Knowledge Base

10532: Passenger Auto Added in 2011, but No Depreciation Shown This Year

Fed Returns Generally

Why is Drake not calculating depreciation for a passenger auto used for business that was added in the 2011 return?

Normal depreciation rules, in some circumstances, may not allow depreciation this year if 100% bonus depreciation was taken for the auto in 2011.

Revenue Procedure 2011-26 created a safe harbor accounting method for allowable depreciation deduction in subsequent years when 100% bonus depreciation is taken (for more information see "Section 280F(a) limitations on passenger automobiles”, Section 3.03(5)(c) of Rev Proc 2011-26 and Rev. Proc. 2012-23). Electing Safe Harbor mitigates the effect of the first-year luxury auto limit and may result in deductible depreciation expense during the recovery period that otherwise would not be recognized until after the recovery period.

In Drake, from the Prior bonus depreciation Safe Harbor drop list on screen 4562, you can select one of these options:

  1. Safe Harbor Election if 100% bonus depreciation taken in 2011 for an auto prevents a depreciation deduction in later years.
  2. 50% bonus depreciation elected in the prior year if you used screen 10 Additional Depreciation Elections in Drake11 to opt out of 100% and take 50% bonus depreciation.
  3. No election.  Do not take depreciation.

For qualified prior-year assets that are passenger autos for which the Safe Harbor election is available, you must make a selection from the Prior bonus depreciation Safe Harbor drop list to avoid Error Message 5890 ENTRY REQUIRED ON DEPRECIATION DETAIL SCREEN

Help for the field (press F1) advises

Safe Harbor Method (direct entry)

Under Rev Proc 2011-26, the IRS provides that if the unadjusted
depreciable basis of a passenger auto that is qualified property
eligible for the 100% additional first-year depreciation deduction
exceeds the first-year luxury auto limit, the excess amount is the
unrecovered basis of the passenger automobile, and, therefore, is
treated as a deductible expense in the first tax year succeeding
the end of the normal 5-year (effectively 6-year) recovery period
subject to the dollar limitation.  Thus, applying the normal
business-auto depreciation rules for years 2 through 6 yields a
zero deduction.

To mitigate this, the IRS allows the election to be deemed 50% (and
not 100%) bonus depreciation. Make the appropriate election for
this asset by selecting one of the choices below:

 1 - Safe Harbor Election
 2 - 50% bonus depreciation elected in the prior year
 3 - No Election.  Do not take depreciation

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