Congress acts to reform the IRS, enhance taxpayer protections

The IRS has updated the inflation-adjusted “luxury automobile” limits on certain deductions taxpayers can take for passenger automobiles — including light trucks and vans — used in their businesses. Revenue Procedure 2019-26 includes different limits for purchased automobiles that are and aren’t eligible for bonus first-year depreciation, as well as for leased automobiles.

The role of the TCJA

The Tax Cuts and Jobs Act (TCJA) amended Internal Revenue Code (IRC) Section 168(k) to extend and modify bonus depreciation for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023, including business vehicles. Businesses can expense 100% of the cost of such property (both new and used, subject to certain conditions) in the year the property is placed in service. 50% bonus depreciation was allowed on qualified property acquired and placed in service prior to September 28, 2017. The bonus depreciation for vehicles with a gross vehicle weight less than 6,000 pounds was limited to the lesser of $8,000 or 50% or of the qualified basis of the vehicle.

The amount of the allowable deduction will begin to phase out in 2023, dropping 20 percentage points each year for four years until it vanishes in 2027, absent congressional action. The pre-TCJA allowable deduction was scheduled to be phased out beginning in 2018. As a result the applicable percentage for qualified property acquired before September 28, 2017, and placed in service in 2019, is 30%.

But 100% (or 30%) bonus depreciation is available only for heavier business vehicles that aren’t considered passenger automobiles. The maximum bonus depreciation amount for passenger automobiles remains at $8,000.

IRC Sec. 280F limits the depreciation deduction allowed for luxury passenger automobiles for the year they’re placed into service and each succeeding year. The TCJA amended the provision to increase the Sec. 280F annual limits for luxury passenger automobiles acquired and placed after September 27, 2017. Prior to TCJA a passenger automobile with a cost greater $15,800 was considered a luxury passenger automobile. Based on the new depreciation caps allowed by TCJA a luxury passenger automobile has a cost greater than $50,000.

Annual depreciation caps

The new guidance includes three depreciation limit tables for purchased autos placed in service in calendar year 2019.

The limits for autos acquired after September 27, 2017, that qualify for bonus depreciation are:

• 1st tax year: $18,100 ($10,100 regular depreciation and $8,000 bonus depreciation)
• 2nd tax year: $16,100
• 3rd tax year: $9,700
• Each succeeding year: $5,760

The limits for autos that don’t qualify for bonus depreciation are:

• 1st tax year: $10,100
• 2nd tax year: $16,100
• 3rd tax year: $9,700
• Each succeeding year: $5,760

The limits for automobiles acquired before September 28, 2017, that qualify for bonus depreciation are:

• 1st tax year: $14,900 ($10,100 regular depreciation and $4,800 bonus depreciation)
• 2nd tax year: $16,100
• 3rd tax year: $9,700
• Each succeeding year: $5,760

Other restrictions

The bonus depreciation deduction isn’t available for automobiles for 2019 if the business:

• Didn’t use the automobile more than 50% for business purposes in 2019,
• Elected out of the deduction for the class of property that includes passenger automobiles (that is, five-year property), or
• Purchased the automobile used and the purchase didn’t meet the applicable acquisition requirements (for example, the business cannot have used the auto at any time before acquisition).

Limits on leased automobiles

The new guidance also includes the so-called “income inclusion” table for passenger automobiles first leased in 2019 with a fair market value (FMV) of more than $50,000. The FMV is the amount that would be paid to buy the car in an arm’s-length transaction, generally the capitalized cost specified in the lease.

Taxpayers that lease a passenger automobile for use in their business can deduct the part of the lease payment that represents business use. Thus, if the car is used solely for business, the full cost of the lease is deductible.

But Sec. 280F requires the deduction to be reduced by a “lease inclusion value.” The idea is to balance out the tax benefits of leasing a luxury car vs. purchasing it. That’s where the table comes into play. Since lease payments are deductible in the year paid but depreciation is limited by the luxury auto rules taxpayers leasing luxury autos get an accelerated tax benefit. The lease inclusion value is effectively an interest charge applied to the value of the accelerated tax benefit.

Lessees must increase their income each year of the lease to achieve parity with the depreciation limits. The income inclusion amount is determined by applying a formula to an amount obtained from the IRS table. The latter amount depends on the initial FMV of the leased auto and the year of the lease term. Although the $50,000 FMV threshold for 2019 is unchanged from 2018, many of the other values in the new table have changed since then due to changes in interest rates.

