The Tax Cuts and Jobs Act set bonus depreciation for passenger automobiles at 100% (previously it was 50%), which translates into an additional $8,000 write-off for the year they are purchased and placed in service. As a general rule, if 100% bonus depreciation is claimed, then the remaining basis in excess of the first-year limit cannot be depreciated until the recovery period has ended.
To avoid this harsh result, the IRS has created a safe harbor (Rev. Proc. 2019-13). The safe harbor requires that depreciation for the vehicle be based on the applicable optional depreciation table used for vehicles (property with 5-year recovery period). This table is in IRS Publication 946.
The safe harbor, which technically is an accounting method to mitigate the unfavorable results of 100% bonus depreciation, is used simply by claiming depreciation for the vehicle in the first year following the year it’s placed in service. No special form or election statement is required.
The IRS gives this example of how the safe harbor operates:
In 2018, a taxpayer buys and places in service a passenger automobile that costs $60,000 and is used 100% for business. The passenger automobile is 5-year property eligible for 100% bonus depreciation. The taxpayer must use the applicable optional depreciation table, which is Table A-1 in Appendix A of Publication 946, the table with the 200% declining balance method of depreciation, a 5-year recovery period, and the half-year convention. The annual dollar limits for vehicles placed in service in 2018 are in Rev. Proc. 2018-25).
Assuming the taxpayer does not “elect out” of bonus depreciation, the allowable depreciation deduction for 2018 is $18,000 ($10,000 dollar limit plus $8,000 for bonus depreciation, shown in Table 2 of Rev. Proc. 2018-25). The remaining adjusted depreciable basis of the passenger automobile as of January 1, 2019, is $42,000 ($60,000 unadjusted depreciable basis less $18,000 depreciation deduction claimed for 2018).
For 2019, the total depreciation allowable for the passenger automobile is $13,440 (32%(the year 2 percentage in Table A-1) multiplied by the remaining adjusted depreciable basis of $42,000). This is the deductible amount as it is less than the depreciation limitation of $16,000 for 2019 (second-year dollar limit for a vehicle placed in service in 2018, shown in Table 2 of Rev. Proc. 2018-25).
Similar computations are made for 2020 through 2023 (the end of the recovery period). For each year, the deduction using the percentage from Table A-1 will be allowed, as it is less than the annual dollar limit shown in Rev. Proc. 2018-25. Starting in 2024, the remaining adjusted depreciable basis is written off using the lesser of the adjusted depreciable basis or the annual dollar limit in Rev. Proc. 2018-25.