Vehicle Depreciation and Bonus SDA

[ForbidInjustice]

Hello.  My 2022 TT file was corrupted so I couldn't import. I requested a complete 2022 return from the IRS and started over from scratch, trying to figure out exactly what was done last year.

I am self-employed.  I bought a car in 2022 and placed it into service in 6/2022.  Last year on TurboTax, I never saw anything about Special Depreciation so I never took it.  I never attached a statement declining anything, either.  I see a Section 179 Deduction of $12,750.  0 depreciation.

Am I to assume that I used Actual Expenses method for this vehicle?  Oddly enough, I had 2 vehicles and the total mileage of them * 0.625 per mile = the deduction I took on Schedule C, Line 9 (Car and truck expenses.)  If the old car was Standard and the new car appears to be Actual, how could I have deducted mileage on both?

Second issue.  When I go into Form View, Car & Truck Wks, Part VI, Line 36a(2), it says Elect 50% in place of 100% Special Depreciation Allowance.  I thought SDA was only for the first year?  If so, why is TurboTax allowing me to select Yes/No?  Based on the year it was placed into service (2022), shouldn't it know that?

It seems backwards that if I select Yes, my refund jumps by $400 or so.  Shouldn't my refund go down if I were to elect 50% rather than 100%?

[AmeliesUncle]

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@ForbidInjustice wrote:

I never attached a statement declining anything, either. 

I see a Section 179 Deduction of $12,750.  0 depreciation.

Am I to assume that I used Actual Expenses method for this vehicle?  Oddly enough, I had 2 vehicles and the total mileage of them * 0.625 per mile = the deduction I took on Schedule C, Line 9 (Car and truck expenses.)  

Second issue.  When I go into Form View, Car & Truck Wks, Part VI, Line 36a(2), it says Elect 50% in place of 100% Special Depreciation Allowance. 

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If you used Actual Expenses but didn't attach a statement saying you elect out of Bonus, that could be a problem.   But first let's figure out the rest of it.

Where do you see the Section 179 deduction?  Are you looking at line 6 of Form 4562?  If Schedule C is showing $0 of depreciation, that indicates you did NOT take Section 179 (or Bonus) and that you used the Standard Mileage Rate.

That is referring to if you made that 50% election in the year it was placed in service.  But that wasn't an option in 2022, so it shouldn't even let you do anything with it.   If you had made that 50% election (if it was used and allowable, which is was not), you would have more to depreciate this year which is why your refund would increase.

In summary:  Based on the fact that Schedule C shows $0 of depreciation and the vehicle expenses match the Standard Mileage Rate, I think you used the Standard Mileage Rate.  But we need to figure out what you are looking at when you say you see Section 179 of $12,750 (I suspect you are looking at the wrong line and you are misinterpreting what you see).

[ForbidInjustice]

Hello and thanks for the reply!  Schedule C, Part II, Line 13, Depreciation and section 179 expense deduction shows $12,750 and was included in the total expenses (Line 28).  Form 4562, Part I, Line 12, Section 179 expense deduction shows $12,750 as well.  Line 6 of 4562 Part I (a, b, c) are all blank. 

I've been deducting vehicle expenses for business for a decade or more and always used Standard, so it makes sense I would have done so for 2022... but 2022 was the first year I was deducting for a brand new vehicle.  So in the back of my mind I thought maybe I did Actual to get a larger deduction?  My rationale: Top of 4562 (Page 2) says to only complete 24a, 24b, columns a-c of Section A if you're using standard mileage rate.  Well, TT filled in columns (d-i) as well.  Based on that, I assumed standard mileage rate wasn't used.

Form 4562:  Lines 8, 9, 12 all show $12,750

Form 4562:  Section A, Line 26, (h) Depreciation/deduction shows 0 but (i) Elected section 179 cost is $12,750

Both vehicles total to 9060 miles  * 0.625 = 5663.  Deduction on my Schedule C is 5665.  Difference of 2.  It's only 2, but this irks me because it shouldn't be close, it should be exact if I used standard mileage rate, right?

At this point, I'm just failing to understand how there seems to have been a Section 179 deduction, yet the mileage seems to point to Standard having been used.

