Do depreciation limitations apply to luxury automobiles that are used as rental vehicles?
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Depreciation limitations under IRC §280F(a) generally apply to "passenger automobiles," which are defined as certain vehicles manufactured primarily for use on public streets and with a gross vehicle weight of 6,000 pounds or less. These limitations restrict the annual depreciation deduction that can be claimed for such vehicles, with specific dollar caps for each year of the recovery period, as adjusted for inflation.
However, there is a key exception for vehicles that are leased or held for leasing by a person "regularly engaged in the business of leasing such property." Under IRC §280F(c)(1), the depreciation limitations of §280F(a) and the alternative depreciation system requirement of §280F(b) do not apply to listed property (including passenger automobiles) leased or held for leasing by such persons.
The IRS has clarified, both in regulations and in technical advice, that a person is considered "regularly engaged in the business of leasing" if contracts to lease such property are entered into with some frequency over a continuous period of time, and the activity is not merely occasional or incidental. For example, a car rental company that enters into numerous rental contracts as part of its ongoing business would meet this standard.
Therefore, luxury automobiles used as rental vehicles by a business that is regularly engaged in the business of leasing (such as a car rental company) are not subject to the depreciation limitations of IRC §280F(a). Instead, these vehicles may be depreciated under the general MACRS rules applicable to their class life and recovery period, without regard to the annual dollar caps imposed on other passenger automobiles.
In summary, depreciation limitations do not apply to luxury automobiles used as rental vehicles if the taxpayer is regularly engaged in the business of leasing such vehicles. The vehicles are depreciated under the standard MACRS rules, not subject to the §280F(a) caps.
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