How does depreciation work for a business vehicle placed in service in 2023 that claimed section 179?
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Depreciation for a business vehicle placed in service in 2023 that claimed a section 179 deduction is governed by several key rules under the Internal Revenue Code and related IRS guidance. Here’s a step-by-step explanation of how it works, including the interaction of section 179, bonus depreciation, and the annual depreciation limits for vehicles:
1. Section 179 Deduction
- Eligibility: The vehicle must be used more than 50% for business, and must qualify as section 179 property (generally, tangible personal property, including vehicles, used in an active trade or business).
- Deduction Limit: For 2023, the maximum section 179 deduction is $1,160,000, reduced dollar-for-dollar if the total cost of section 179 property placed in service exceeds $2,890,000. However, for passenger vehicles, there is a much lower cap due to the “luxury auto” rules.
- SUVs and Passenger Autos: For most SUVs (with a gross vehicle weight rating over 6,000 lbs but not more than 14,000 lbs), the section 179 deduction is capped at $28,900 for 2023. For passenger automobiles (GVWR 6,000 lbs or less), the section 179 deduction is subject to the annual depreciation limits under section 280F.
2. Section 280F “Luxury Auto” Depreciation Limits
- Annual Caps: For passenger automobiles placed in service in 2023, the maximum total depreciation deduction (including section 179 and bonus depreciation) is limited to:
- Year 1: $20,200 (if bonus depreciation is claimed)
- Year 2: $19,500
- Year 3: $11,700
- Each succeeding year: $6,960
- If no bonus depreciation is claimed, the Year 1 limit is $12,200.
- Section 179 is subject to these limits: Any section 179 deduction for a passenger automobile is included in the annual cap for that year. If the section 179 deduction exceeds the cap, the excess is not deductible in the first year but is carried forward and deducted in later years, subject to the annual limits.
3. Bonus Depreciation
- Interaction with Section 179: After applying section 179 (up to the annual cap), you may claim bonus depreciation on the remaining basis, but the total first-year deduction (section 179 + bonus + regular depreciation) cannot exceed the annual cap for that year.
- 2023 Bonus Depreciation Rate: For vehicles placed in service in 2023, the bonus depreciation rate is 80%.
4. Regular MACRS Depreciation
- After Section 179 and Bonus: Any remaining basis after section 179 and bonus depreciation is depreciated under MACRS, using the 5-year recovery period for vehicles, typically with the 200% declining balance method switching to straight line, and the half-year convention.
- Still Subject to Annual Caps: The annual deduction for each year (including all methods) cannot exceed the section 280F limits.
5. Example Calculation
Suppose you purchase a passenger automobile (not an SUV) for $40,000 in 2023, use it 100% for business, and elect section 179.
- Step 1: Section 179 Deduction: You elect to expense $20,200 (the maximum allowed for Year 1, including bonus depreciation).
- Step 2: Bonus Depreciation: If you have remaining basis after section 179, you may claim bonus depreciation, but the total first-year deduction (section 179 + bonus + regular) cannot exceed $20,200.
- Step 3: Carryover: Any section 179 or bonus depreciation not allowed in Year 1 due to the cap is carried forward and deducted in later years, subject to the annual limits for those years.
- Step 4: Subsequent Years: In each subsequent year, you may deduct up to the annual cap, until the vehicle is fully depreciated.
6. Special Rules
- Business Use < 50%: If business use drops to 50% or less, you must recapture (as income) a portion of the section 179 and bonus depreciation previously claimed.
- Listed Property: Vehicles are “listed property,” so strict substantiation of business use is required.
7. Recordkeeping
You must keep records of the date placed in service, cost, business use percentage, method used, and annual computations.
Summary: For a business vehicle placed in service in 2023 that claimed section 179, you may expense up to the annual cap ($20,200 for passenger autos, higher for certain SUVs), with any excess carried forward. Bonus depreciation may be claimed on the remaining basis, but the total first-year deduction cannot exceed the annual cap. Any remaining basis is depreciated under MACRS, subject to the annual limits. All deductions are subject to strict substantiation and recapture rules if business use drops below 50%.
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