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Luxury Auto Depreciation Calculations when 100% Bonus Claimed |
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Revenue Procedure 2011-26 Revenue Procedure 2011-26 includes a number of provisions related to the Small Business Jobs Act of 2010 and the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (TRUIRJCA).
One of these provisions increased the bonus depreciation percentage from 50% to 100% for assets acquired during the period September 9, 2010 through December 31, 2011.
One of the side effects of the increase in the bonus percentage from 50% to 100% that specifically affects luxury autos is that it eliminates recovery deductions (other than the initial year when bonus depreciation is claimed) until the asset’s life has expired.
However, Revenue Procedure 2011-26 provides some relief to this effect by allowing “safe harbor” calculations that allow you to claim recovery deductions in the 2nd and subsequent years for luxury autos. This includes Trucks and Vans.
The information and calculations that follow are based on luxury autos. These amounts will be different for Trucks and Vans since they have different dollar caps.
If you wish to read this revenue procedure in its entirety, you can find it here. http://www.irs.gov/pub/irs-drop/rp-11-26.pdf
Why no deduction after initial year? The elimination of deductions after the initial year is caused by the dollar caps that are imposed on the asset in the year the asset is acquired.
Although the bonus provisions permit you to take 100% of the asset’s cost as a deduction in the year of acquisition, the dollar cap prevents you from claiming the entire cost as a current deduction. However, the IRS treats the “allowable” deduction as 100% of the assets cost, consequently the “allowed or allowable” rule determines the amount remaining for deduction in subsequent years as zero. That is, until the end of the asset’s life.
At that time, you can claim the remaining undepreciated basis as a current deduction at the rate of $ 1,775 per year. This amount is based on the dollar caps that apply to luxury autos acquired during this time period whose life has expired.
To summarize, in the acquisition year, you claim 100% bonus depreciation subject to the dollar caps and then get no further deduction until the asset’s life has expired.
Safe Harbor Calculations This onerous treatment of luxury autos (and trucks and vans) has been modified by this revenue procedure to allow you to claim deductions during the asset’s life by applying “safe harbor” calculations. While complex, they permit additional deductions in the 2nd and subsequent years without waiting until the expiration of the asset’s life.
Depending on the cost of the luxury auto, one of two methods is used to calculate deductions in years 2 through 6, at which time the asset’s life will have expired and you can continue to depreciate at the rate of $ 1,775 per year.
Unrecovered Basis after Year 1 In order to determine the method used to calculate depreciation deductions in subsequent years, you must first determine the unrecovered basis after year 1. Unrecovered basis is determined:
For example, if an auto costs $ 25,000, the unrecovered basis after year 1 is calculated as follows:
Based on the above calculation to determine unrecovered basis, if the asset’s cost is $ 18,450 or more, then there will be an unrecovered basis after year 1.
If the asset’s cost is equal to the dollar cap or less than the dollar cap, you should get the full amount as a current deduction in the year of acquisition. The safe harbor calculations will not be needed.
Method 1 - Unrecovered Basis > 0 If there is unrecovered basis after year 1, then the 2nd and subsequent years is calculated by applying the percentages from the tax tables to the basis remaining after deducting the 50% bonus depreciation amount. For example, on a $ 25,000 auto used 100% for business, the 2nd year recovery amount is calculated like this: $ 12,500 X 32% = $ 4,000. If the amount ($ 4,000) calculated is less than the 2nd year cap ($ 4,950), then you can deduct that amount. Otherwise, you are limited to the dollar cap.
Again, based on the math involved, if an asset’s cost is more than $ 30,625, you won’t see any reduction in the recovery deduction in the 2nd through the 5th year. The 6th year (the last year of the asset’s life) will be less than the dollar cap.
Method 2 - Unrecovered Basis <= 0 If there is no unrecovered basis after year 1, then the 2nd and subsequent years is calculated by applying the double-declining balance method to the basis remaining at the end of each year. Once again, you are limited to the lesser of the annual dollar caps or the amount calculated using the DDB method.
Most assets that will be subject to this method will range in cost from the dollar cap, $ 11,060 until you reach the amount when the unrecovered basis results in a positive number, $ 18,450.
Trucks & Vans Affected Also Trucks and Vans are also affected by the provision of this revenue procedure since they are also subject to dollar caps each year. Consequently, you must apply the “safe harbor” calculations in the 2nd and subsequent years to get recovery deductions.
Asset Keeper, Version 2011 and Safe Harbor Calculations Asset Keeper, Version 2011, dated November 28th or later, will use the safe harbor provisions in the 2nd and subsequent years to calculate recovery deductions. |
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