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Under pre-Act law, the Code Sec. 168(k) additional first-year depreciation deduction (also called bonus first-year depreciation) is allowed equal to 50% of the adjusted basis of qualified property acquired and placed in service before Jan. 1, 2011 (before Jan. 1, 2012 for certain longer-lived and transportation property). The additional first-year depreciation deduction is allowed for both regular tax and alternative minimum tax purposes (AMT), but is not allowed for purposes of computing earnings and profits. The basis of the property and the depreciation allowances in the year of purchase and later years are appropriately adjusted to reflect the additional first-year depreciation deduction. A taxpayer may elect out of additional first-year depreciation for any class of property for any taxable year.
In general, an asset qualifies for the bonus depreciation allowance if:
New law. The 2010 Tax Relief Act extends and expands additional first-year depreciation to equal:
Rules similar to those in Code Sec. 168(k)(2)(A)(ii) and Code Sec. 168(k)(2)(A)(iii) , which provide that qualified property does not include property acquired under to a written binding contract that was in effect prior to Jan. 1, 2008, apply for purposes of determining whether property is eligible for the 100% additional first-year depreciation deduction. Thus under the provision, property acquired under a written binding contract entered into after Dec. 31, 2007 is qualified property for purposes of the 100% additional first-year depreciation deduction assuming all other requirements of Code Sec. 168(k)(2) are met.
Under the luxury auto dollar limits of Code Sec. 280F , depreciation deductions (including Code Sec. 179 expensing) that can be claimed for passenger autos are subject to dollar limits that are annually adjusted for inflation. For passenger automobiles placed in service in 2010, the adjusted first-year limit is $3,060. For light trucks or vans, the adjusted first-year limit is $3,160. Light trucks or vans are passenger automobiles built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis that are subject to the Code Sec. 280F limits because they are rated at 6,000 points gross (loaded) vehicle weight or less.
The applicable first-year depreciation limit is increased by $8,000 (not indexed for inflation) for any passenger automobile that is "qualified property" under the bonus depreciation rules of Code Sec. 168(k) and which isn't subject to a taxpayer election to decline bonus depreciation.
Under pre-Act law, qualified property didn't include property placed in service after Dec. 31, 2010 (except for certain aircraft and certain long-production-period property that had, instead, a Dec. 31, 2011 placed-in-service deadline).
New law. The 2010 Tax Relief Act provides that the placed-in-service deadline for "qualified property" is Dec. 31, 2013 (Dec. 31, 2014 for the aircraft and long-production-period property). ( Code Sec. 168(k)(2)(A)(iv), as amended by Act Sec. 401(a))
Under current law's Code Sec. 168(k)(4) , for "eligible qualified property" (generally, "qualified property" for bonus depreciation purposes that is originally used and acquired after Mar. 31, 2008 and placed in service before Jan. 1, 2010 (Jan. 1, 2011 for certain long-production period property and certain aircraft), corporations can elect to forego bonus depreciation and accelerated depreciation in exchange for the present allowance, as refundable tax credits, of the following otherwise-deferred "pre-2006 credits": (1) research credits from tax years beginning before 2006 and (2) credits against regular tax for AMT paid, to the extent the AMT is attributable to tax years before 2006. Otherwise applicable credit limits are increased by 20% of the difference between depreciation allowed for eligible qualified property if bonus depreciation is claimed less depreciation allowed if bonus depreciation isn't claimed.
Cumulatively, the total increase in credit limitations can't exceed the lesser of $30 million or 6% of the pre-2006 credits. A corporation can choose to exclude from the election "extension property" (eligible qualified property placed in service after 2008 (after 2009 for certain long-production period property and certain aircraft)). If a corporation doesn't choose to exclude extension property from the election, the election is computed separately for extension property and property that isn't extension property. The election could be made beginning with the first tax year ending after Mar. 31, 2008 or the first tax year ending after Dec. 31, 2008.
New law. For property placed in service after Dec. 31, 2010, in tax years ending after that date, the 2010 Tax Relief Act generally permits a corporation to increase the AMT credit limitation (but not the research credit limitation) by the bonus depreciation amount with respect to certain property placed in service after Dec. 31, 2010 and before Jan. 1, 2013 (Jan. 1, 2014 in the case of certain longer-lived and transportation property). ( Code Sec. 168(k)(4) , as amended by Act Sec. 401(c)) This change will apply for "round 2 extension property," namely property that is eligible qualified property solely because it meets the requirements under the extension of the additional first-year depreciation deduction for certain property placed in service after Dec. 31, 2010.
A taxpayer that has made an election to increase the research credit or minimum tax credit limitation for eligible qualified property for its first tax year ending after Mar. 31, 2008 or for extension property may choose not to make this election for round 2 extension property. Additionally, a taxpayer that has not made an election for eligible qualified property for its first tax year ending after Mar. 31, 2008 or for extension property, may make the election for round 2 extension property for its first tax year ending after Dec. 31, 2010, and for each subsequent year. For a taxpayer that elects to increase the research or minimum tax credit for eligible qualified property and extension property and the minimum tax credit for round 2 extension property a separate bonus depreciation amount, maximum amount, and maximum increase amount will be computed and applied to each group of property. (Code Sec. 168(k)(4)(I), Committee Report)
Under Code Sec. 179, a taxpayer, other than an estate, a trust, or certain noncorporate lessors, can elect to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer's trade or business. The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of Code Sec. 179 property placed in service during the tax year in excess of a specified investment ceiling. The amount eligible to be expensed for a tax year can't exceed the taxable income derived from the taxpayer's active conduct of a trade or business. And any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding tax years. For tax years beginning in 2010 or 2011: (1) the dollar limitation on the expense deduction is $500,000; and (2) the investment-based reduction in the dollar limitation starts to take effect when property placed in service in a tax year exceeds $2,000,000 (beginning-of-phaseout amount). Amounts ineligible for expensing due to excess investments in expensing-eligible property can't be carried forward and expensed in a subsequent year. Rather, they can only be recovered through depreciation. Under pre-Act law, for tax years beginning after 2011, there's a $25,000 dollar limit on expensing and a $200,000 beginning-of-phaseout amount.
In general, property is eligible for Code Sec. 179 expensing if it is:
Under pre-Act law, for tax years beginning before 2012, an expensing election or specification of property to be expensed may be revoked without IRS's consent, but, if revoked, can't be re-elected. New law. For tax years beginning in 2012, the 2010 Tax Relief Act increases the maximum expensing amount under Code Sec. 179 from $25,000 to $125,000 and increases the investment-based phaseout amount from $200,000 to $500,000. The $125,000/$500,000 amounts will be indexed for inflation. However, for tax years beginning after 2012, the maximum expensing amount drops to $25,000 and the investment-based phaseout amount drops to $200,000. ( Code Sec. 179(b) , as amended by Act Sec. 402)
The Act also provides that off-the-shelf computer software is expensing eligible property if placed in service in a tax year beginning before 2013 (a one-year extension). ( Code Sec. 179(d)(1)(A)(ii) Finally, it provides that for tax years beginning before 2013 (also a one-year extension), an expensing election or specification of property to be expensed may be revoked without IRS's consent. But, if such an election is revoked, it can't be re-elected. (Code Sec. 179(c)(2))
Posted: December 2010
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