Under the Tax Cuts and Jobs Act (TCJA), businesses may claim an additional, first-year depreciation bonus equal to 100% of the depreciable basis of qualifying assets placed in service after September 27, 2017, and before January 1, 2023. The TCJA also increased the limit on bonus depreciation for passenger automobiles from $10,000 to $18,000.
An anomaly in the tax code, however, provides that, if a passenger auto’s depreciable basis exceeds that limit, the excess isn’t deductible until the first tax year after the end of the five-year recovery period, subject to a $5,760 annual limit. In other words, if your business acquires a $50,000 passenger auto in December 2019 and claims $18,000 in first-year bonus depreciation, it can’t begin deducting the remaining $32,000 until 2025, limited to $5,760 per year.
To avoid this result, the IRS recently established a safe harbor accounting method that allows businesses to deduct the excess amount over the recovery period (subject to applicable limits). The safe harbor, which is available for autos placed in service before 2023, doesn’t apply to businesses that claim Section 179 expensing for all or part of an auto’s cost.