Under the “Tax Relief Act of 2010,” you may be able to write off the entire cost of business property placed in service this year, thanks to 100% “bonus depreciation.”
Prior to this law, a business was able to claim 50% bonus depreciation on qualified new (but not used) property placed in service in 2010. This included property with a cost recovery period of 20 years or less, most computer software, qualified leasehold improvement property, and certain water utility property. Bonus depreciation could be coordinated with Section 179 first-year expensing and regular depreciation deductions (subject to the annual limits).
The “Tax Relief Act,” signed December 17, 2010, improved and extended the tax benefits. It allows a business to claim 100% bonus depreciaiton for qualified property placed in service from September 9, 2010, through December 31, 2011 (through 2012 for property with a cost recovery period of ten years or more and certain aircraft and transportation property). As the law currently stands, 50% bonus depreciation can be claimed for qualified property placed in service during 2012.
The “Tax Relief Act of 2010” did not change the definition of “qualified property”; it remains the same as it was before.
Recently, the IRS issued new guidance on using bonus depreciation. It focuses on the following areas:
- Depreciation step-down. You’re allowed to “step down” from 100% bonus depreciation to 50% bonus depreciation this year if it suits your needs. For example, it may not be advantageous for a business to front-load its depreciation deductions to receive the maximum amount. The IRS guidance spells out the procedure for cutting back to 50% bonus depreciation.
- Company vehicles. The first-year depreciation deduction for “luxury cars” and other vehicles is enhanced by $8,000 due to the bonus depreciation.
Be aware that certain heavy-duty SUVs and other vehicles weighing more than 6,000 pounds are exempt from the luxury car limits. If purchased after September 8, 2010, and before January 1, 2012, they may qualify for 100% bonus depreciation.
- Qualified leasehold property. The IRS says that qualified restaurant and retail improvement properties may be eligible for 100% bonus depreciation under the definition of “qualified leasehold property.”
- Component depreciation. A business may be able to deduct certain components of a business building over a faster cost recovery period than the usual 39-year period required for an entire building. The IRS ruling authorizes an election to use 100% bonus depreciaton for qualified components of a self-constructed building.
Even with the recent IRS guidance, the depreciation rules remain very complicated. For assistance in applying the rules for maximum tax benefit to your business, contact our office.