Practitioners who are helping clients decide whether to take advantage of the new 100% bonus depreciation provision should be aware of how it affects depreciation of business automobiles. The Code section allowing bonus depreciation (IRC § 168(k)(1)) says that the adjusted basis of qualified property must be reduced by the bonus depreciation allowance (50% or 100%, as applicable) before computing the amount otherwise allowable as a depreciation deduction for the initial and all subsequent tax years.
The regulations define “remaining adjusted depreciable basis” as the unadjusted depreciable basis of qualified property reduced by the amount of bonus depreciation allowed or allowable. This remaining adjusted depreciable basis is then depreciated using either the applicable calculations (double-declining balance in the case of business autos) or the optional depreciation tables (Treas. Reg. § 1.168(k)-1(d)(2)). Clearly, the authors of these provisions never envisioned the advent of 100% bonus depreciation, which reduces the remaining adjusted depreciable basis to zero, leaving nothing to which to apply either the declining balance calculations or the table percentages.
Normally, this would not matter because the asset in question already would have been fully depreciated in the placed-in-service year by the application of the 100% bonus. However, the depreciation of business autos is subject to yearly dollar caps (section 280F(a)). Although the cap for the first year of service is increased by $8,000 when the auto qualifies for bonus depreciation, often the cost of a new auto will exceed the amount of the increased cap ($11,060 for 2011). Therefore, there will be unrecovered basis, amounting to the difference between the car’s cost and the first-year cap, but no way to depreciate this unrecovered basis in subsequent recovery years because the remaining adjusted depreciable basis after 100% bonus depreciation is zero. Instead, the unrecovered basis is deducted beginning in the first tax year after the recovery period (section 280F(a)(1)(B)). For a $25,000 car (assuming 100% business use and no section 179 expense taken), $11,060 depreciation would be deducted in the initial year, but the unrecovered basis of $13,940 could be expensed only beginning in the seventh year, subject to the section 280F cap each year. Years 2–6 would receive no depreciation deduction.
Anticipating this problem, Revenue Procedure 2011-26 provides a safe-harbor method for business automobiles that qualify for 100% bonus depreciation. Depreciation for the first placed- in-service year remains the lesser of 100% bonus depreciation or the first-year limitation amount. For subsequent recovery years, the taxpayer applies the applicable table rates to the remaining adjusted depreciable basis of the asset as if a 50% bonus had been claimed instead of 100%; that is, they are applied to 50% of the unadjusted depreciable basis rather than to zero. This produces reasonable depreciation deductions for years 2–6 and a correspondingly smaller amount of unrecovered basis to be expensed beginning in the seventh year.
If there is no unrecovered basis from the first year under the safe-harbor method, a taxpayer cannot use the optional depreciation tables for subsequent years and, instead, depreciates the automobile in those years using the double-declining-balance method, applied to the adjusted depreciable basis—that is, the adjusted basis after depreciation deductions.
For a detailed discussion of the issues in this area, see “Some Implications of 100% Bonus Depreciation,” by Darcy R. Geffen, CPA, in the October 2011 issue of The Tax Adviser.
—Alistair M. Nevius, editor-in-chief
The Tax Adviser
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