Hello Tax Pros: I am writing to ask you kindly, please, if there are any serious consequences of choosing a "safe harbor method of accounting" as applied to a luxury truck purchased and placed in business in 2011 and on which 100% bonus depreciation was taken in 2011. Now for 2012 there is no depreciation allowed on that vehicle unless "safe harbor method of accounting" was picked up. We would like to accept that "safe harbor accounting method" to be able to pull some depreciation on that vehicle for 2012 and not to wait so many years for that, but at the same time are afraid if that would also trigger anything else for us? - I mean anything other than depreciation deduction applied to that vehicle and which could partly be pulled right away on it in 2012.
In other words, would choosing that "safe harbor method of accounting" for 2012 only refer to that vehicle's depreciation deduction timing or perhaps it would also force us to change our accounting method for the whole business operation or additionally have some other implications on the whole business accounting, other than the above mentioned vehicle's depreciation deduction? We are lost here. Please help us with at least your short answer. I trust this will receive your consideration. Kind regards, Andrew S.
asked 27 Mar '13, 23:11
You are confusing the safe harbor method of accounting with something completely different.
If you previously claimed 100% bonus depreciation, then there is no further allowable depreciation that you may claim. This is why it's called '100%' bonus. 100% of the asset was expensed in 2011. A taxpayer's method of accounting has no effect on the 100% bonus depreciation.
answered 29 Mar '13, 00:01
To Bill-EA or others: Not so much as you say, I believe. The IRS has issued a guidance on 100 Percent Bonus Depreciation also in reference to luxury autos and it says among other things: "Applying the mechanics of rule 280F, the taxpayer would not be entitled to any further depreciation deduction on that automobile until 2016, and then the deduction would be limited to $1,775.00 in 2016 and each year thereafter until it is disposed of or finally fully depreciated in 2032. To mitigate this result, the IRS provides a safe harbor method of accounting under Rev. Proc. 2011-26. For a taxpayer with an auto that qualifies for 100 percent bonus depreciation deduction that would exceed the $11,060.00 luxury auto limit ($11,160.00 for 2012), the safe harbor method of accounting allows the taxpayer to essentially calculate depreciation for years two through six of the recovery as if 50 percent bonus depreciation had been claimed instead of 100% bonus depreciation."
The whole thing is explained here: http://www.cbiz.com/tofias/page.asp?pid=9283
and we only seek if that would only pertain to our auto and would not effect the whole accounting method of our bus operation? If it is completely safe for us as such?
I wait for your response Bill!
Section 3.03(5)(c) of Rev. Proc. 2011-26 provides a safe harbor method of accounting which addresses an anomalous result caused by the interaction of the 100 percent bonus depreciation rate for new vehicles acquired after September 8, 2010 and placed in service before January 1, 2012 and the Code Sec. 280F luxury car depreciation caps.
So there is nothing at all wrong with using it, and it does not otherwise effect your method of accounting.
If the safe harbor method is not adopted a taxpayer will deduct an amount equal to the first-year cap in the year that the 100 percent-rate vehicle is placed in service and the remainder of the cost of the vehicle will only be recovered after the end of the vehicle’s regular six-tax year depreciation period.
The first-year caps are $11,060 for a car placed in service in 2010 or 2011, $11,160 for a truck or van placed in service in 2010, and $11,260 for a truck or van placed in service in 2011.
If the safe harbor method is adopted, a taxpayer will generally compute its depreciation deductions as if a 50 percent bonus depreciation rate applied to the vehicle. Consequently, the taxpayer will claim a first-year deduction equal to the applicable first-year cap and additional depreciation deductions will be claimed in each of the five remaining years of the vehicle’s regular depreciation period as if a 50 percent bonus rate applied but in an amount no greater than the cap that applies for the year.
Congress intended that a 50 percent bonus depreciation rate apply to vehicles that are eligible for a 100 percent rate and subject to the Code Sec. 280F depreciation limitations. The IRS safe harbor in effect accomplishes this result.
