November 8, 2013
By Ryan Greenway, Greenway & Company
Bonus depreciation will expire for most taxpayers at the end of 2013 unless Congress extends the provision. A 50-percent bonus depreciation deduction (the "special first-year depreciation allowance") is allowed for the first year that qualifying property is placed in service. Bonus depreciation is available for property acquired after December 31, 2007 and acquired and placed in service only before January 1, 2014 (the "applicable period").
The 50-percent rate is also available for property acquired pursuant to a binding written contract entered into during the applicable period. Self-constructed property for the taxpayer's own use qualifies for bonus depreciation if the taxpayer begins manufacturing, constructing or producing the property during the applicable period. In addition, the 50-percent rate is extended one year, to property acquired and placed in service before January 1, 2015, for property with a longer production period and for aircraft. Unlike the Code Sec. 179 expensing allowance, there is no limit on the overall amount of bonus depreciation that may be claimed.
The bonus depreciation rate was 100 percent for qualified property acquired after September 8, 2010 and before January 1, 2012, and placed in service before January 1, 2012. A special election is available under Rev. Proc. 2011-26 for taxpayers that want to claim 50-percent bonus depreciation instead of the 100-percent rate available in the latter part of 2010 and in 2011.
Qualifying property is property depreciable under MACRS (the Modified Accelerated Cost Recovery System) that has a recovery period of 20 years or less, or is MACRS water utility property, computer software depreciable over three years, or qualified leasehold improvement property. The property must be new property, and its original use must start with the taxpayer during the applicable period. Property is acquired when the taxpayer takes possession or control of the property and has the risk of loss. Property is placed in service when it is in a condition or state of readiness and availability for a specifically assigned function in a trade or business, or for the production of income.
A taxpayer must claim bonus depreciation unless the taxpayer elects not to take any additional first year depreciation. This "election out" applies to all property in the class or classes for which the election is made, and that is placed in service for the tax year of the election. The election out may be revoked only with the IRS's consent.
The election must be made by the due date (including extensions) of the tax return for the year in which the property is placed in service. Form 4562 provides instructions for making the election. The taxpayer must attach a statement to the return that indicates the property class for which the election is being made.