SERVICE PROVIDES 1989 DOLLAR DEPRECIATION LIMITS FOR OWNED AND LEASED AUTOS PLACED IN SERVICE IN 1989.

Rev. Proc. 89-64

SECTION 1. PURPOSE

This revenue procedure prescribes limitations on depreciation deductions for passenger automobiles that are first placed in service during 1989 and provides a table for use in determining the amounts included in income by lessees of passenger automobiles that are first leased during calendar year 1989. The new table used in determining inclusion amounts and the new limitations on deductions reflect the automobile price inflation adjustments for 1989 required by section 280F(d)(7) of the Internal Revenue Code.

SEC. 2. BACKGROUND

For owners of automobiles, section 280F(a) of the Code imposes dollar limitations on the depreciation deduction for the year that the automobile is placed in service and succeeding years. Section 280F(d)(7) provides that the amounts allowable as depreciation deductions are increased for passenger automobiles placed in service after calendar year 1988 by a price inflation adjustment amount.

For leased automobiles, section 280F(c) of the Code requires a reduction in the deduction allowed to the lessee of the automobile. The reduction must be substantially equivalent to the limitations on the depreciation deductions imposed on owners of automobiles. Under section 1.280F-7T(a) of the temporary Income Tax Regulations, this reduction is accomplished by requiring the lessees to include in gross income an inclusion amount determined by applying a formula to the amount obtained from a table. The applicable table for automobiles that are first leased in 1987 or 1988 is contained in section 1.280F-7T(a)(2)(iv) of the temporary regulations. For automobiles that are first leased after 1988, the applicable tables are published in the Internal Revenue Bulletin.

SEC. 3. SCOPE AND OBJECTIVE

01. The limitations on depreciation deductions in section 4.02 of this revenue procedure apply to automobiles (other than leased automobiles) that are placed in service in calendar year 1989, and continue to apply for each tax year that the automobile remains in service.

02. The table in section 4.03 of this revenue procedure applies to leased automobiles for which the lease term begins in calendar year 1989. Lessees of such automobiles must use this table to determine the inclusion amount for each tax year during which the automobile is leased. See sections 1.280F-5T(d), 1.280F-5T(e) and 1.280F-7T(a) of the temporary regulations for rules on determining inclusion amounts for automobiles that were first leased before January 1, 1989.

SEC. 4. APPLICATION

01. A taxpayer placing an automobile in service for the first time during calendar year 1989 is limited to the depreciation deduction shown in Table 1 of section 4.02(2) for 1989 and succeeding years. A taxpayer first leasing an automobile in calendar year 1989 must use Table 2 in section 4.03 to determine the inclusion amount that is added to gross income for 1989 and succeeding years. Otherwise, the procedures of section 1.280F-7T(a) of the temporary regulations must be followed.

02. LIMITATIONS ON DEPRECIATION DEDUCTIONS FOR CERTAIN AUTOMOBILES.

(1) AMOUNT OF THE INFLATION ADJUSTMENT. Under section 280F(d)(7)(B)(i) of the Code, the automobile price inflation adjustment for any calendar year is the percentage (if any) by which the CPI automobile component for October of the preceding calendar year exceeds the CPI automobile component for October 1987. The term "CPI automobile component" is defined in section 280F(d)(7)(B)(ii) as the "automobile component" of the Consumer Price Index for all Urban Consumers published by the Department of Labor (the CPI). The new car component of the CPI was 115.2 for October 1987 and 117.7 for October 1988. The October 1988 index exceeded the October 1987 index by 2.5. The Internal Revenue Service has, therefore, determined that the automobile price inflation adjustment for 1989 is 2.17 percent ((2.5 / 115.2) x 100%). This adjustment is applicable to all cars that are first placed in service in calendar year 1989. The dollar limitations in section 280F(a) must therefore be multiplied by a factor of .0217, and the resulting increases after rounding to the nearest $100, are added to the 1988 limitations to give the depreciation limitations for 1989.

(2) AMOUNT OF THE LIMITATION. For automobiles placed in service in calendar year 1989, Table 1 contains the dollar amount of the depreciation limitations for each tax year.

                       REV. PROC. 89-64, TABLE 1

The inclusion amounts for automobiles first leased in calendar year 1989 are calculated under the procedures described in section 1.280F-7T(a) of the temporary regulations. Table 2 of this revenue procedure is the applicable table to be used in applying those procedures.

                       REV. PROC. 89-64, TABLE 2

This revenue procedure is effective for automobiles (other than leased automobiles) that are first placed in service during calendar year 1989 and to leased automobiles that are first leased during calendar year 1989.

DRAFTING INFORMATION

The principal author of this revenue procedure is John E. Moffat of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue procedure contact Mr. Moffat on (202) 566-3553 (not a toll-free call).