Special Depreciation Allowance (Override)

[Sirius]

Hi everyone,

I have an interesting situation with one of my clients and am having trouble finding an answer. The purchased a vehicle with a cost of $55K. This vehicle is >6,000 lbs and qualifies for a 100% deduction in the first year. However, before the deduction my client only has net income of $63K. If I deduct the entire vehicle in the first year I will be leaving much of his standard deduction on the table.

Am I allowed to "limit" the amount of depreciation using the "Current Special Depreciation Allowance" box in ProConnect? I did the math. If I only deduct $43K I will get to use the entire standard deduction AND have depreciation left over for future periods.

Thanks in advance!

[IRonMaN]

Special depreciation is all or nothing.  You can't cherry pick just the amount that you would like to use.

[Sirius]

Thanks IronMan!

I did find one example that may allow me to take a 50% deduction, if that is advantageous. See excerpt below...

"A taxpayer may elect to apply the 50% special depreciation allowance instead of 100% for the taxpayer’s first tax year ending after September 27, 2017."

[IRonMaN]

You might want to check out that source a second time and make sure that those percentages weren't referring to fiscal years ending in 2017.

[Sirius]

This excerpt is from the 2023 Quickfinder book.

[IRonMaN · Accepted solution]

But read what you posted ------ "first tax year ending after September 27, 2017".  Don't you think they might have been referring to the year 2017 rather than 2023?

[Sirius]

I see what you're saying now. I ready "first tax year ending" as "first tax year property was placed in service". Couldn't they have just said "in 2017 you can elect to use 100% or 50% for assets placed in service after September 27th".

Anyways, thanks for the help!

[IRonMaN]

But if they made it easy to read, anybody could do this job 😜

I'm glad you got things figured out.

[TaxGuyBill]

Consider electing OUT of Bonus and use Section 179 for whatever amount you want to use.

[Sirius]

Brilliant, this is exactly what I was looking for. Right after IronMan's reply I started looking at the Sec 179 deduction instead. Primarily because Kentucky doesn't conform to Bonus Depreciation rules.

Publication 946 specifically says you can elect to deduct "all or part of an assets costs". Additionally it goes to say, "If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct."

For those wondering, here's the difference in electing Bonus Depreciation vs Sec 179 in this example and why I'm going through all of this trouble in the first place for my client.

Federal Refund with Bonus Depreciation - $3,933

State Tax Liability with Bonus Depreciation - $2,190

Net Impact to Taxpayer - Refund of $1,743

Federal Refund with Sec 179 - $5,750

State Tax Liability with Sec 179 - $0

Net Impact to Taxpayer - Refund of $5,750

Difference - $4,007

There are two reason's why there are differences this large that I can see:

1.  Using Bonus Depreciation is reducing AGI to an amount that is impacting the potential of the Earned Income Credit and Child Tax Credit.

2. Kentucky doesn't conform with Bonus Depreciation rules.

If anyone sees something wrong with this approach or my reasoning please comment! I just want this information to be available to someone else that may have a client that fits a similar shape.

[sjrcpa]

So client purchases a $55K car and they get EIC?

What a system we have!