Rev Proc 2011-26, 2011-16 IRB
IRS has issued detailed guidance on the 2010 Tax Relief Act's 100% bonus depreciation rules for qualifying new property generally acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012. Overall, the rules are quite generous. For example, they permit 100% bonus depreciation for components where work on a larger self-constructed property began before Sept. 9, 2010, allow a taxpayer to elect to “step down” from 100% to 50% bonus depreciation, OK 100% bonus depreciation for qualified restaurant property or qualified retail improvement property that also meets the definition of qualified leasehold improvement property, and provide an escape hatch for some business car owners who would otherwise be subject to a draconian depreciation result.
Background. In general, under the 2010 Tax Relief Act, an asset qualifies for the 100% bonus depreciation allowance if:
... It is: property to which the modified accelerated cost recovery system (MACRS) rules apply with a recovery period of 20 years or less; computer software other than computer software covered by Code Sec. 197; qualified leasehold improvement property; or certain water utility property;
... It is acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012 (placed in service before Jan. 1, 2013 for certain long production property and aircraft); and
... Its original use commences with the taxpayer. (Code Sec. 168(k)(5))
Limited exception for components. If before Sept. 9, 2010, a taxpayer began the manufacture, construction, or production of a larger self-constructed property that is qualified property for use in its trade or business or for its production of income, but this larger self-constructed property meets the placed in service and original use requirements, the taxpayer may elect to treat any acquired or self-constructed component of that larger self-constructed property as being eligible for the 100% additional first year depreciation deduction if the component is qualified property and is acquired or self-constructed by the taxpayer after Sept. 8, 2010, and before Jan. 1, 2012 (before Jan. 1, 2013, for certain long production property and aircraft)).
The election must be made by the due date (including extensions) of the federal tax return for the taxpayer's tax year in which it placed in service the larger self-constructed property, and by attaching a statement to that return indicating that the taxpayer is making the election under Sec. 3.02(2)(b) of Rev Proc 2011-26, and whether the taxpayer is making the election for all or some of the components.
If a taxpayer timely filed its federal tax return for its tax year in which the larger self-constructed property is placed in service by the taxpayer on or before Apr. 18, 2011, there's an automatic extension of 6 months from the due date of that federal return (excluding extensions) to make the election.
Qualified restaurant property and qualified retail improvement property. Code Sec. 168(e)(7)(B) and Code Sec. 168(e)(8)(B) provide that qualified restaurant property and qualified retail improvement property are not treated as qualified property for purposes of the bonus depreciation rules in Code Sec. 168(k) and thus aren't eligible for the 100% bonus depreciation allowance. Following the lead of the Joint Committee of Taxation (JCT) on the issue, IRS says that an asset that is qualified restaurant property or qualified retail improvement property also may fall within the definition of qualified leasehold improvement property under Code Sec. 168(e)(6), which is eligible for bonus deprecation. If it does, such “dual character” property qualifies for 100% bonus depreciation (or, at the taxpayer's election, 50% bonus depreciation, see below).
Observation: For a detailed article on bonus depreciation for qualified restaurant property and qualified retail improvement property.
Step-down election to 50% bonus depreciation OK'd. An election to take a reduced bonus depreciation deduction was specifically authorized under prior law, when a taxpayer could elect 30%–instead of 50%–bonus first-year depreciation. However, current law does not specially authorize a step-down from 100% to 50% bonus first-year depreciation. Apparently, the only choice for a taxpayer that does not want 100% bonus depreciation was to elect out of bonus depreciation entirely.
Nonetheless, the JCT in its “General Explanation of Tax Legislation Enacted in the 111th Congress” (JCS-2-11, March 2011, colloquially referred to as “the Blue Book”) says that it was Congress's intent that “a taxpayer may elect 50 percent (rather than 100 percent) bonus depreciation with respect to all property in any class of property placed in service during a taxable year.” Now, IRS has decided to follow the JCT's lead on this issue as well, and permit a step-down election from 100% to 50% bonus depreciation.
Observation: This is a reversal of IRS's position in the original Instructions to Form 4562 (Depreciation and Amortization) for 2010, in which IRS said the step-down election from 100% to 50% bonus depreciation could not be made.
Secs. 4 and 5 of Rev Proc 2011-26 carry elaborate procedures for taxpayers that claimed 100% bonus depreciation or that elected out of bonus depreciation but now want to elect to claim a stepped-down 50% bonus depreciation allowance.
Business autos. Under the 2010 Tax Relief Act, the otherwise applicable first-year depreciation deduction for new business autos (as well as light trucks and vans) bought and placed in service after Sept. 8, 2010, and before Jan. 1, 2012, and that otherwise are eligible for 100% bonus first year depreciation, is increased by $8,000. The confluence of these rules, and the pre-existing depreciation rules for business autos, produces a bizarre result. As we'll explain in detail in a future article, most business-car owners would wind up with a first-year depreciation deduction amount capped at $11,060 (for an auto) or $11,260 (for a light truck or van), but would have to defer writing off the balance of the vehicle until after the normal recovery period (literally 5 years, but effectively 6 because of the half-year convention). Fortunately, IRS provides an “out” to mitigate what it calls an “anomalous result.” It takes the form of an “as-if” calculation that determines the unrecovered basis of the vehicle as if 50%—instead of 100%—bonus depreciation had been claimed.
References: For 100% (instead of 50%) bonus depreciation for certain qualified property, see FTC 2d/FIN ¶L-9311.2; United States Tax Reporter ¶1684.0251.