Highlights of Bonus Depreciation for VehiclesSeptember 13, 2011
Lisa DeCaprio, MST
The Small Business Jobs Act of 2010 (the 2010 Jobs Act) and the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the 2010 Tax Relief Act) were very favorable to taxpayers placing assets, including vehicles, in service in 2010 through 2012. The 2010 Tax Relief Act further extended the 50% first-year bonus depreciation through 2012 and introduced 100% first-year bonus depreciation. The allowable years and related bonus depreciation percentages are broken down as follows: (1) 50% first-year bonus for qualifying assets purchased and placed in service from January 1, 2010 through September 8, 2010; (2) 100% first-year bonus for qualifying assets from September 9, 2010 through December 31, 2011; and (3) 50% first-year bonus for qualifying assets purchased and placed in service in the 2012 calendar year.
The 2010 Jobs Act increased the depreciation limit on business vehicles (defined below) by $8,000. Previous to the 2010 Jobs Act, the depreciation limit on business vehicles capped the first-year depreciation deduction at $3,060 (for an auto) or $3,160 (for a light truck or van). For the 2010 tax year, these amounts have been increased to $11,060 (for autos that qualify for bonus depreciation) or $11,160 (for a light truck or van that qualify for bonus depreciation).
Under Section 179, a taxpayer may expense up to $25,000 of the cost of an SUV or truck (GVW over 6,000 lbs. but not greater than 14,000 lbs.) that would otherwise be subject to depreciation. Used property is eligible for Section 179 expensing. Under Section 179, a taxpayer cannot decrease current taxable income below zero. Any Section 179 expense disallowed because of the current taxable income limitation can be carried forward indefinitely. Also, the allowable Section 179 expense deduction phases out when more than $2,000,000 (for 2010 & 2011) of qualifying property is placed into service. Once purchases exceed $2,500,000, Section 179 expensing allowance is not permitted.
Qualifying a vehicle for bonus depreciation
A business vehicle qualifies for bonus depreciation if it is (1) new (not used); and (2) purchased by the taxpayer and placed in service in the qualifying year. A taxpayer is assumed to take bonus depreciation on qualifying vehicles: therefore, the taxpayer must elect out of taking bonus depreciation, if the taxpayer so chooses.
Gross Vehicle Weight (GVW) matters when considering 100% first-year bonus depreciation
Vehicles are grouped into three buckets depending on their GVW. Each bucket has different depreciation limits. Cars, lightweight trucks and vans (including SUVs and minivans) with a GVW of 6,000 lbs. or less may be considered luxury automobiles and therefore subject to the luxury auto depreciation limitations. Cars, trucks and vans (including SUV's and minivans) with a GVW over 6,000 lbs. but not over 14,000 lbs. are not limited by the luxury auto limitations but are subject to a Section 179 limit of $25,000. Vehicles with a GVW greater than 14,000 lbs. are not subject to luxury auto limitations or Section 179 limitations.
Under the 2010 Tax Relief Act vehicles (used entirely for business and placed in service after September 8, 2010 and before December 31, 2011) with a GVW greater than 6,000 lbs. qualify for 100% first-year bonus depreciation (50% first-year bonus depreciation for vehicles placed in service in 2008 through September 8, 2010 and 2012). This bucket of vehicles is not subject to the luxury auto limitations (discussed below). Tax depreciation on those vehicles with a GVW of 6,000 lbs. or less is not calculated as simply.
For vehicles with a GVW of 6,000 lbs. or less, taxpayers must consider the interplay between bonus depreciation and luxury auto limitations. Bonus depreciation must be considered by a taxpayer for qualifying assets on a class life basis. A taxpayer who chooses to benefit from 100% first-year bonus depreciation on its non-vehicle assets, in the same class, will be subject to bonus depreciation on its vehicles as well. These vehicles, though, are still subject to the luxury auto limitations as set in Code Section 280F.
The clash between the bonus depreciation rules and the luxury auto limitations produces an unexpected result. Most business car owners would wind up with a first-year depreciation deduction amount capped at $11,060 (for an auto) or $11,160 (for a light truck or van), but would have to defer writing off the balance of the vehicle until after the normal recovery period (because 100% first-year bonus depreciation has been claimed in year one, except for the luxury auto limitations). For example, a business owner purchases an auto (used 100% for business) for $20,000 on October 1, 2010. The taxpayer would only be allowed a first-year depreciation deduction of $11,060, as the luxury auto limitations permit. The remaining $8,940 can only be recovered by the taxpayer beginning in year 2016. Fortunately, Rev. Proc. 2011-26 provides relief for this unfavorable tax situation.
How to mitigate this depreciation deduction deferral
Under Rev. Proc. 2011-26, the IRS will allow a taxpayer to elect to step-down from 100% to 50% first-year bonus depreciation for all qualified property that is in the same class of property and placed in service in its tax year that includes September 9, 2010. The election to claim 50% instead of 100% bonus first-year depreciation must be made by the due date (including extensions) of the federal tax return for the tax year that includes September 9, 2010. However, if a taxpayer has already timely filed its federal tax return for its tax year that includes September 9, 2010, on or before April 18, 2011, he/she may take advantage of an automatic extension of 6 months from the due date of that federal return (excluding extensions) to make the step-down election.
If the taxpayer chooses not to elect the step-down, beginning in year 2, a "safe harbor" calculation takes the form of an "as if" calculation that determines the unrecovered basis of the vehicle as if 50%, instead of 100% first-year bonus depreciation was claimed. Using the same facts as our previous example, by electing the safe harbor method, the taxpayer would still be allowed a depreciation deduction of $11,060, as the luxury auto limitations permit, but could then depreciate the remaining value, $8,940, ratably over the remaining recovery period of the vehicle.