The safe harbor method is adopted by using the safe-harbor computational method on the tax return for the tax year following the tax year in which the vehicle is placed in service (Rev. Proc. 2011-26, Section 3.03(5)(c)(ii)). No special election is required.
The safe harbor method may be used for none, some, or all of a taxpayer’s eligible vehicles.
How depreciation is computed if the safe harbor method is not adopted. Without regard to the safe harbor relief, a taxpayer who claims a 100-percent bonus depreciation deduction on a new vehicle acquired after September 8, 2010, and placed in service before January 1, 2012 and that is used 100 percent for business purposes must deduct any cost in excess of the applicable first-year cap after the end of the vehicle's recovery period at the specified annual post-recovery period rate. In the case of a vehicle placed in service in 2010 and 2011, the post-recovery period rate is $1,775 for cars and $1,875 for trucks and vans. The first-year deduction claimed on the return is limited to the first-year cap. No deductions are allowed on the return during the remaining five years of the vehicle’s regular recovery period (e.g., 2011 through 2015 if the vehicle is placed in service in 2010) because the 100 percent bonus deduction decreases the basis of the vehicle to $0 and, accordingly no regular depreciation may be claimed in the subsequent years of the vehicle’s regular recovery period (Section 3.03(5)(c)(i) of Rev. Proc. 2011-26, amplifying Rev. Proc. 2011-21).
There are examples provided in the Revenue Procedure.
The practical effect of the safe harbor is that if the sum of bonus depreciation and the regular first-year depreciation deduction, computed as if a 50 percent bonus rate apply, exceed the first-year cap, the taxpayer will claim exactly the same amount of depreciation during each of the six tax years of the vehicle’s recovery period as would have been allowed if a 50 percent bonus depreciation rate had originally applied. If the deemed first-year deduction does not exceed the first-year cap, the taxpayer will claim a first-year deduction equal to the first-year cap and generally be able to deduct the entire amount of the remaining cost of the vehicle over the next five years of the regular six year recovery period. In either situation, the first-year deduction is equal to the first-year cap (e.g., $11,060 for a car placed in service in 2010 or 2011). Thus, unless a taxpayer has a compelling reason to defer depreciation on the vehicle into post-recovery years, the safe harbor method should be adopted. If deferral is desired, a taxpayer should also consider an election out of bonus depreciation.
Relation of safe harbor to election to claim 50 percent bonus rate in lieu of 100 percent rate. A taxpayer may elect a 50 percent bonus depreciation rate in lieu of the 100 percent rate for any class of MACRS property placed in service in a tax year that includes September 9, 2010 (Rev. Proc. 2011-26).
Thus, a taxpayer may make this election for five-year property (the property class of a car, truck , or van) to avoid the anomalous interaction between the 100 percent bonus rate and the caps. However, the election to use a 50 percent rate in lieu of the 100 percent rate would apply to all five-year property placed in service by the taxpayer—not simply its vehicles. Further, since the safe-harbor method generally provides a result equivalent to or better than the computation using a 50 percent bonus rate, the election to use the 50 percent rate in lieu of the 100 percent rate provides no benefit.
Relation of safe-harbor to Section 179 allowance. A taxpayer should not claim the section 179 allowance on a vehicle that is eligible for the 100 percent bonus depreciation rate. Since the entire cost of the vehicle can be claimed as a bonus deduction (subject to the first-year cap) no benefit would be derived by electing to expense any portion of the vehicle’s cost.
Exception for trucks and vans with GVWR over 6,000 pounds. Trucks and vans (including SUVs) with a gross vehicle rate rating (GVWR) in excess of 6,000 pounds are not subject to the Code Sec. 280F caps. Thus, a taxpayer may avoid the caps and the necessity of utilizing the safe-harbor by purchasing a heavy vehicle.
New vehicles costing less than first-year cap. In the unlikely event that a new vehicle costs less than the applicable first-year cap it would not be necessary to adopt the safe harbor method of accounting since the entire cost could be claimed as a bonus deduction in the year of purchase.
answered 01 Apr '13, 05:55