The American Taxpayer Relief Act of 2012 (the Act) extended 50 percent bonus depreciation for qualified property placed in service from Jan. 1, 2013, through Dec. 31, 2013 (2014 for long production property).
This is an expansive benefit for businesses and may result in substantial tax savings for taxpayers that already had plans to purchase 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. However, bonus depreciation is not available for 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.
Extended placed in service dates
The placed in service dates for long production property generally are extended an extra year (i.e., before Jan. 1, 2015); however, 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 have 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.
Property with a recovery period of 20 years or less, qualified leasehold improvements, certain computer software, and water utility property are eligible for bonus depreciation. Qualified leasehold improvements generally are 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, taxpayers may expense up to $250,000 of the cost of these improvements—as well as qualified leasehold improvements—under section 179. This benefit applies to property placed in service in 2012 or 2013.
Original use requirement
Only new property is eligible for bonus depreciation.
Electing out of bonus?
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 that many states have not adopted the recent higher federal section 179 limits, plus you should be aware of the deduction’s other restrictions.