The IRS issued long-awaited changes to the vehicle safe harbor tax law rules on February 13, 2019, after Sage released its Sage Fixed Assets 2019.1 updates. Know that Sage is aware of these changes, and they are planning an update for these new rules to enable you to take advantage of the maximum available depreciation deduction.
Here’s an overview of the vehicle safe harbor tax law changes of 2019 and the impact on Sage Fixed Assets.
The updated vehicle safe harbor tax law rules (Rev. Proc. 2019-13) are for taxpayers claiming 100% first-year bonus depreciation on vehicles subject to the luxury car depreciation caps under Sec. 280F(a). The rules affect the depreciation calculations for year two to the end of a vehicle’s recovery life (typically year six). The safe harbor does not apply when the taxpayer elects Sec. 179 treatment.
What’s the Impact
Sage Fixed Assets – Depreciation follows the previously existing vehicle safe harbor rules, as they were the best available guidance at the time. The new safe harbor rules provide for higher depreciation deductions for Autos and Trucks (Property types A and T) from year 2 to the end of vehicle’s recovery life.
The vehicle safe harbor is elected in the second year of the property’s life. Thus, for many taxpayers subject to the rules, they become relevant for their 2019 tax return. If a taxpayer put qualifying vehicles in service in the last quarter of 2017, when 100% bonus became available under the Tax Cuts and Jobs Act of 2017 (TCJA), the adjustment will affect their 2018 returns. Affected taxpayers may choose to extend their 2018 tax return to allow time for the adjustment.
A taxpayer places a $60,000 auto in service in 2018 which is subject to the luxury auto caps. In 2018, only $18,000 can be deducted under 100% expensing, due to the 1st year cap. In year 2, $13,440 is deducted because the safe harbor calculated amount is less than the 2nd year cap of $16,000.
Under the prior rules (currently in place in Sage Fixed Assets 2018.1 and 2019.1), the 2nd year calculation is $9,600. Thus, $3,840 more is deductible in year 2 under the new rules. At the end of 2023, the unrecovered basis of the auto is $8,401 with the new safe harbor and $18,000 under the prior rules. The unrecovered amount is deducted starting in 2024, with a cap of $5,760 per year.