United States: IRS Issues Guidance On Bonus Depreciation

Last Updated: October 4 2011
Article by Mark L. Regante, Drew Batkin, Thallen J. Brassel and Leah S. Karlov

On March 29, 2011, the Internal Revenue Service issued Revenue Procedure 2011-26 (the "Revenue Procedure"), which provides guidance on the rules applicable to the 50-percent and 100-percent first-year depreciation deductions ("bonus depreciation") for qualified property that were added to the Internal Revenue Code of 1986, as amended (the "Code"), by the Small Business Jobs Act of 2010 (the "SBJA") and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "Tax Relief Act").

The SBJA and the Tax Relief Act extended until January 1, 2013 (January 1, 2014 for certain long-lived and transportation property), the date before which qualified property (as defined in Code section 168(k)(2)) must be placed in service to qualify for 50-percent bonus depreciation. Under prior law, 50-percent bonus depreciation was not available for qualified property placed in service after December 31, 2009. The Tax Relief Act increased to 100 percent the bonus depreciation deduction allowable for qualified property acquired after September 8, 2010, and placed in service before January 1, 2012 (January 1, 2013 for certain long-lived and transportation property).

The Revenue Procedure clarifies that for purposes of determining whether property was acquired after September 8, 2010, a taxpayer is deemed to have acquired the qualified property when it pays or incurs the cost of the property or, in the case of self-constructed property, when construction, manufacture or production begins. Property will be treated as acquired after September 8, 2010 if the taxpayer enters into a written binding contract to acquire the property after that date. Although self-constructed property will not qualify for 100-percent bonus depreciation if manufacture or construction commenced before September 9, 2010, the Revenue Procedure allows taxpayers to elect to treat "components" of such property that are acquired or self-constructed after September 8, 2010 as eligible for 100-percent bonus depreciation provided that the larger project is placed in service before the relevant deadline.

Property will not be treated as acquired after September 8, 2010, for purposes of the 100-percent bonus depreciation if either (1) the user of the property or a related person entered into a written binding agreement to purchase the property before September 9, 2010, or (2) for property constructed for or by the user or a related person, the manufacture, construction, or production of the property began before September 9, 2010. This rule and the concomitant rule that property is not eligible if construction began before September 9, 2010, is not apparent from the statute and may be particularly troubling for taxpayers who completed sale-leasebacks or sales to controlled partnerships prior to March 29, 2011 in reliance on a straight-forward reading of the statute.

In another deviation from a plain reading of the statute (but in an attempt to accommodate taxpayers), the Revenue Procedure allows taxpayers to elect 50-percent depreciation, in lieu of 100-percent depreciation, for an entire class of qualified property (e.g., all 5-year property) that is placed in service by the taxpayer in its taxable year that includes September 9, 2010. This election eliminates the need for a taxpayer to determine the precise date on which the property was acquired or placed in service.

The Revenue Procedure also spells out that the 100-percent bonus depreciation deduction is determined after the taxpayer's basis in the property is reduced by (1) the amount of any credits claimed that require adjustments to basis, including the investment tax credits under Code section 48, and (2) the amount of any grants received on specified energy property under section 1603 of the American Recovery and Reinvestment Tax Act of 2009, as amended by Section 707 of the Tax Relief Act.

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.

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