Just ran into something disturbing. Rev.Proc. 2019-13 states that if you claimed f.e. for 2018 $18,000 Sec. 179 then you only can claim depreciation again in the year 2024. It's different if you claimed bonus depreciation. The example is on page 10 of this Rev.Proc. I was wondering what the rules are if you only claimed $5,000 for Sec. 179 or any other amount then the full 1st year depreciation limit amount.
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I'll need to re-read it, but from what I remember, if you elected OUT of Bonus depreciation you are fine. That is because you aren't trying to claim over $18,000.
If you did NOT elect OUT of Bonus, then the 100% Bonus sort-of allows you to try to claim over $18,000, which is then limited by the Limits, which then throws the excess until after the Recovery Period. -
From what I understand there are 3 sets of rules: 1.Regular Depreciation claimed only - as before, 2. Bonus claimed - Safe Habor Rules apply which include taking depreciation every year, 3. Sec.179 claimed - Safe Habor Rules do not apply and regular depreciation starts after the end of the recovery period. It does not make any sense why there would be such a difference between bonus and Sec. 179.Comment
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Safe Harbor rules do not apply and the use of the "disallowed deductions" start after the end of the recovery period.Originally posted by Gretel View Post
Think of it this way: Start off pretending the Luxury Limits don't exist. Create a depreciation schedule for that vehicle. Now look at the limits. The rule is that the 'extra' amount over the limit is thrown to the back of the Recovery Period. This has always what the rules were.
Example #1 (using 2018 amounts): You buy a $60,000 vehicle, and you elect out of Bonus and don't use 179. Without the limits, the depreciation schedule would be this:- Year 1: $12,000
- Year 2: $19,200
- Year 3: $11,520
- Year 4: $6,912
- Year 5: $6,912
- Year 1: $12,000, limited to $10,000. The excess ("disallowed deduction") $2000 is tossed to the end of the Recovery Period.
- Year 2: $19,200, limited to $16,000. The excess ("disallowed deduction") $3200 is tossed to the end of the Recovery Period.
- Year 3: $11,520, limited to $9,600. The excess ("disallowed deduction") $1920 is tossed to the end of the Recovery Period.
- Year 4: $6,912, limited to $5,760. The excess ("disallowed deduction") $1152 is tossed to the end of the Recovery Period.
- Year 5: $6,912, limited to $5,760. The excess ("disallowed deduction") $1152 is tossed to the end of the Recovery Period.
Example #2 (using 2018 amounts): You buy a $60,000 vehicle, and you USE Bonus (or use the full §179 on the entire amount). Without the limits, the depreciation schedule would be this:- Year 1: $60,000
- Year 2: $0
- Year 3: $0
- Year 4: $0
- Year 5: $0
- Year 1: $60,000, limited to $18,000. The excess $42,000 is tossed to the end of the Recovery Period.
- Year 2: $0. Not limited, so there is no excess to toss to the end of the Recovery Period.
- Year 3: $0. Not limited, so there is no excess to toss to the end of the Recovery Period.
- Year 4: $0. Not limited, so there is no excess to toss to the end of the Recovery Period.
- Year 5: $0. Not limited, so there is no excess to toss to the end of the Recovery Period.
So that is how the 'usual' rule works, and it has been that way for many years. However, in previous years it generally hasn't been a factor because Bonus was only 50% (or less) and the Luxury Limits were much lower.
Now that we have 100% Bonus, as we see in Example #2, that excess $42,000 in year 1 gets tossed to the end of the Recovery Period. This special rule is to significantly reduce that effect.
Originally posted by Gretel View Post
The difference is that 100% Bonus forces you to take a huge amount in Year 1, but then the Luxury Limits force that 'excess' amount to the end of the Recovery Period.
With Section 179, you don't need to use the full amount for Year 1. Only the 'excess' amount goes to the end of the Recovery Period. So if you elect OUT of Bonus, you aren't being forced to claim a huge amount in Year 1.
Does that help at all, or am I just making it even more confusing?Comment
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Just lurking on this thread, but I think your explanation is excellent, TaxGuyBill.Comment
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Thansk, TaxGuyBill. I understood the logic when reading the Rev.Proc. But it does not make sense that you are allowed more depreciation not using bonus after two years than if you used the full allowable amount in the first year - see in your text. The Rev.Proc. actually allows a safe habor IF you reached the limit taking bonus. You still can take depreciation in the 2nd, 3rd year with limitations. BUT with Sec. 179 taken you are stuck with $18,000 for 5 years. If you take just regular depreciation you were allowed $47,120. Am I so far off and misunderstand?Originally posted by TaxGuyBill View Post
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That is correct, but the difference is that 100% Bonus FORCES the full amount in year one, but then due to the Luxury Limits they made this Revenue Procedure to counter-act not being able to claim anything in years 2 through 5.
But with §179, you are NOT forced to take the full amount. It is your choice how much to take. So if you were to elect out of Bonus and take §179, you should only §179 an amount to max year 1. Then the non-179 amount will be used in years 2 through 5. So for the $60,000 vehicle, you could CHOOSE to use §179 for $8000, then then other $52,000 would be depreciated as usual. Because you have the option to select how much §179 you take (and therefore you can use the non-179 amount for depreciation in years 2 through 5), there is no need for the Revenue Procedure to apply.
