Tax Depreciation for Autos With Bonus

Question

I have 3 questions related to this topic. 
 
 Our company's tax advisor says that for luxury automobiles that have 100% Bonus (e.g. $18,000 for a car purchased in '18), they should have no more tax depreciation on them till year 7. The way Sage software does it, calculates depreciation each year after Bonus (starting with year 2). Is Sage doing it correctly? 
 If we want to choose to opt out of the new Safe Harbor for automobiles (included in Sage Fixed Assets 2019.1.2), how can we do that? The software is automatically applying the Safe Harbor to our 2018 purchased vehicles going forward. 
 The way Tax Depreciation was calculated prior to the Safe Harbor (when100% Bonus was in effect), it took 50% of the car's acquisition value and multiplied it by the IRS Publication 946 Rate Table rate. Where does the 50% come from? Why isn't it 100% since that is the Bonus Depreciation rate?

Delray · Answer

Hello Mindy Sue, 
 1. That is for Section 179. 
 2. Opt out? Not for the going forward calculation, but you can set your prior Accum amount so that your old calculation will still be there. See How to force prior accumulated depreciation for details 
 3. Due to the limits on the Property type A assets, there is no 100% 168 calculation, only the 50% which comes from various IRS code sections out there. For the whole story on that, See How Property Type A or T is calculated with 168 Allowance (9/28/2017-12/31/2022) which does make reference to those sections. 
 ~Delray

Delray · Answer

Yes, I agree. Since the Depreciable Basis is lower on those lower value vehicles than what it was prior to the safe harbor rules, the year to date calculations would also be lower. At least these asset will fully depreciation in the 5 year life, instead of the 8-10 years higher value vehicles will take to fully depreciate. 
 ~Delray

Delray · Answer

Hello Mindy, 
 All I really got is the How Property Type A or T is calculated with 168 Allowance (9/28/2017-12/31/2022) where the resolution section was mostly written by our folks to actually read the IRS documentation. If your Tax guy can provide documentation backing up his opinion, I will be happy to look it over and then forward it to those who decide. 
 As for the tax form: I can say that Line 26 of the 4562 is where all depreciation, bonus or regular calculation, for all Property Type A and T assets will appear and, since all these assets are listed separately, they usually appear on the 4562 attachment which the program produces. If this is for any other Tax form - we would have no knowledge. 
 ~Delray

Ann Donie · Answer

Hi Mindy Sue, 
 Sage Fixed Assets does not have a built-in option for opting-out of the safe harbor in Rev Prod 2019-13. It automatically applies the safe harbor calculation because it is tax advantageous - the auto is expensed faster with the safe harbor over the rest of its tax life than without it. If taxpayers opt out of the new safe harbor, the end result is that the autos will not be written off as quickly in the following tax years. For example, a $35,000 auto PIS in 2017 fully depreciates in 2028, using the safe harbor. Without the safe harbor, it fully depreciates in 2035 - seven years later. 
 This is because without the new safe harbor, $0 deduction is allowed in years 2 to 6 , and then up to $1,875 can be deducted in year 7+ until fully depreciated. Taxpayers cannot use the 2011 safe harbor, that was applicable in the past, for vehicles PIS in 2017 and later. (Although I do wonder if the IRS will provide leniency in 2018, since the safe harbor rules came out in 2019.) 
 There is a good article about the new safe harbor, with calculation examples, in Sage City - safe harbor rule changes. The examples use the 2018 luxury limits, but the same theory applies for autos that took 100% bonus in late 2017. 
 If desired, you can get the effect of not using the safe harbor ($0 depreciation in 2018 to 2022) by editing the 2017 vehicles to take $0.01 of Section 179 in their PIS year, 2017. When you edit Section 179 to be $0.01, the system will prompt you to choose a date on which you want the critical change to be effective, Choose the "Placed-in-Service" date. 
 Having $0.01 of Section 179 for the PIS year will result in $0 deduction for years 2 - 6, as Rev. Proc. 2019-13 does not allow the safe harbor calculation for years 2 to 6 if any Section 179 is claimed in the 1st year. For 2017, the application will calculate the remaining balance of the luxury limit, $11,159.99 as bonus depreciation. The total tax expense for each 100% bonus auto in 2017 will still be $11,160, the same as you claimed on your tax return, however, the SFA application will reflect that 1 cent of each auto was expensed as Section 179, with 1 cent less of bonus. Of course, you and your tax accountant will need to be comfortable with this approach. 
 For years 2 to 6, the program will calculate $0 depreciation expense for the autos, as it should be without the safe harbor. Years 7+ will calculate the lower of the net value or the $1,875 depreciation limit.

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