Claiming Bonus Depreciation for Business Property Acquisitions

As the economy picks up, business begins to expand, and the bottom line starts to improve. But, quite often, the tax bill goes up as well. However, an excellent way to reduce that tax bill is through the use of bonus depreciation. Bonus depreciation is available for qualified property in the year the property is acquired and placed in service. Bonus depreciation is not prorated; therefore, it doesn’t matter when during the tax year the property was placed in service. So, even property placed in service on the last day of the tax year is eligible for the full applicable amount. Bonus depreciation is available for qualifying vehicles via an $8,000 increase in the first-year luxury auto depreciation limit.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) provides for 100% first-year bonus depreciation (i.e., effectively writing off the entire cost of the asset in the year placed in service) for qualified property that is purchased and placed in service after September 8, 2010, and before January 1, 2012 (January 1, 2013, for certain aircraft and long-production-period property). Prior to this legislation, the maximum bonus depreciation allowance percentage had been 50%. Note the 100% first-year bonus depreciation rules apply for both regular tax and AMT purposes, so no adjustment is required for AMT.

To be eligible for bonus depreciation, the property must meet three broad criteria:

1. The asset must be qualified property (defined below),
2. The original use must commence with the taxpayer, and
3. The property must be acquired and placed in service before January 1, 2012 (January 1, 2013, for certain aircraft and long-production-period property).

Qualified property must also meet one of four definitions:

1. The asset is eligible property with a recovery period of 20 years or less.
2. The asset is depreciable computer software.
3. The property is water utility property.
4. The asset is qualified leasehold improvement property.

The term original use generally means the first use of the asset. Simply put, the asset generally must be new, rather than pre-owned; however, there are some exceptions. New property initially used by a taxpayer for personal use and subsequently converted to business use meets the original-use requirement. Property acquired for use in a taxpayer’s business that was previously used by another taxpayer does not qualify regardless of how the previous owner used the property (i.e., for business or personal use). Capital expenditures to recondition or rebuild acquired or owned property satisfy the original use requirement, but purchases of reconditioned or rebuilt assets do not qualify. The determination of whether an asset is reconditioned or rebuilt (i.e., used) is a question of fact. However, an asset that contains used parts will not be considered used if the cost of the used parts is 20% or less of the total cost.

The time to take advantage of the 100% first-year bonus depreciation provision is limited. So, please contact us to discuss the benefits of bonus depreciation or any other tax compliance or planning issue.