[AmeliesUncle]

Okay, the 4562 and Schedule C both indicate you took Section 179.

Lines 30-36 of Form 4562 only shows the two vehicles, right?  Not an accidental third vehicle?

If lines 30-36 of Form 4562 properly shows only your two vehicles, it is possible that your Actual Expenses (gas, insurance, repairs, etc., not counting depreciation) just happened to correspond with the amount of Standard Mileage Rate.  Weird coincidence, but possible.   Do you still have your records of expenses to see if that is true?

As for the $2, the deduction on Schedule C is often higher than the Standard Mileage Rate (although ONLY $2 for that large amount of miles is a bit odd).  The business portion of vehicle loan interest, tolls, parking and the vehicle registration tax are all added in addition to the Standard Mileage Rate.  But as I mentioned in my previous paragraph, at first glance it seemingly is a coincidence that your Actual Expenses are pretty close to the same as the Standard Mileage Rate (besides depreciation).

If you used the Actual Expenses in the first year, that means you must continue to use that method.  You are not allowed to use the Standard Mileage Rate for that vehicle.

Am I correct that the business portion of the total vehicle cost was higher than $12,750?  Or was that the total cost of the business portion of the vehicle?

Now we turn the conversation back to Bonus depreciation.  You said you did NOT make the election to elect out of Bonus.  The short story is that really messes up your depreciation for five years and you won't be able to start to depreciate the rest of it until the 6th or 7th year.  I think it may be an option to amend to undo the Section 179 election for 2022 though; that is likely to have better results (it would give you Bonus depreciation for 2022 and then regular depreciation for the following years; however depending on the circumstances the Bonus amount for 2022 could be different than your Section 179 amount).

[ForbidInjustice]

There's no third vehicle on the 4562, only the two.  Haven't located all of my records, as many of them were in the drive that got corrupted w/ the TT22 file, but I do see where I noted my gas expenses.  I guess there would be no reason to do that unless I'd been tallying them for the purposes of the Actual expenses method.  Yes, I also find it a weird coincidence that my Actual expenses totaled to within $2 of what the Standard would have been, but given that I took a Section 179, it's the safest assumption at this point.  I don't see why TT would have allowed me to take a Section 179 and do Standard for that vehicle.  If it did, I'd think the IRS would have just rejected the return as it'd be a pretty obvious error.

The total vehicle cost was $37,770.  The business portion was 66.48%, total of $12,764.  That results in Form 4562, Part V, Section A, (e) Basis for depreciation showing $12,345

So what has caused depreciation for this year to still be 0?  Simply because I did not take the bonus depreciation that I should have?

Is it best to just fill out a 1040X on my own if I choose to amend?  This 2023 return (extension) is due in 6 weeks so I don't have time to wait on them to process it before I submit the 2023.  I guess the only other option would just be to not depreciate over the next 5 years.  I mean, the basis is only $12,345 anyway so it's not like it's a ton of money split over 5 years.  I'm willing to accept that loss to make this process less complicated.  I just don't want the IRS on my case because I didn't elect for bonus SDA nor submit a statement electing out of it.

[AmeliesUncle]

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@ForbidInjustice wrote:

So what has caused depreciation for this year to still be 0?  Simply because I did not take the bonus depreciation that I should have?

Is it best to just fill out a 1040X on my own if I choose to amend?  This 2023 return (extension) is due in 6 weeks so I don't have time to wait on them to process it before I submit the 2023. 

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It is an odd quirk in the law for vehicles under 6000 pounds.  The IRS created a work-around for vehicles that qualify for 100% bonus depreciation, but that work-around isn't allowed when you also take Section 179.  You should take one or the other. 

Yes, you could amend.   There is no need to wait to file 2023 until the amended 2022 return is processed.  Just file 2023 based on the amended 2022.  But it is too late to elect out of Bonus now, so the only option would be to amend to remove Section 179 (and only use Bonus).  The end tax result for 2022 is likely the same, but it would allow you to use the work-around rule and depreciate it in 2023 and the next several years.

