That Pesky Bonus Depreciation & Automobiles — 2011 Taxes

If you are in busi­ness, you prob­a­bly use your car, truck or SUV for some busi­ness pur­pose.  Indeed your busi­ness may have pur­chased a vehi­cle. How much of the pur­chase price you can deduct as a busi­ness expense dur­ing any given year is a com­plex cal­cu­la­tion, called depre­ci­a­tion, which con­gress has fur­ther com­pli­cated with the addi­tion of things like 100% Bonus Depre­ci­a­tion.  This blog talks how you depre­ci­ate a new car placed in the ser­vice in 2011 includ­ing what to do about that pesky 100% Bonus Depre­ci­a­tion.

NOTE:  What the IRS con­sid­ers a pas­sen­ger auto, usage lim­its on listed prop­erty, what you do when you dis­pose of an asset before it is fully depre­ci­ated and other detailed dis­cus­sions of MACRS & IRS depre­ci­a­tion are beyond the scope of this blog. The are other rules that need to be applied and if you do not know what they are, con­sult a tax pro­fes­sional.  That said…

When you pur­chase equip­ment for your busi­ness, and it has an expected life­time of more than a year, you gen­er­ally are NOT sup­posed to deduct the entire value of that pur­chase in the year you bought the equip­ment and placed it in ser­vice, but instead you are sup­posed to take the expense that pur­chase over the life-time of the equip­ment.  As you “use up” your pur­chase, you depre­ci­ate it.

Although there are other ways of depre­ci­at­ing busi­ness assets, the IRS has its own rules about how long a piece of equip­ment is sup­posed to last, and how much depre­ci­a­tion you can take for var­i­ous things. Cars and trucks are con­sid­ered “machin­ery” by the IRS and machin­ery has a life-time of 5 years, which actu­ally gets depre­ci­ated over 6 years.  But unlike other equip­ment you pur­chase for your busi­ness, pas­sen­ger auto­mo­biles are treated dif­fer­ently by the IRS-the IRS lim­its the amount of depre­ci­a­tion you can take when you pur­chase and use a pas­sen­ger auto­mo­bile for business.

2011 Pas­sen­ger Auto Lim­its per IRS Rev­enue Pro­ce­dure 2011–21

• For other types of machin­ery you would take a per­cent­age of the full pur­chase cost per the table and depre­ci­ate it-meaning that is the amount of expense you would be allowed for the pur­chase of equip­ment with given life-time. For a piece of equip­ment with an life-time of 5 years you would be allowed to take 20% of the pur­chase price for depre­ci­a­tion of machin­ery in the year the equip­ment was placed in service.
• But with pas­sen­ger autos the IRS says take a per­cent­age, but if it is more than the limit, $11,060 for cars, $11,260 for trucks & vans, then max­i­mum you depre­ci­a­tion you can take $11,060 for cars, $11,260 for trucks & vans.
• This amount you are allowed to depre­ci­ate is fur­ther reduced by the per­cent­age of per­sonal usage of the automobile-you apply the IRS limit then you apply your per­cent­age of busi­ness use.  The amount of depre­ci­a­tion attrib­ut­able to per­sonal use is not deductible and is lost.
• Finally, if your pur­chase price exceeds the max­i­mum amount allowed by the IRS over the 6-year period, then you will con­tinue to depre­ci­ate after 6 years still sub­ject to the annual max­i­mum until the car is com­pletely depre­ci­ated or oth­er­wise dis­posed of. Expen­sive lux­ury autos can take a long, long time to depre­ci­ate for tax purposes.

However, we have a wrin­kle.  For machin­ery includ­ing pas­sen­ger cars, trucks and vans pur­chased after Sep­tem­ber 8, 2010 and before Jan­u­ary 1, 2012 the Tax Relief, Unem­ploy­ment Insur­ance Reau­tho­riza­tion and Job Cre­ation Act of 2010 increased first year bonus depre­ci­a­tion for NEW equip­ment pur­chased and placed in ser­vice to 100%.

• You are required to take the spe­cial 100% bonus depre­ci­a­tion for new pur­chases in 2011
• If you do not want to take the spe­cial 100% bonus depre­ci­a­tion, you have to OPT OUT of it by attach­ing a state­ment to your tax return.
• Tech­ni­cally, the law that estab­lished MACRS/IRS depre­ci­a­tion did not take into account future laws lim­it­ing pas­sen­ger auto depre­ci­a­tion, nor bonus depreciation-therefore when 100% depre­ci­a­tion is taken, there is noth­ing left to depre­ci­ate subsequently…

IRS Safe Har­bor for cars cost­ing more than $18,433 & Light Trucks and Vans cost­ing more than $18,765

• Year 1, com­pute the MACRS/IRS depre­ci­a­tion at 100% and since it is higher than the IRS lim­its, use the IRS limit for depreciation
• Year 2 and beyond cre­ate an arti­fi­cial amount using the 50% bonus depre­ci­a­tion amount instead and depre­ci­ate that.

Exam­ple of a car pur­chased in 2011, used 100% for Busi­ness, and cost­ing $20,000

• This cal­cu­la­tion assumes 100% busi­ness use, if the vehi­cle is not used a 100% the cal­cu­la­tion only yields the max­i­mum that could be depre­ci­ated, and deduc­tion for per­cent­age of busi­ness use would be cal­cu­lated from this max­i­mum amount
• Year 1, the car costs 20,000, 100% depre­ci­a­tion is $20,000, you are lim­ited to $11,060 so you take $11,060 depreciation
• Year 2, refig­ure amount depre­ci­ated under the 50% bonus depre­ci­a­tion rules.  Year 1, 50% of 20,000 bonus depre­ci­a­tion is 10,000, so the amount for fig­ur­ing MACRS depre­ci­a­tion is $10,000.  When you add the bonus to depre­ci­a­tion to 20% reg­u­lar depre­ci­a­tion allowed for year 1 under MACRS is $12,000 less the limit of $11,060 yields $940 of unused depre­ci­a­tion you will take in Year 7.  You depre­ci­ate year 2–6 using the MACRS 5 year table on $10,000: $3,200, $1,920, $1152, $1152, $576 and in year 7, you take the remain­ing $940.  All of these com­puted depre­ci­a­tion amounts are less than the IRS lim­its for each year.

NOTE: For cars cost­ing $18,433 or less and for light trucks & vans cost­ing $18765 or less, this method DOES NOT WORK because no part of the orig­i­nal cost remains to be recov­ered after Year 6. In this case the IRS requires a Dou­ble Declin­ing Bal­ance method for years 2–6 com­pared to the amount yielded by the Straight Line method, and depre­ci­ate using the higher amount.  If the pre­ced­ing sen­tence sounded like total gob­blede­gook, you prob­a­bly want to use an accoun­tant to fig­ure your depre­ci­a­tion for tax purposes.

Call us before the IRS calls you.  Small busi­ness ser­vices and tax­a­tion are our busi­ness.  If you need help with this issue, or require other ser­vices,  Please give Art & Busi­ness Con­sult­ing a call.  We would love to engage you as a client.

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