Auto depreciation with bonus

[markorec]

I purchased an auto for $54,500 and placed into service on 1/1/23. (80% business use). Turbo Tax asked if I wanted to take bonus depreciation and I elected yes so I got 80% of $20,200= $16,160 depreciation for 2023. Forms show basis is now $54,500 x .8 = $43,600 - $16,160= $27,440

Transferring this info to my 2024 return, with same 80% business use,Turbo Tax says my depreciation is $2,790 for 2024. How is that being calculated? I assumed MACRS would take 40% of the remaining basis. Am I doing something wrong?

If I revise last years return to not elect bonus, I get a 2023 depreciation of $43,600 x 20% (first year)= $8,720. Transferring that gives me a 2024 depreciation of $43,600 - $8,720(first year) = $34,880 x 40% = $13,952. That makes sense.

Why is second year with bonus taken in first year only $2,790?

Any ideas?

[KrisD15]

Please revisit the mileage screen and enter the total miles driven, business miles, and personal use miles. 

TurboTax uses this information to determine the percentage of business use.  

I ASSUME you may not be entering the number of miles for 2024 to show an 80% business use.  

For example, the vehicle was valued 54,500 new, with a five year life which comes out to 10,900 per year potential depreciation. 

Using the vehicle 80% business would be 8,720 per year which is reflected in your "re-do" of the first year with no bonus depreciation. 

Again, please verify that the program is allowing 80% business use. 

[markorec]

I did enter mileage for both years and business use was 80% for both.

When I say $13,952 for second year (2024) that is based on 40% of the remaining basis of $34,880. First year basis (2023) is 20% of the $54,500= $43,600 x 80% = $8,720. Subtracting $8,720 from $43,600 leaves $34,880.

So that scenario I believe is correct.

Its when I take bonus depreciation the first year (2023) of $16,160 (80% of the max bonus of $20,200) that the second year (2024) is calculating wrong. The forms say my basis is correct at $43,600-$16,160= $27,440. But the depreciation for that basis is showing $2,790. I think it should be 40% of $27,440= $10,976 correct?

[AmeliesUncle]

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@markorec wrote:

Why is second year with bonus taken in first year only $2,790?

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My first thought that seems too HIGH.  But there are some variables and I may be doing the order of the math calculations slightly differently than the program when doing 80% business use.

This involves a weird, little-known rule that is going to surprise a lot of people this year (including many tax professionals).

For simplicity, my explanation will assume 100% business use (not your 80%).

You purchased a vehicle for $54,500.  The 80% Bonus depreciation is $43,600.  Plus 'regular' depreciation on other 20% could be roughly $2180 (depending on circumstances and options).  For a total depreciation of $45,780.  However, the vehicle limits only allows $20,200 of that $45,780.  The remaining $25,580 ($45,780 minus $20,200) can't be used until year SEVEN.  Yes, year seven.  It is weird.

That means years two through six will only use the remaining amount of $8720 ($54,500 minus $45,780) for depreciation during years two through six.

[markorec]

But that would mean the vehicle would take more than 10 years to fully depreciate. Who would elect the bonus when regular MACRS 200db 5 year depreciation could be taken instead?

[AmeliesUncle]

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@markorec wrote:

But that would mean the vehicle would take more than 10 years to fully depreciate.

Who would elect the bonus when regular MACRS 200db 5 year depreciation could be taken instead?

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Yes.

People who don't know about that weird rule (including you and many tax professionals).  It would have been better to elect OUT of Bonus and used Section 179 instead.

[AmeliesUncle]

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@markorec wrote:

Why is second year with bonus taken in first year only $2,790?

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I'm testing out the program, and I think I have confirmed that the program is giving too HIGH of a deduction.

As I mentioned in my first comment, you purchased a vehicle for $54,500.  The 80% Bonus depreciation is $43,600.  But the program is ignoring the 'regular' depreciation that should have been taken the first year.  It is using $10,900 (rather than $8720).  It is taking $10,900, using the year two percentage of 32%, resulting in $3488.  Then taking $3488 multiplied by your 80% business use to get $2790.

[markorec]

Yes the program did not add regular depreciation the first year. Just bonus depreciation with limit. 
One question though. When regular depreciation is limited in a given year the basis carries to the next year for a calculation and so on. If any depreciation left after 6 th year then you continue to so why does excess bonus depreciation from the limit not carry to year 2 and instead skip to year seven? I don’t see that explained anywhere in the depreciation instructions from the IRS. Can you point me to this weird rule?

[markorec]

Yes the program did not add regular depreciation the first year. Just bonus depreciation with limit. 
One question though. When regular depreciation is limited in a given year the basis carries to the next year for a calculation and so on. If any depreciation left after 6 th year then you continue to so why does excess bonus depreciation from the limit not carry to year 2 and instead skip to year seven? I don’t see that explained anywhere in the depreciation instructions from the IRS. Can you point me to this weird rule?