If you were to take the full amount using §179, that is your choice, but that choice will have poor results because you won't be able to claim anything in years 2 through 5. But because it was your CHOICE, they did not need to make a Revenue Procedure apply to it.
Does that make any sense?Comment
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Hm, one of us is dense and you know how much I trust and value your opinion. Here is part of the text from the Rev.Proc. The explanations about the Safe Harbor start on pg. 5, text below starts on the bottom of page 7. Text in bold and underlined is from the Rev.Originally posted by TaxGuyBill View Post
(1) Example 1 -- Application of § 280F(a) safe harbor method of accounting. In 2018, X, a calendar-year taxpayer, purchased and placed in service for use in its business a new passenger automobile that costs $60,000. The passenger automobile is 5-year property under § 168(e), is qualified property under § 168(k) for which the 100-percent additional first year depreciation deduction is allowable, and is used 100
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percent in X’s trade or business. X does not claim a § 179 deduction for the passenger automobile and does not make an election under § 168(b), (g)(7), or (k). X depreciates the passenger automobile under the general depreciation system by using the 200-percent declining balance method, a 5-year recovery period, and the half-year convention. X adopts the safe harbor method of accounting provided in section 4.03 of this revenue procedure. As a result:
(a) X must use the applicable optional depreciation table that corresponds with the 200-percent declining balance method of depreciation, a 5-year recovery period, and the half-year convention, for determining the depreciation deductions for the passenger automobile (see Table A-1 in Appendix A of IRS Publication 946);
(b) For 2018, X deducts depreciation of $18,000 for the passenger automobile, which is the depreciation limitation for 2018 under § 280F(a)(1)(A)(i) (see Table 2 in Rev. Proc. 2018-25). As a result, 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);
(c) For 2019 through 2023, the total depreciation allowable for the passenger automobile for each taxable year is determined by multiplying the annual depreciation rate in the applicable optional depreciation table by the remaining adjusted depreciable basis of $42,000, subject to the limitation under § 280F(a)(1)(A) for that year. Accordingly, for 2019, the total depreciation allowable for the passenger automobile is $13,440 (32 percent multiplied by the remaining adjusted depreciable basis of $42,000). Because this amount is less than the depreciation limitation of $16,000 for 2019 (see
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Table 2 in Rev. Proc. 2018-25), X deducts $13,440 as depreciation on its federal income tax return for the 2019 taxable year. For 2020, the total depreciation allowable for the passenger automobile is $8,064 (19.20 percent multiplied by $42,000). Because this amount is less than the depreciation limitation of $9,600 for 2020 (see Table 2 in Rev. Proc. 2018-25), X deducts $8,064 as depreciation on its federal income tax return for the 2020 taxable year. Below is a table showing the depreciation allowable for the passenger automobile under the safe harbor method of accounting for the 2018 through 2023 taxable years. X deducts these amounts.
Taxable year
Depreciation limitations under Table 2 of Rev. Proc. 2018-25
Depreciation deduction under the safe harbor
2018 MY Notes: This table shows that you can claim depreciation each year after max. in the first year.
$18,000
$18,000
2019
$16,000
$13,440 ($42,000 x .32)
2020
$ 9,600
$ 8,064 ($42,000 x .1920)
2021
$ 5,760
$ 4,838 ($42,000 x .1152)
2022
$ 5,760
$ 4,838 ($42,000 x .1152)
2023
$ 5,760
$ 2,419 ($42,000 x .0576)
TOTAL
$51,599
(d) As of January 1, 2024 (the beginning of the first taxable year succeeding the end of the recovery period), the adjusted depreciable basis of the passenger automobile is $8,401 ($60,000 unadjusted depreciable basis less the total depreciation allowable of $51,599 for 2018-2023 (see above table)). Accordingly, for the 2024 taxable year, X deducts depreciation of $5,760 for the passenger automobile (the lesser of the adjusted depreciable basis of $8,401 as of January 1, 2024, or the § 280F(a)(1)(B)(ii) limitation of $5,760).
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(e) As of January 1, 2025, the adjusted depreciable basis of the passenger automobile is $2,641 ($8,401 adjusted depreciable basis as of January 1, 2024, less the depreciation claimed of $5,760 for 2024). Accordingly, for the 2025 taxable year, X deducts depreciation of $2,641 for the passenger automobile (the lesser of the adjusted depreciable basis of $2,641 as of January 1, 2025, or the § 280F(a)(1)(B)(ii) limitation of $5,760).
(2) Example 2 -- Section 179 deduction claimed. The facts are the same as in Example 1, except X elects to treat $18,000 of the cost of the passenger automobile as an expense under § 179. As a result, this passenger automobile is not within the scope of this revenue procedure pursuant to section 3.01(4) of this revenue procedure. Accordingly, the safe harbor method of accounting in section 4.03 of this revenue procedure does not apply to the passenger automobile. For 2018, the 100-percent additional first year depreciation deduction and the § 179 deduction for this passenger automobile is limited to $18,000 under § 280F(a)(1)(A)(i) (see Table 2 of Rev. Proc. 2018-25). Therefore, for 2018, X deducts $18,000 for the passenger automobile under § 179, and X deducts the excess amount of $42,000 beginning in 2024, subject to the annual limitation of $5,760 under § 280F(a)(1)(B)(ii).
