Question

In 2019, Bill purchased a new automobile for $78,000 that will be used 100% for business. If Bill did NOT have to consider the limitations for depreciation on automobiles, he would be able to deduct $(1) in regular MACRS depreciation and bonus depreciation the first year. However, he will only be able to deduct $(2) due to the luxury limitations.

a. $15,600; $78,000
b. $10,000; $68,000
c. $7,800; $15,600
d. $78,000; $0

Answer 1

The correct answer is (a) $15,600 in regular MACRS depreciation and bonus depreciation if not for the luxury limitations, but the luxury limitations restrict the first year deduction to (c) $7,800; $15,600.

Step-by-step explanation:

The Bill's question about depreciation on his new $78,000 automobile, if not limited by the luxury automobile limitations, is (a) $15,600; $78,000. However, due to luxury automobile limitations on depreciation, the actual amount he can deduct is (c) $7,800; $15,600.

For business vehicles, there are IRS limitations on the amount of depreciation that can be claimed each year. These are known as luxury auto limitations. The regular Modified Accelerated Cost Recovery System (MACRS) and bonus depreciation would allow for a certain percentage to be depreciated in the first year, based on the cost of the vehicle and if the 100% bonus depreciation rule applies. Nevertheless, the luxury auto limitations cap the amount that can actually be claimed—these limits are published yearly by the IRS. For the tax year 2019, the maximum first-year depreciation limit for passenger automobiles was $10,100 ($18,100 if the bonus depreciation applies).