The American Taxpayer Relief Act of 2012 (ATRA) extended 50 percent bonus depreciation for qualified property placed in service from Jan. 1, 2013, through Dec. 31, 2013 (2014 for long production property). For property placed in service after Dec. 31, 2013, bonus depreciation is currently expired. At this point, it is unknown if Congress will extend bonus depreciation for 2014 and beyond. In prior years, bonus depreciation has been extended late in the year–or even after the start of a new year–as part of a larger package of tax extenders. While the House passed a bill to make bonus depreciation permanent, continued gridlock in Congress means the chances of the bill becoming law are uncertain. Many tax publications and comments from Congress are leaning toward extending bonus depreciation for 2014. This, along with increased section 179 deduction limits, will likely be part of a lame duck Congress tax-extender package. Passing the tax laws may happen as soon as early December, but given past performance, early January is a possibility.
Bonus depreciation may result in substantial present value tax savings for businesses that already had plans to purchase or construct qualified property. Unlike section 179 expensing, you do not need net income to take bonus depreciation deductions. Further, bonus is not limited to smaller businesses or capped at a certain dollar level, but it is not available for used property, property used outside of the US, tax-exempt use property, or tax-exempt financed property. Also, many states are likely to opt out of this provision for state income tax purposes.
Bonus depreciation has generally been available since Sept. 11, 2001, with a period of expiration in 2005, 2006, and 2007, and has ranged from 30 percent to 100 percent over the years, as shown in this chart:
|Start date||End date||Bonus amount|
Newly constructed or original use property with a recovery period of 20 years or less (real or personal), qualified leasehold improvements, certain computer software, and water utility property are eligible for bonus depreciation. Only new property is eligible for bonus depreciation; used property is not eligible.
Long production property
While placed-in-service dates for long production property generally are in effect for property placed in service before Jan. 1, 2015, only costs incurred before Jan. 1, 2014, are eligible for bonus—this is known as the progress expenditure rule. For example, a building owner contracts for $2 million of qualified tenant improvements and begins construction in 2013, during the 50 percent bonus window. By the end of 2013, they incurred $1.2 million. Construction is completed in 2014 and the improvements are placed in service in June of that year. Under the progress expenditure rule, $1.2 million is eligible for 50 percent bonus.
Long production property is property that has a recovery period of at least 10 years, an estimated production period of more than two years, or an estimated production period of more than one year and a cost of more than $1 million. Transportation property is tangible personal property used in the trade or business of transporting persons or property.
Qualified leasehold, retail, and restaurant property
Qualified leasehold improvements are generally bonus eligible, if made under a lease to the interior portion of a building occupied by a tenant and placed in service more than three years after the building was first placed in service. Qualified restaurant property and qualified retail improvement property are not eligible for bonus depreciation; however, under section 179, taxpayers may expense up to $250,000 of the cost for these improvements as well as qualified leasehold improvements. This benefit applies to property placed in service in 2012 or 2013. The treatment details for these three types of property are summarized below.
|Qualified Leasehold Improvement Property (QLIP)||Qualified Leasehold Improvement Property (QLIP)||Qualified Retail|
Improvement Property (QRIP)
|Qualified Restaurant Property (QRP)|
|Life of Real Property||39||15||15||15||15|
|Depreciation Method||Mid-month, straight-line||Half-year, straight-line||Half-year, straight-line||Half-year, straight-line|
|179 Eligible 1||No|
|Yes - 1/1/10-12/31/13||Yes - 1/1/10-12/31/13||Yes - 1/1/10-12/31/13||No|
|Building Age Requirement||3 years or older||3 years or older||3 years or older||None||3 years or older|
Landlord and tenant can't be related party, improvement must be to an interior portion of a nonresidential building, enlargement / elevators / escalators / common area / internal structural framework excluded
Improvement must be to an interior portion of a nonresidential building, portion of improvements must be open to the general public and used in the retail trade or business of selling tangible personal property to the general public, enlargement/elevators/escalators/common area/internal structural framework excluded
A building, or an improvement to a building, if more than 50% of building's square footage is devoted to preparation of, and seating for on-premises consumption of, prepared meals
1179 amount is limited to $250,000, phase out begins at $1,000,000 of qualified property. Qualified property does not include air conditioning or heating units. Total 179 amount for 2010, 2011, 2012, & 2013 is $500,000 and phase out begins at $2,000,000 of total qualified property.
Electing out of bonus and section 179
For taxpayers that want to spread out their cost-recovery deductions, one alternative is to elect out of bonus depreciation and selectively expense the cost of eligible acquisitions under section 179. Keep in mind many states have not adopted the recent higher federal section 179 limits, and there may be other restrictions to the deductions.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
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