Depreciation Deduction for Passenger Automobiles Used For Business And Personal Travel
A recent announcement by the Internal Revenue Service impacts deductions for the
Taxpayers are generally aware of the position that they can claim a depreciation (cost recovery) deduction for the use of an automobile in business. The deduction is generally spread over a 5 year period. This has been the rule for the last many years.
Many taxpayers are also aware that, because of two Internal Revenue Code (Code) Sections, viz., Code Section 168 and Section 179, many types of personal property used in the trade or business can, within limits, be expensed, i.e., deducted fully—in the year the property was purchased and placed in service in the business. (These rules, which are not the subject of this Tip, have many exceptions and qualifications to come within these quick deduction rules. For more on these issues, see Levine, Mark Lee and Segev, Libbi Levine, Real Estate Transactions, Tax Planning, Chapter 13, Thomson/West 2020.)
However, one of the key limits, restricting the deduction for one year, relative to a business automobile that is employed in business and personal use, is under Code Section 280F. That Section of the Code limits the ability to claim the full deduction in the year the property is placed in service, since such vehicle is used on a personal basis as well as a business basis.
This limit under Code Section 280F allows more than the normal depreciation, but it does not allow a full one-year write off for the vehicle. Each year, Code Section 280F is updated to allow for the current year deduction of this type of property. This change is the focus of this Tip.
Under Revenue Procedure 2020-37, 2020-31 IRB, the Service has issued the following information for the depreciation that is allowed in 2020 for vehicles that qualify and are used in business for more than 50% of the use of the vehicle. That is, the vehicle is used for both business and personal use. However, the dominant use is for business. Assuming other basic requirements are met for the depreciation deduction, as referenced early in this Tip, the taxpayer can claim the following maximum amount of depreciation deduction for the vehicle in the 2020 tax year. This is according to the Procedure, Rev. Proc. 2020-37, mentioned above.
Amount of the limitation. Tables 1 and 2 contain the dollar amount of the depreciation limitation for each taxable year for passenger automobiles a taxpayer places in service during calendar year 2020. Use Table 1 for a passenger automobile to which the § 168(k) additional first year depreciation deduction applies that is acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer during calendar year 2020; and Table 2 for a passenger automobile for which no § 168(k) additional first year depreciation deduction applies. REV. PROC. 2020-37 TABLE 1 DEPRECIATION LIMITATIONS FOR PASSENGER AUTOMOBILES ACQUIRED AFTER SEPTEMBER 27, 2017, AND PLACED IN SERVICE DURING CALENDAR YEAR 2020, FOR WHICH THE § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION APPLIES Tax Year Amount 1st Tax Year $18,100 2nd Tax Year $16,100
3rd Tax Year $9,700
Each Succeeding Yr $5,760
REV. PROC. 2020-37 TABLE 2
DEPRECIATION LIMITATIONS FOR PASSENGER AUTOMOBILES PLACED IN SERVICE DURING CALENDAR YEAR 2020 FOR WHICH NO § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION APPLIES
Tax Year Amount
1st Tax Year $10,100
2nd Tax Year $16,100
3rd Tax Year $9,700
Each Succeeding Year $5,760
Thus, although limited under Code Section 280F, taxpayers can see the attractive depreciation deduction ceiling that is allowed for the business automobile in 2020.
Dr. Mark Lee Levine,
Professor, University of Denver