Wrong Vehicle Depreciation in Turbox

[QPC]

I bought a passenger automobile with 100% business purpose in 2023 at $39700 and took special depreciation allowance of $20200. For 2024, I should be able to deduct $19,500 but TurboTax says I can only take $2541. Here is my reasons why I think Turbo tax is wrong but I need someone to confirm:

• Luxury Auto “Cap” Rules
  For passenger automobiles placed in service during 2023, the IRS sets “luxury auto” depreciation caps. With bonus depreciation, the first-year cap was $20,200 (which aligns with the amount I claimed).

• Remaining Adjusted Basis

  • Original cost: $39,700

  • 2023 depreciation: $20,200

  • Remaining basis going into 2024: $39,700 – $20,200 = $19,500

• Second-Year Limit for 2024
  For a vehicle placed in service in 2023, the second-year depreciation cap is $19,500.

• Actual Depreciation in Year 2
  I can claim the lesser of (a) the second-year cap ($19,500) or (b) your remaining adjusted basis ($19,500). In this case, both are exactly $19,500, so I can fully depreciate $19,500 in 2024.

[KrisD15]

This is the way Bonus (or Special) depreciation works-

You purchased a vehicle for 39,700 and used Special Depreciation which for 2023 was 80%.

That means 31,760 was 2023 depreciation. 

The 2023 limit was 20,200, so that was all you could claim, but the basis was reduced by 31,760 to 7,940.

Second year you can depreciate 32%

.32 x 7940 = 2,540,80 (rounded to 2,541) cap is 19,500, so all of 2,541 is allowed

Third year is 19.2%

Third and fourth 11.52%

Fifth 5.76%

After the fifth year, the remain basis can be depreciated.

According to the IRS:

"Deductions After the Recovery Period

If the depreciation deductions for your automobile are reduced under the passenger automobile limits, you will have unrecovered basis in your automobile at the end of the recovery period. If you continue to use the automobile for business, you can deduct that unrecovered basis after the recovery period ends. You can claim a depreciation deduction in each succeeding tax year until you recover your full basis in the car. The maximum amount you can deduct each year is determined by the date you placed the car in service and your business/investment-use percentage. See Maximum Depreciation Deduction, earlier.

Unrecovered basis is the cost or other basis of the passenger automobile reduced by any clean-fuel vehicle deduction, electric vehicle credit, depreciation, and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use and the passenger automobile limits had not applied."

[QPC]

That's a GREAT and CLEAR explanation @KrisD15 ! So, in this case, should depreciation in the income statement be keep the theoretical value, i.e. 31,760 in 2023 and 7940 in 2024, then let turbo tax handle the maximum allowed value? Or I need to adjust the depreciation on my book to match the IRS limit?

[KeshaH]

You have two options:

1. Don't adjust your books: you can keep the depreciation records on your books the same as what you've already calculated. This will create a variance in the value of your assets that you'll need to track and account for when you dispose of the asset.

2. Adjust your books: if you want your books to match your tax return (which many business owners prefer for simplicity), you can adjust your depreciation records to use the same IRS-allowed amounts each year.

@cupidchan