[ForbidInjustice]

So as I've been reading, it looks like I really do need to amend my 2022 because if I didn't take Bonus SDA and didn't elect out of it, I'm "using an improper accounting method", which is unsettling.  Alternatively, I'd have to file Form 3115 to change accounting method entirely, which looks like a huge headache.

To amend, I should only need to include any form that has changed, correct? 1040X, Schedule C, Schedule SE, and 4562, from what I can tell.

In calculating the Bonus SDA, my vehicle cost $37,770, business use 66.48%, for a basis of $25,109 on 4562 Column (e) since Section 179 deduction is now 0.

According to 4562 instructions, limit on depreciation and section 179 expense for passenger automobiles is $19,200 if taking SDA.

So does this mean I take a full $19,200 and depreciate the remaining $5909 over 5 years, starting with 2022 ($5909 * 0.20)?  That huge deduction would put me at a net loss for 2022.

If this is just as simple as recalculating depreciation and adjusting a few forms, looks like I'll be able to do it myself.  But it seems like amending is certainly the thing to do here.

[AmeliesUncle]

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@ForbidInjustice wrote:

I didn't take Bonus SDA and didn't elect out of it, I'm "using an improper accounting method"

To amend, I should only need to include any form that has changed, correct? 1040X, Schedule C, Schedule SE, and 4562, from what I can tell.

limit on depreciation and section 179 expense for passenger automobiles is $19,200 if taking SDA.

So does this mean I take a full $19,200 and depreciate the remaining $5909 over 5 years, starting with 2022 ($5909 * 0.20)?  That huge deduction would put me at a net loss for 2022.

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You are not using an incorrect method.  Even though you don't realize it, you are still using Bonus.

The limit is $19,200 based on 100% business use.  At 66.48% business use, the limit is $12,764.  That is why your Section 179 was $12,764 - you maxxed out the limit.  That is also why I said that most likely there won't be any tax change on your 2022 return.

You hit the max amount, so the remaining amount starts to be depreciated in 2023.  There would not be any additional in 2022.

[ForbidInjustice]

Thank you, the math is making sense now.  I figured it's best to ensure my 2022 reflects the SDA since they did say it's mandatory and I didn't elect out.  I've decided to amend my 2022 return and have gotten the ball rolling on those forms.  So now I'm completing 2023 in TurboTax to reflect what my amended 2022 shows. 

I found the place on Form View, Car & Truck Wks, Part VI, 36a (i) to enter prior year SDA taken, so I put in $12,764.  It calculates a Depreciation deduction of $3950 for 2023.

$3950 represents the remaining depreciable basis of $12,345 * 0.32.  I get it-- this is technically year 2, not year 1.  So what happens to the 20% depreciation that I couldn't claim on my 2022, since I had already hit the maximum of $12,764 with SDA alone?  Does that 20% carry over to this year or do I claim it at another time?

[AmeliesUncle]

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@ForbidInjustice wrote:

$3950 represents the remaining depreciable basis of $12,345 * 0.32. 

So what happens to the 20% depreciation that I couldn't claim on my 2022, since I had already hit the maximum of $12,764 with SDA alone?  Does that 20% carry over to this year or do I claim it at another time?

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Most likely your business percentage in 2023 is different than it was in 2022, so your depreciable Basis should be different.

The 20% will eventually be used, but possibly not until after the 'usual' depreciation period of 5-6 years.  The odd quirk in the law would push it to year 7, but the IRS work-around thingy may be able to use it earlier (offhand, I don't remember the specifics of the work-round thingy without looking it up, but the software should hopefully calculate it correctly).

[ForbidInjustice]

Got it.  Everything is looking straightforward and the math is making sense.

Looking over the forms to amend my 2022, it appears Schedule C and Schedule SE are going to be exactly the same.  Schedule C will still have the $12,764 on Line 13.  Schedule SE looks unchanged as well because as you said, same tax liability.

So I will need to mail in a 1040X explaining the changes as well as a reworked 4562 taking the Bonus SDA instead of Section 179.  Just those 2 forms should be it?

Thanks again.

[AmeliesUncle]

Hypothetically, yes.  But personally, I would include the Schedule C as well, even though it hasn't changed.  It may make it clearer to the IRS employee that it has not changed.