For example, let’s say you leased a car with an FMV of $56,500 on January 1, 2019, for three years and placed it in service that same year. You use the car for business purposes only. According to the table, your income inclusion amounts for each year of the lease would be as follows:

• Year 1: $26
• Year 2: $59
• Year 3: $86

The annual income inclusion amount may seem small compared to the depreciation deduction limits, but this is related to the very low interest rates currently in place. The $26 represents the interest charge for the accelerated tax benefit of the lease payment over the limited depreciation deduction.

Drive carefully

The new tax rules for vehicles used in business generally are favorable but aren’t easily navigable. We can help steer you toward the best strategy given your current circumstances.The U.S. Senate has passed, and President Trump is expected to sign into law, a broad package of reforms aimed at the IRS. Among other things, the Taxpayer First Act contains several new protections for taxpayers, along with provisions intended to improve the IRS’s customer service.

Stronger safeguards against identity theft

Several of the bill’s provisions address tax-related identity theft. For example, the bill generally requires the IRS to notify a taxpayer as soon as practicable when it suspects or confirms an unauthorized use of the individual’s identity. The IRS also must:

• Provide the taxpayer instructions on how to file a report with law enforcement on the unauthorized use,
• Identify any steps the individual should take to permit law enforcement to access his or her personal information during the investigation,
• Provide information regarding the actions the taxpayer can take to protect him- or herself from harm, and
• Offer identity protection measures, such as the use of an “identity protection personal identification number” (IP PIN).

The bill also requires the IRS to establish a program within five years that allows all taxpayers to request IP PINs to better secure their identity when filing their tax returns. This protection currently is available only to victims of tax-related identity theft.

The IRS must provide a suspected victim with additional notifications regarding whether it has initiated an investigation into the unauthorized use and whether the investigation has substantiated such unauthorized use. It also must notify the individual of whether any action has been taken against someone relating to the unauthorized use or whether any referral for criminal prosecution has been made.

And the IRS must ensure that victims of tax-related identity theft have a single point of contact at the agency throughout the processing of their cases. That contact must track the taxpayer’s case to completion and coordinate with other IRS employees to resolve the taxpayer’s issues as quickly as possible.

Greater appeals rights

The Taxpayer First Act codifies into law the IRS’s already-existing, independent Office of Appeals. It also expands taxpayers’ rights of appeal regarding tax matters.

For example, under the law, the IRS must provide certain taxpayers who request a conference with the Office of Appeals with access to the nonprivileged portions of the case file on the disputed issues no later than 10 days before the scheduled conference date. Currently, taxpayers must file a Freedom of Information Act request to gain access to their case files.

The resolution process available through the appeals office generally is available to all taxpayers. If a taxpayer’s request to appeal an IRS notice of deficiency is denied, the IRS must give the taxpayer a written notice with a detailed description of the facts involved, the basis for the denial and a detailed explanation of how the basis applies to the facts. The notice also must describe the procedures for protesting the denial.

Customer service improvements

The bill gives the IRS one year to develop and submit to Congress a comprehensive customer service strategy. The strategy must include a plan to extend assistance to taxpayers that’s secure and designed to meet reasonable taxpayer expectations. The plan must adopt appropriate customer service best practices from the private sector, including online services, telephone callback services and training of customer service employees.

Separately, the bill requires the IRS to supply helpful information to taxpayers who are on hold during a telephone call to any IRS help line. That information includes common tax scams, where and how to report tax scams, and additional advice on how taxpayers can protect themselves from identity theft and tax crimes.

Additional provisions

The Taxpayer First Act tackles many other areas, including:

Structuring. The bill establishes new protections from IRS enforcement abuses of so-called “structuring laws.” Those laws let the agency seize taxpayer assets when a taxpayer appeared to make bank deposits in amounts just under the $10,000 trigger for bank reporting requirements.

Whistleblower reforms. The bill permits the IRS to disclose to a whistleblower tax return information related to the investigation of any taxpayer about whom the whistleblower has provided information (to the extent necessary to obtain information that isn’t otherwise reasonably available). It also mandates certain updates to whistleblowers on investigations and adds antiretaliation provisions.

Electronic filing. The IRS generally must eventually require individuals filing 10 or more returns — down significantly from the current 250-return threshold — to file electronically. The lower threshold will be phased in, falling to 100 returns for 2021 and 10 returns in 2022. Special rules apply to partnerships.

And that’s not all

The far-reaching bill will affect a variety of other areas, such as cybersecurity, innocent spouse relief, private debt collection and misdirected tax refund deposits. We’ll keep you abreast of these and other relevant tax developments.