Due to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, business owners may be able to take advantage of renewed “bonus depreciation” deductions this year. In fact, this tax break is bigger than ever. The IRS recently issued new guidelines for bonus depreciation and expanded some provisions in the law.
Background: Previously, you could benefit from 50% bonus depreciation, coordinated with Section 179 deductions and regular depreciation deductions, for qualified new property placed in service before 2011. “Qualified property” includes property with a cost recovery period of 20 years or less, qualified leasehold improvement property, and certain software and water utility property.
The 2010 Tax Relief Act reinstated and improved the bonus depreciation tax break. It authorizes the following:
- 100% bonus depreciation deduction for qualified property placed in service from September 9, 2010, through December 31, 2011 (through 2012 for certain other property).
- 50% bonus depreciation for qualified property placed in service from January 1, 2012, through December 31, 2012.
The new IRS ruling addresses a number of issues related to 100% bonus depreciation. Here are four key points:
- Step-down to 50% bonus depreciation: Under one previous law, you could “step down” from 50% bonus depreciation to 30% bonus depreciation if it suited your needs. For instance, postponing depreciation deductions may have been advantageous in your situation. But there is no step-down provision in the 2010 Tax Relief Act. The new ruling allows business owners to step down from 100% to 50% bonus depreciation in 2011.
- Component depreciation: If you began to manufacture, construct or produce property before September 9, 2010, the components may qualify for 100% bonus depreciation. In other words, you can benefit for faster write-offs for qualified parts of the property. The new ruling explains how to elect the faster deductions for qualified components.
- Restaurant and retail improvement property: Under prior law, qualified restaurant and retail improvement property was not eligible for 100% bonus depreciation. But the IRS says in the new ruling that these properties may fall within the definition of “qualified leasehold property.” Thus, property with a “dual character” may qualify for enhanced deductions.
- Business vehicles: The “luxury car” rules limit annual deductions for business vehicles. Generally, the first-year depreciation deduction is increased by $8,000 as a result of 100% bonus depreciation. Therefore, business car owners may be able to claim a maximum deduction of $11,060 ($11,160 for a light truck or van) placed in service in 2011. The actual deduction is based on the percentage of business use. However, this effectively slows down the deductions that may be claimed in subsequent years.
The new ruling provides a special “escape hatch” based on a calculation involving 50% bonus depreciation. If this election is made, business owners may claim deductions over the usual cost recovery period for business vehicles.
Final point: The new ruling clarifies the rules relating to 100% bonus depreciation, but this remains a complex area of the law. Taxpayers must follow strict procedures regarding special elections. It is recommended that you obtain professional assistance from your Condley & Company, L.L.P. tax advisers.