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?

[AmeliesUncle]

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@markorec wrote:

Yes the program did not add regular depreciation the first year.

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?

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I've been discussing this with a colleague, and the program may be right.  I may have misunderstood/misremembered that the 'regular' depreciation from year 1 does not affect the Basis for years 2 through 6 are, so TurboTax might be right.

It is in IRS Publication 463.  It won't let me post the direct link (this forum censors it because it thinks it contains a telephone number or social security number), but you can look for the subheading "Deductions in years after the recovery period". There are several paragraphs and an example, although it isn't particularly easy to read.

https://www.irs.gov/publications/p463#en_US_2023_publink100034033

In the Tax Code, it is in Section 280F(a)(1)(B):

(B) Disallowed deductions allowed for years after recovery period

(i) In general

Except as provided in clause (ii), the unrecovered basis of any passenger automobile shall be treated as an expense for the 1st taxable year after the recovery period. Any excess of the unrecovered basis over the limitation of clause (ii) shall be treated as an expense in the succeeding taxable year.

The "Recovery Period" lasts six years (it is actually five years, but the first and last year are half-years, making it six tax years).  It says the "Unrecovered Basis" goes to "after the recovery period" (year 7).

https://www.law.cornell.edu/uscode/text/26/280F

[markorec]

So I ran a test to see what was happening. First I entered a vehicle into service in 2022 two different ways, with standard 5 yr depreciation and with first year bonus depreciation. I manually calculated the depreciation for each way for 3 years (2022, 2023 and 2024) and compared that to what Turbo Tax calculated. Everything matched for all 6 variations.

Then I entered the same vehicle into service in 2023 two different ways, with standard 5 yr depreciation and with first year bonus depreciation. Again I manually calculated the depreciation for each way, but only for 2 years (2023 and 2024) and compared to what Turbo Tax calculated. 3 out of 4 matched. The one that didn't match was the second year (2024) depreciation when bonus was taken in year 1 (2023). It still calculates to $2,790 when the manual calculation comes to $8,781. The tax law hasn't changed and the only thing different is the max limit for bonus increased from $19,200 to $20,200.

I think the 2024 version of Turbo Tax has an error that needs to be updated. See my chart below for all calcs.

Depreciation Analysis
Purchase Price	$54,500
Business Use	80%
	Proposed Calculation	Est Value	Turbo Tax Calculated		Proposed Calculation	Est Value	Turbo Tax Calculated		Proposed Calculation	Est Value	Turbo Tax Calculated
			2022				2023				2024
First Year Standard Dep
	$54,500 x 80% x 20%	$8,720	$8,720		$54,500 x 80% x 32%	$13,952	$13,952		$54,500 x 80% x 19.2%	$8,371	$8,371
First Year Bonus Dep
	Max $19,200 x 80%	$15,360	$15,360		($54,500 x 80% ) -$15,360	$9,037	$9,037		$28,240 x 19.2%	$5,422	$5,422
Bonus Max = $19,200					28240 x 32%
$19,200 x 80% = $15,360
					Proposed Calculation	Est Value	Turbo Tax Calculated		Proposed Calculation	Est Value	Turbo Tax Calculated
							2023				2024
			First Year Standard Dep
					$54,500 x 80% x 20%	$8,720	$8,720		$54,500 x 80% x 32%	$13,952	$13,952
			First Year Bonus Dep
					Max $20,200 x 80%	$16,160	$16,160		($54,500 x 80% ) -$16,160	$8,781	$2,790
			Bonus Max = $20,200						$27,440 x 32%
			$20,200 x 80% = $16,160

[AmeliesUncle]

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@markorec wrote:

a vehicle into service in 2022

The tax law hasn't changed 

Tax law did change.

In 2022 it was 100% Bonus depreciation.  In 2023 it was 80% Bonus depreciation.

During 100% Bonus depreciation, the IRS created a special rule in Revenue Procedure 2019-13 to avoid that weird rule (otherwise there would be NO depreciation in years two through six).

If you want to test it out in the program, in your 2022 scenario with Bonus, add $1 of Section 179 (or use any amount of Section 179 and do NOT elect out of Bonus).  You should see that there is NO depreciation for 2023 or 2024 (using Section 179 disqualifies the special rule that the IRS made).

https://www.irs.gov/pub/irs-drop/rp-19-13.pdf

[markorec]

Aahh. Thanks so much for clearing that up. It seems a bit unfair though that with 100% bonus, they "fix" the rule so you don't have to carry $28K to the seventh year, but with the 80% bonus they don't fix it and you only get to depreciate $8.7K in years 2-6 but have to carry $18.7K to the seventh year. Maybe another revenue procedure coming? Or do they just ignore it since bonus is slowly phasing out each year anyway.

Either way, I really appreciate your help with this. Looks like my decision to take bonus first year is coming back to bite me.