100% Tax Depreciation for 2011

1/6/2011

By Mark Corey, CPA

In December 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This act, among other things, extended and expanded the additional depreciation expense (otherwise known as the bonus depreciation) in two important ways. First, it extended the 50% bonus depreciation for property acquired after December 31, 2007, and placed in service before January 1, 2013. Second, it increased the bonus depreciation to 100% for assets acquired after September 8, 2010, and placed in service before January 1, 2012.

Following are highlights of the existing 50% bonus depreciation regime and the expanded 100% bonus depreciation:

General Rules for Bonus Depreciation

• Unlike section 179 expensing, there is no limit on the total amount of bonus depreciation that may be claimed in any given tax year.
• Bonus depreciation deduction is allowed in full for alternative minimum tax purposes.
• Taxpayers may elect out of the bonus depreciation allowance for any class of property for the tax year (for example, all five-year property could be excluded). However, there is no provision to elect out of the 100% bonus depreciation and take 50% bonus depreciation.
• Qualifying property
  • New property (original use of which begins with the taxpayer)
  • Acquired after December 31, 2007
  • Placed in service before January 1, 2013
  • Depreciable under MACRS
  • Recovery period of 20 years or less, including:
    • Computer software depreciable over three years
    • Qualified leasehold improvement property depreciable over 15 years
      • Includes any improvement to an interior portion of nonresidential real property if the following requirements are satisfied:
        • The improvement is made under, or pursuant to, a lease by the lessee, lessor or any sublessee of the interior portion.
        • The improvement is a structural component (not personal property that is eligible for a shortened recovery period, like carpeting or signs, under the cost segregation rules).
        • The lease is not between related persons.
        • The interior portion of the building is to be occupied exclusively by the lessee or any sublessee of that interior portion.
        • The improvement is placed in service more than three years after the date the building was first placed in service by any person
      • The following are not qualified leasehold improvement property:
        • Enlargement of the building
        • Elevators and escalators
        • Structural components that benefit a common area
        • Internal structural framework
    • Automobiles, which are used 50% or less for business, do not qualify for bonus depreciation
    • Luxury car depreciation caps
      • Bonus depreciation is increased by $8,000. For 2010, the deduction would be $11,060 for passenger automobiles and $11,160 for trucks and vans.
      • Sport Utility Vehicles and pickup trucks with a gross vehicle weight rating in excess of 6,000 pounds are exempt from the luxury car depreciation caps, so 100% or 50% of the vehicles cost is eligible for bonus depreciation.

State Tax Consequences

Many states have decoupled from the federal bonus depreciation allowance to help alleviate budget shortages. If your state does not allow bonus depreciation you will need to make an adjustment on your state tax return and recalculate depreciation for your state if bonus depreciation is taken on your federal tax return.