 (for which the bonus first-year depreciation deduction do not apply) are: (a) $10,000 for the placed in service year; (b) $16,000 for the second tax year; (c) $9,600 for the third tax year; and (d) $5,760 for each succeeding year.
A taxpayer that leases a business automobile may deduct the part of the lease payment representing the business/investment use of the vehicle. If the business/investment use is 100%, then the full lease cost is deductible. To prevent taxpayers from avoiding the effect of the luxury auto limits, however, taxpayers must include a certain amount in income during each year of the lease to partially offset the lease deduction, to the extent the vehicle’s Fair Market Value (FMV) exceeds certain dollar limits. The income inclusion amount varies with the initial FMV of the leased vehicle and the year of the lease, and is adjusted for inflation each year.
Revenue Procedure 2018-25 includes the income inclusion tables for passenger automobiles for which the lease term begins during calendar year 2018 and the vehicle has a FMV over $50,000. Taxpayers leasing these passenger automobiles must use these tables to determine the inclusion amount for each tax year during which the passenger automobile is leased.
If you have any questions or comments about the business use of automobiles, please contact your business and tax attorney at JSenney@pselaw.com or 937-223-1130.