IRS PROVIDES LIMITS ON DEPRECIATION DEDUCTIONS FOR ELECTRIC CARS.

Rev. Proc. 98-24

SECTION 1. PURPOSE

[1] This revenue procedure provides limitations on depreciation deductions for owners of passenger automobiles designed to be propelled primarily by electricity and built by an original equipment manufacturer (electric automobiles) first placed in service after August 5, 1997, and before January 1, 1998, and the amounts to be included in income by lessees of electric automobiles first leased after August 5, 1997, and before January 1, 1998. The tables detailing these depreciation limitations and lessee inclusion amounts reflect the tripling of the base depreciation limits provided in section 280F(a)-(1)(A) required by section 280F(a)(1)(C) of the Internal Revenue Code, and the automobile price inflation adjustments required by section 280F(d)(7).

SECTION 2. BACKGROUND

[2] For owners of automobiles, section 280F(a)-(1)(A) imposes dollar limitations on the depreciation deduction for both the year that the automobile is placed in service and each succeeding year. Section 280F(a)(1)(C)(ii) provides that inn the case of a "purpose built passenger vehicle" (as defined in section 4001(a)(2)(C)(ii)), each of the annual limitations specified in section 280F(a)(1)(A) shall be tripled. Section 4001(a)(2)(C)(ii) provides that a purpose built passenger vehicle means a passenger vehicle produced by an original equipment manufacturer and designed so that the vehicle may be propelled primarily by electricity.

[3] Section 280F(d)(7) requires the amounts allowable as depreciation deductions under section 280F(a)(1)(A) to be increased by a price inflation adjustment amount for passenger automobiles placed in service after calendar year 1988.

[4] For leased automobiles, section 280F(c) 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-7(a), this reduction requires the lessees to include in gross income an inclusion amount determined by applying a formula to the amount obtained from a table. The table shows inclusion amounts for a range of fair market values for each tax year after the automobile is first leased.

SECTION 3. SCOPE AND OBJECTIVE

01. The limitations on depreciation deductions in section 4.02 of this revenue procedure apply to electric automobiles (other than leased electric automobiles) that are placed in service after August 5, 1997, and before January 1, 1998, 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 electric automobiles for which the lease term begins after August 5, 1997, and before January 1, 1998. Lessees of such automobiles must use this table to determine the inclusion amount for each tax year during which the automobile is leased.

03. Sec. Rev. Proc. 96-25, 1996-1 C.B. 681, for depreciation limitations and income inclusion amounts for electric automobiles first purchased or leased before January 1, 1997, and Rev. Proc. 97-20, 1997-11 I.R.B. 10, for depreciation limitations and income inclusion amounts for electric automobiles first purchased or leased on or after January 1, 1997, and before August 6, 1997.

SECTION 4. APPLICATION

01. A taxpayer placing an electric automobile in service for the first time after August 5, 1997, and before January 1, 1998, is limited to the depreciation deduction shown in Table 1 of section 4.02(2) of this revenue procedure. A taxpayer first leasing an electric automobile after August 5, 1997, and before January 1, 1998, must use Table 2 in section 4.03 of this revenue procedure to determine the inclusion amount that is added to gross income.

02. LIMITATIONS ON DEPRECIATION DEDUCTIONS FOR CERTAIN AUTOMOBILES.

(1) AMOUNT OF THE INFLATION ADJUSTMENT. Under section 280F(d)(7)(B)(i), 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 141.5 for October 1996. The October 1996 index exceeded the October 1987 index by 26.3. The Internal Revenue Service has, therefore, determined that the automobile price inflation adjustment for 1997 is 22.83 percent (26.3/115.2 x 100%). This adjustment is applicable to all automobiles that are first placed in service in calendar year 1997. To determine the dollar limitations applicable to an electric automobile first placed in service after August 5, 1997, and before January 1, 1998, the dollar limitations in section 280F(a)(1)(A) are tripled in accordance with section 280F(a)(1)(C) and are then multiplied by a factor of 0.2283; the resulting increases, after rounding to the nearest $100, are added to the tripled 1988 limitations to give the depreciation limitations for 1997.

(2) AMOUNT OF THE LIMITATION. For electric automobiles placed in service after August 5, 1997, and before January 1, 1998, Table 1 contains the dollar amount of the depreciation limitations for each tax year.

                       REV. PROC. 98-24 TABLE 1

[5] The inclusion amounts for electric automobiles first leased after August 5, 1997, and before January 1, 1998, are calculated under the procedures described in section 1.280F-7(a) of the Income Tax regulations. Table 2 of this revenue procedure is the applicable table to be used in applying those procedures.

                       REV. PROC. 98-24 TABLE 2

[6] This revenue procedure is effective for electric automobiles (other than leased electric automobiles) that are first placed in service after August 5, 1997, and before January 1, 1998, and for leased electric automobiles that are first leased after August 5, 1997, and before January 1, 1998.

DRAFTING INFORMATION

[7] The principal author of this revenue procedure is Bernard P. Harvey of the Office of the Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding the depreciation limitations and lessee inclusion amounts in this revenue procedure, contact Mr. Harvey at (202) 622-3110 (not a toll-free call).