On Dec. 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act), a multi-billion dollar tax cut package that generally extends the Bush income tax cuts for individuals and the lower capital gain/dividend tax rates for all taxpayers for two additional years. One significant item for businesses is the increase and extension of bonus depreciation, which allows taxpayers to expense the entire capital cost of qualifying property placed into service in 2011. This Alert summarizes the new bonus depreciation rules:
Increase and Extension of Bonus Depreciation.
100 percent Bonus Depreciation. The 2010 Tax
Act increases the bonus depreciation from 50 percent to 100 percent
for qualifying property placed in service after Sept. 8, 2010 and
before the end of 2011. The 100 percent bonus depreciation allows
taxpayers to expense the entire capitalized cost of the property in
the first year. A one-year extension of the placed-in-service date
(i.e., before the end of 2012) for 100 percent bonus depreciation
is allowed for certain transportation property and property with a
depreciation recovery period of 10 years or more.
50 percent Bonus Depreciation. For qualifying
property placed in service after 2011 and before the end of 2012,
the bonus depreciation allowance will equal 50 percent of the basis
of the qualifying property. The remaining 50 percent of the
property's basis will be depreciated under the normal
depreciation rules. A one-year extension of the placed-in-service
date (i.e., before the end of 2013) is allowed for certain
transportation property and property with a depreciation recovery
period of 10 years or more.
Taxpayers can elect out of bonus depreciation for a particular
class of property placed into service in a given tax year. However,
there is no provision allowing a taxpayer to elect out of the 100
percent bonus depreciation and into the 50 percent bonus
depreciation. As a result, any property placed in service between
Sept. 8, 2010 and the end of 2011 must be either (i) entirely
expensed in the year it is placed in service, or (ii) depreciated
under the normal depreciation rules without any first year bonus
depreciation allowance.
Qualifying Property.
Property that qualifies for the bonus depreciation includes the following:
- Tangible property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less;
- Water utility property;
- Most computer software; and
- Qualified leasehold improvement property.
Other Requirements.
- The qualifying property must be acquired (i) before the end of 2011 (for 100 percent bonus depreciation) or before the end of 2012 (for 50 percent bonus depreciation), but only if no binding written contract for the acquisition is in effect before 2008, or (ii) pursuant to a binding written contract which is entered into after 2007 and before the end of 2011 (for 100 percent bonus depreciation) or before the end of 2012 (for 50 percent bonus depreciation).
- Original use of the qualifying property must begin with the taxpayer – no used property will qualify.
For property being manufactured, constructed or produced by the
taxpayer for use by the taxpayer, the taxpayer must begin the
manufacture, construction or production of the property after 2007
and before the end of 2012.
Subject to various requirements, the 2010 Tax Act also allows
corporations to convert old AMT or research tax credits to
refundable credits in lieu of claiming bonus depreciation for
qualifying property. In order to take advantage of this provision,
corporations must agree to depreciate the qualifying property on a
straight-line basis.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
