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Depreciation Updates

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As we approach year end, many taxpayers plan to acquire additional assets as either an expense or to take advantage of bonus depreciation, which is currently scheduled to reduce to 50% unless the law is extended. The following article highlights some basic depreciation, bonus depreciation and Section 179 expensing rules and provides a good referral source for planning.

Revenue Procedure 2011-26, issued by the IRS in the spring of 2011, provides for 100% bonus depreciation for qualifying property placed in service after September 8, 2010 and before January 1, 2012. The guidance outlines bonus depreciation rules for “qualifying property” used in businesses, including computer software, water utility property, qualified leasehold improvements, and MACRS property with a useful life of 20 years or less.

The use of bonus depreciation is not limited to smaller entities and there is no cap on the expenses permitted. The deductions may also be utilized to place businesses in a taxable loss position.

The information below summarizes the basic rules for depreciation of certain qualifying property:

  • Qualified Leasehold Improvements
    Placed in Service: 10/23/04-12/31/11
    MACRS Recovery Period: 15 Year/Straight Line
    Bonus Depreciation Eligible: Yes, if placed in service between 10/23/04-12/31/04 or 1/1/08-12/31/11
    Section 179 Expense Eligibility: Up to $250,000
  • Qualified Restaurant Property 2004-2007
    Placed in Service: 10/23/04-12/31/07
    MACRS Recovery Period: 15 Year/Straight Line
    Bonus Depreciation Eligible: No
    Section 179 Expense Eligibility: No
  • Qualified Restaurant Property 2008
    Placed in Service: 1/1/08-12/31/08
    MACRS Recovery Period: 15 Year/Straight Line
    Bonus Depreciation Eligible: Yes
    Section 179 Expense Eligibility: No
  • Qualified Restaurant Property 2009-2011
    Placed in Service: 1/1/09-12/31/11
    MACRS Recovery Period: 15 Year/Straight Line
    Bonus Depreciation Eligible: No
    Section 179 Expense Eligibility: No
  • Qualified Retail Improvement Property
    Placed in Service: 1/1/09-12/31/11
    MACRS Recovery Period: 15 Year/Straight Line
    Bonus Depreciation Eligible: No
    Section 179 Expense Eligibility: Up to $250,000

Additionally, the Revenue Procedure permits taxpayers to claim an election for qualified leasehold improvement construction costs acquired or placed in service after September 8, 2010 if construction started earlier than September 8, 2010 in order to be able to utilize 100% bonus depreciation. Previously these assets would be limited to a 50% deduction. The election can be made for any qualified leasehold improvement constriction or component acquired and placed in service after September 8, 2010 with construction starting before September 8, 2010.

For your reference, prior and future Bonus Depreciation Rates are as follows:

9/11/2001-5/5/2003

30%

5/6/2003-12/31/2004

50%

1/1/2008-9/8/2010

50%

9/9/2010-12/31/2011

100%

1/1/2012-12/31/2012

50%*

Also for your reference, please keep in mind that Section 179 deductions are subject to phaseout after a certain investment dollar limitations:

Tax Years Beginning in:

Dollar Limitation

Investment Limitation

2003$100,000$400,000
2004$102,000$410,000
2005$105,000$420,000
2006$108,000$430,000
2007$125,000$500,000
2008 and 2009$250,000$800,000
2010 and 2011$500,000$2,000,000
2012*$125,000$500,000
2013 and thereafter*$25,000$200,000

*Unless extended by the President.

For further guidance on depreciation and other tax issues, please contact your Marcum Tax Professional.

 
 
 
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