United States: Extension and Expansion of Taxpayer Favorable Depreciation Rules

Last Updated: November 2 2011
Article by Crystal A. Germanese


In late September 2010, the Small Business Jobs Act of 2010 (the Jobs Act) retroactively restored the 50% first-year bonus depreciation and enhanced expensing under Section 179. Then, in late December 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the Tax Relief Act) allowed 100% first-year bonus depreciation, further extended 50% first-year bonus depreciation and extended the 15-year property rule for qualified leasehold, restaurant and retail property. Recently issued Rev. Proc. 2011-26 provides eagerly anticipated guidance on how the 100% bonus depreciation rules work and the options that are available to taxpayers.

50% & 100% Bonus Depreciation

The Small Business Jobs Act of 2010 extended the 50% bonus depreciation provisions to include eligible assets placed in service before January 1, 2011. The 2010 Tax Relief Act then provided for 100% first-year bonus depreciation (effectively writing off the entire cost of the asset in the year placed in service) for qualified property that is placed in service after September 8, 2010 and before January 1, 2012. The 2010 Tax Relief Act also reinstated 50% first-year bonus depreciation for qualified property placed in service in 2012.

Bonus depreciation (additional first-year depreciation) allows a taxpayer to expense 50% or 100% of an asset's cost in the first year of service.  If 50% bonus depreciation is used, the remaining cost of the asset is depreciated using the "normal" rules. For example, a taxpayer buys new depreciable 5-year property that costs $10,000. If the property was eligible for 100% bonus depreciation, the taxpayer would get a deduction for $10,000 in year 1. If the property was eligible for 50% bonus depreciation the taxpayer would get to deduct $5,000 (50%) in year 1, and the remaining cost of $5,000 would be depreciated over the 5-year life. If half-year convention applied, then 20% of the remaining cost would be allowed as depreciation in
year 1, or $1,000. Therefore, under the 50% bonus depreciation rules, $6,000 would be deducted in year 1.

For an asset to qualify for bonus depreciation, certain rules need to be met. First, the property must be considered qualified property. Qualified property is defined as property with a tax recovery period (under MACRS) of 20 years or less, purchased software, water utility property and qualified leasehold improvement property (explained below). Most tangible personal property will meet the 20-years-or-less requirement, and most real estate assets will fail to meet the definition. If any of the real estate assets can be broken out into assets with a 20-year-or-less life, for example through Real Estate Cost Segregation or as qualified leasehold improvement property, those assets would be eligible for bonus depreciation.

In order for an asset to qualify for bonus depreciation, the original use must commence with the taxpayer.  In other words, the asset must be new rather than used.  The asset must also be placed into service during the bonus depreciation time periods and the acquisition requirements must be met. In order to meet the acquisition requirement, the taxpayer cannot enter into a contract to buy the qualified asset before the commencement of the bonus depreciation periods. In order for an asset to be eligible for 50% bonus depreciation, the taxpayer cannot enter into a contract to buy the assets before January 1, 2008. To be eligible for 100% bonus depreciation that date is September 8, 2010. There are special rules for self-constructed property which may be eligible for bonus depreciation despite the contract dates.

Bonus depreciation is automatic unless a taxpayer elects not to take it. A taxpayer can elect out of bonus depreciation on their timely filed tax return (including extensions). If the election is made, bonus depreciation is not allowed for any assets in that class that are placed into service during that year.  In other words, the election applies to property with the same tax recovery period; for example, all five-year property is one class and all 15-year property is another class.  A taxpayer is not allowed to elect out of bonus depreciation asset by asset. The election is made annually and applies to the assets placed into service during that tax year.

The dollar amount of bonus depreciation a taxpayer may take on qualified property is not limited.  However, it might not be the best idea to use bonus depreciation to bring net income to zero (or a loss) since it would eliminate income in a lower tax bracket. Since a taxpayer can only elect out of bonus depreciation by asset class, there is less flexibility to control this. Revenue Procedure 2011-26 does contain guidance on how to "step down" from 100% to 50% for the tax year that includes September 9, 2010 which might be a viable option. As of right now that step down is not available for a calendar year taxpayer's 2011 tax return.

Increased Section 179 Deduction

For tax years beginning in 2010 or 2011, a taxpayer can elect to expense up to $500,000 of qualifying property using the Section 179 deduction. The $500,000 limit is reduced dollar-for-dollar to the extent the taxpayer purchases more than $2,000,000 of qualifying property during the tax year. Accordingly, no Section 179 deduction is available for 2010 or 2011 if the total investment in qualifying property is $2,500,000 or more. The $500,000 deduction and the $2,000,000 phase-out threshold are scheduled to reduce to $125,000 and $500,000, respectively, for years beginning in 2012 (indexed for inflation).

The 179 deduction can be applied to new and used assets and also can be applied on an asset-by-asset basis (does not apply to the whole asset class) which can make it a more attractive depreciation option than bonus depreciation. However, there is a taxable income limitation for the 179 deduction. Whereas a taxpayer is able to create a net operating loss with bonus depreciation, the Section 179 deduction is limited to the taxpayer's aggregate taxable income derived from the active conduct of any trade or business. Active trade or business is based on facts and circumstances and requires a meaningful participation in the management or operation of the trade or business.  Often the active trade or business rules preclude a taxpayer from benefiting from taking the 179 deduction on their passive rental real estate activities.

New for 2010, the Small Business Act added a provision for the expensing of qualified real property under Section 179. For tax years beginning in 2010 and 2011, taxpayers may expense up to $250,000 of qualified real property towards the $500,000 Section 179 limitation. Qualified real property is defined as qualified leasehold improvements, qualified restaurant property and qualified retail improvement property.

Qualified Leasehold, Restaurant and Retail improvements

The 2010 Tax Relief Act extends the 15-year life for qualified leasehold improvement property, qualified retail improvement property and qualified restaurant property for two years by changing the date before which the three types of property must be placed in service from January 1, 2010 to January 1, 2012. Without this extension, the life of these types of property would generally be 39 years.  

A qualified leasehold improvement is an improvement to an interior part of a building that is nonresidential real property. If the improvement is made under or according to a lease by the lessee (or any sublessee) or the lessor of that part of the building, that part of the building is to be occupied exclusively by the lessee (or any sublessee), and the improvement is placed in service more than 3 years after the date the building was first placed in service by any person. The improvement has to be part of the building but does not include any improvement attributable to the enlargement of the building, any elevator or escalator, any structural component benefiting a common area or the internal structural framework of the building. Also note that a lease between related persons is not treated as a lease and, as such, property would not qualify as qualified leasehold improvement property.

Qualified restaurant property is defined as a building or an improvement to a building in which more than 50% of the building's square footage is devoted to the preparation of and seating for the on-premises consumption of prepared meals. The 50% test applies to a building as well as the improvements.

Qualified retail improvement property is defined as an improvement to an interior portion of a building that is nonresidential real property, if that portion of the building is open to the general public and is used in the retail trade or business of selling tangible personal property to the general public, and if such improvements are placed in service more than 3 years after the building was first placed in service. The rules to define the interior portion of the building are similar to the qualified leasehold improvement rules.

Qualified Restaurant and Retail Can Be Eligible for Bonus

Qualified leasehold improvement property is eligible for bonus depreciation as long as the acquisition date and placed-in-service date rules are met. Qualified restaurant and qualified retail improvement property are not eligible for bonus depreciation. However, the IRS clarified in Revenue Procedure 2011-26 that qualified restaurant and retail improvement property that also meets the definition of qualified leasehold improvement property is eligible for bonus depreciation.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions