Depreciation Calculation Issues

[danielmalkin]

I was tying out a depreciation schedule and noticed something odd with one asset.

A truck under 6000lbs was placed in service July 2017.  Cost basis was $38,975 and took max Section 179 of $11,560 in 2017 (so depreciable basis of $27,415).  Code M2 was used for 'type of asset' on the worksheet - which is truck, van, or SUV under 6,000 lbs.

In 2018 it calculated depreciation at $3,495 and I'm not quite sure why.  The second year auto limit for trucks/vans placed in service in 2017 is $5,700 so it is not hitting truck/van auto limitations.  It is a farming vehicle so using 150DB method but by my calculations it should still be much closer to the auto limitation.

Is it possible there is something going on with ProSeries depreciation calculation?  Is there maybe some component to the equation I am missing?  Any advice/help would be appreciated!

[Terry53029]

What kind of truck, to my knowledge all 1/2 ton full size pickups are over 6000 # 

[danielmalkin]

2017 Toyota Tacoma - the GVWR was listed at 5,600 lbs when we looked it up.

[TaxGuyBill]

It is due to Bonus Depreciation.

If you used Section 179, did you elect OUT of Bonus Depreciation in 2017?  And out of curiosity, why did you choose §179 over Bonus (perhaps State reasons?)?

I'll give you the explanation after you confirm if you elected OUT of Bonus or not (the amount indicates that you did not elect out, so Bonus is in play).

[danielmalkin]

@TaxGuyBill we did not elect out of Bonus Depreciation in 2017, that is correct. 

And yes for state reasons, this is relating to a CT client and the add-back for Bonus depreciation is 100%  in year elected whereas the add-back for Section 179 is 80% - giving them at least some kind of benefit on the state side in the year taken.

[TaxGuyBill · Accepted solution]

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@danielmalkin wrote:

Cost basis was $38,975 and took max Section 179 of $11,560 in 2017 (so depreciable basis of $27,415). 

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Because you did not elect our of Bonus, you are wrong about your depreciable Basis (for optimal results, you should have elected out of Bonus).

First year is $11,560 of §179 plus $13,708 of Bonus depreciation (50%).  That leaves your depreciable Basis of $13,708.  That gives about $3,495 for the second year using 150%DB.

Between §179 and Bonus, the preliminary amount for the first year is $25,268.  The Luxury Limits reduce then that to $11,560.  But that 'extra' $13,708 does NOT get added to the depreciable Basis for the next 5 years.  It goes to the END of the Recovery Period, when it can then be used (up to the Limits).

For future reference:  If you had elected OUT of Bonus, it would have been better.  And also only claim $8,000 of Section 179 which would further increase the depreciable Basis.  In the first year, you would still 'max out' the Luxury Limits because you would have also used $3,560 of 'regular' first-year depreciation.

[danielmalkin]

@TaxGuyBill ahh, that is what I was missing!  Thank you very much, I appreciate you explaining it so thoroughly.

[KarenCPA-CFE]

I had the same situation from a truck that was bought in 2015 and the depreciation schedule is taking it out until 2032. Unfortunately, I did not notice until this year. Trying to figure out the best approach for correcting or getting it off the books. Any suggestions?

[TaxGuyBill]

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@KarenCPA-CFE wrote:

I had the same situation from a truck that was bought in 2015 and the depreciation schedule is taking it out until 2032. Unfortunately, I did not notice until this year. Trying to figure out the best approach for correcting or getting it off the books. Any suggestions?

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I don't think you are hitting the same problem.  I think you are just hitting the low pre-2008 Luxury Limits.  There is nothing to correct and nothing you can do about it, other than selling the vehicle.

[Zack2]

Do you have the IRC code or other source that says that you can't claim depreciation for 5 years after taking the section 179 deduction? I'm having trouble finding anything other than this post saying that.

Thank you!

[TaxGuyBill]

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@Zack2 wrote:

Do you have the IRC code or other source that says that you can't claim depreciation for 5 years after taking the section 179 deduction? I'm having trouble finding anything other than this post saying that.

Thank you!

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§280F(a)(1)(B)(i).  In a nutshell, that says any depreciation that is not allowed due to the Luxury Limits is not usable until after the Recovery Period.

Because 100% Bonus depreciation tries to claim all of the depreciation but gets limited due to the Luxury Limits, then everything else is suspended until after the Recovery Period.

Because of that weird thing, the IRS created a special work-around because of the 100% Bonus depreciation.  But the IRS says that work-around does NOT apply if both Section 179 and Bonus are used.