The IRS has updated the inflation-adjusted “luxury automobile” limits on certain deductions taxpayers can take for passenger automobiles — including light trucks and vans — used in their businesses. Revenue Procedure 2019-26 includes different limits for purchased automobiles that are and are not eligible for bonus first-year depreciation, as well as for leased automobiles.

The Role of the TCJA

The Tax Cuts and Jobs Act (TCJA) amended Internal Revenue Code (IRC) Section 168(k) to extend and modify bonus depreciation for qualified property purchased after September 27, 2017, and before January 1, 2023, including business vehicles. Businesses can expense 100% of the cost of such property (both new and used, subject to certain conditions) in the year the property is placed in service.

The amount of the allowable deduction will begin to phase out in 2023, dropping 20 percentage points each year for four years until it vanishes in 2027, absent congressional action. The applicable percentage for qualified property acquired before September 28, 2017, and placed in service in 2019, is 30%.

But 100% (or 30%) bonus depreciation is available only for heavier business vehicles that are not considered passenger automobiles. The maximum bonus depreciation amount for passenger automobiles is much smaller.

IRC Sec. 280F limits the depreciation deduction allowed for luxury passenger automobiles for the year they are placed into service and each succeeding year. The TCJA amended the provision to increase the Sec. 280F first-year limit for qualified property acquired and placed after September 27, 2017, by $8,000. It increased the limit on first-year depreciation for qualified property acquired before September 28, 2017, and placed in service in 2019, by $4,800. These amounts are the bonus depreciation.

Annual Depreciation Caps

The new guidance includes three depreciation limit tables for purchased autos placed in service in calendar year 2019. The limits for automobiles acquired before September 28, 2017, that qualify for bonus depreciation are:

• 1st tax year: $14,900
• 2nd tax year: $16,100
• 3rd tax year: $9,700
• Each succeeding year: $5,760

The limits for autos acquired after September 27, 2017, that qualify for bonus depreciation are:

• 1st tax year: $18,100
• 2nd tax year: $16,100
• 3rd tax year: $9,700
• Each succeeding year: $5,760

The limits for autos that do not qualify for bonus depreciation are:

• 1st tax year: $10,100
• 2nd tax year: $16,100
• 3rd tax year: $9,700
• Each succeeding year: $5,760

Other Restrictions

The bonus depreciation deduction is not available for automobiles for 2019 if the business:

• Did not use the automobile more than 50% for business purposes in 2019;
• Elected out of the deduction for the class of property that includes passenger automobiles (that is, five-year property); or
• Purchased the automobile used and the purchase did not meet the applicable acquisition requirements (for example, the business cannot have used the auto at any time before acquisition).

Limits on Leased Automobiles

The new guidance also includes the so-called “income inclusion” table for passenger automobiles first leased in 2019 with a fair market value (FMV) of more than $50,000. The FMV is the amount that would be paid to buy the car in an arm’s-length transaction, generally the capitalized cost specified in the lease.

Taxpayers that lease a passenger automobile for use in their business can deduct the part of the lease payment that represents business use. Thus, if the car is used solely for business, the full cost of the lease is deductible. (Alternatively, you could just deduct the standard mileage rate — 58 cents for 2019 — for business miles driven.)

But Sec. 280F requires the deduction to be reduced by an amount that is substantially equivalent to the limits on the depreciation deductions imposed on owners of passenger automobiles. The idea is to balance out the tax benefits of leasing a luxury car versus purchasing it. That is where the table comes into play.

Lessees must increase their income each year of the lease to achieve parity with the depreciation limits. The income inclusion amount is determined by applying a formula to an amount obtained from the IRS table. The latter amount depends on the initial FMV of the leased auto and the year of the lease term. Although the $50,000 FMV threshold for 2019 is unchanged from 2018, many of the other values in the new table have changed since then.

For example, say you leased a car with an FMV of $56,500 on January 1, 2019, for three years and placed it in service that same year. You use the car for business purposes only. According to the table, your income inclusion amounts for each year of the lease would be as follows:

• Year 1: $26
• Year 2: $59
• Year 3: $86

The annual income inclusion amount may seem small compared to the depreciation deduction limits, but it represents a permanent tax difference that affects the effective tax rate but not book or taxable income. The depreciation limits, on the other hand, represent a timing difference that affects book and taxable income in the same way but at different times and doe not change the effective tax rate. The business will recover the timing difference through depreciation deductions or when it disposes of the auto.

Drive Carefully

The new tax rules for vehicles used in business generally are favorable but are not easily navigable. We can help steer you toward the best strategy given your current circumstances.

For more information, contact Seamus Donoghue at [email protected] or 312.670.7444. 

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