(3) Example 3 – Section 168(k)(7) election made. The facts are the same as in Example 1, except X makes an election under § 168(k)(7) to not claim the 100-percent additional first year depreciation deduction for 5-year property placed in service during 2018. As a result, the 100-percent additional first year depreciation deduction is not allowable for the passenger automobile. Accordingly, the passenger automobile is not
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within the scope of this revenue procedure pursuant to section 3.01(2) of this revenue procedure, and the safe harbor method of accounting in section 4.03 of this revenue procedure does not apply to the passenger automobile. For 2018 and subsequent taxable years, X determines the depreciation deductions for the passenger automobile in accordance with the general depreciation system of § 168(a), subject to the § 280F(a) limitations.Comment
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Maybe you could clarify where we aren't on the same page?
If you are referring to Example 2, in that example Section 179 was claimed but they did NOT elect out of Bonus. So Bonus is still in play. That means that without the limitations, they could claim $18,000 of §179 plus $42,000 of Bonus all in Year 1. But because the §179 makes this Revenue Procedure not applicable, that excess $42,000 can't be used until 2024.
But if in Example 2 they claimed $8,000 of §179 AND elected OUT of Bonus, then there is no 'excess' amount in year 1. So the other $52,000 can be depreciated as usual. So modifying the table above, it would look like this:- 2018: $18,000. We took $8000 of §179 plus $10,000 of regular depreciation ($52,000 x .2 = $10,400, but limited to $10,000).
- 2019: $16,000 ($52,000 x .32 = $16,640, but limited to $16,000)
- 2020: $ 9,600 ($52,000 x .1920 = $9984, but limited to $ 9,600)
- 2021: $ 5,760 ($52,000 x .1152 = $5990, but limited to $ 5,760)
- 2022: $ 5,760 ($52,000 x .1152 = $5990, but limited to $ 5,760)
- 2023: $ 2,995 ($52,000 x .0576) =$ 2995
- TOTAL $58,115
- (d) As of January 1, 2024 (the beginning of the first taxable year succeeding the end of the recovery period), the adjusted depreciable basis of the passenger automobile is $1,885 ($60,000 unadjusted depreciable basis less the total depreciation allowable of $58,115 for 2018-2023 (see above table)). Accordingly, for the 2024 taxable year, X deducts depreciation of $1,885 for the passenger automobile (the lesser of the adjusted depreciable basis of $1,885 as of January 1, 2024, or the § 280F(a)(1)(B)(ii) limitation of $5,760).
(e) As of January 1, 2025, the adjusted depreciable basis of the passenger automobile is $0.
Is that where we aren't on the same page, or is it something else? If it is something else, let me know and maybe we can figure it out.
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Thanks, for bearing with me. Are we looking at the same Example 2? My Example 2 states that TP claims $18,000 Sec.179 depreciation not $8,000 and is then prohibited from claiming depreciation until 2024.Originally posted by TaxGuyBill View PostComment
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Originally posted by Gretel View Post
Right. But that example did NOT elect out of Bonus, and THAT is what caused them not being about to claim anything until 2024. Because they did not elect out of Bonus, they are still entitled to use the full $60,000 ($18,000 of §179 plus $42,000 from Bonus) in year 1, before applying the Luxury Limits. But then the Luxury Limits kick in and throw the 'excess' $42,000 to the year 2024.
It is the Luxury Limits that mess things us and pushes depreciation to the year 2024.
But if you were to use §179, you would want to elect OUT of Bonus to avoid those bad results. Then you could depreciate the non-§179 over the next few years because the Luxury Limits aren't kicking in to mess things up. That is what I showed in my example.
In my example, I used $8,000 rather than $18,000 to maximum things. That is because you can already get up to $10,000 of 'regular' depreciation, so there is no point in claiming more than $8,000 of §179 in my example. If you WERE to choose $18,000 for §179 in my example (AND elect OUT of Bonus), I think the numbers would end up the same as in the original Example #1.
So the key is electing OUT of Bonus if you use §179. Example 2 in the Revenue Procedure did not do that, so it has those bad results. If you elect OUT of Bonus, then the results are much better.
Are we getting closer? :-)Comment
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Yes, yes, yes, I am happy now. Many thanks. But tell me one thing: How do you conclude that they did not elect out of bonus, because it's not mentioned?Originally posted by TaxGuyBill View PostComment
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Originally posted by Gretel View Post
Example #2 says "The facts are the same as in Example 1" [except for claiming §179]. And Example #1 says "is qualified property under § 168(k) for which the 100-percent additional first year depreciation deduction is allowable ... does not make an election under § 168(b), (g)(7), or (k)." §168(k) is Bonus depreciation, so it says they did NOT make an election under §168(k).
Yay, we figured it out. :-)Comment
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