IRS Provides Guidance on 100% Bonus Depreciation
On March 29, 2011, the IRS released Rev. Proc. 2011-26 providing much-needed guidance on 100% bonus depreciation and associated issues. This effectively clarifies a number of issues including two which may be of interest to our clients: the ability to elect alternative 50% bonus depreciation; and the ability to depreciate components of self-constructed property.
The Obama Administration’s Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“the Act”) granted an additional 100% first-year depreciation for certain “qualified property” acquired or placed in service after September 8, 2010 and prior to January 1, 2012. The prior definition of “qualified property” remained intact – generally as acquired and placed in service after December 31, 2007 and prior to January 1, 2013 with original construction commencing with the taxpayer.
The Rev. Proc. provides much-welcomed guidance, inter alia, on self-constructed property in the context of 100% bonus depreciation; and on the ability to elect 50% bonus depreciation in lieu of 100% bonus depreciation or standard statutory depreciation deductions.
In general, for 100% depreciation purposes, self-constructed property is acquired when significant construction begins. Even if the construction of a property begins before the September 9, 2010 eligibility date, specific components of the project, with a proper election, may be eligible for 100% bonus depreciation if the component’s self-construction began or acquisition occurred after September 8, 2010.
Election of 50% Bonus Depreciation
Prior to the issuance of Rev. Proc. 2011-26, there was no ability to elect 50% bonus depreciation rather than 100% depreciation due to no affirmative guidance. For eligible property, taxpayers either opted for 100% bonus depreciation or elected out of the bonus depreciation regime entirely.
Fortunately, the new guidance permits taxpayers to elect – if preferable due to their particular tax positions – 50% bonus depreciation instead of 100% bonus depreciation. Because this has been released very close to the April 15, 2011 tax return filing deadline, taxpayers who have already filed their 2010 returns may opt for 50% bonus depreciation on an amended return filed prior to next year’s return or file an automatic accounting method change for either the first or succeeding years.
If the taxpayer elected out of bonus depreciation for a class of property, the taxpayer may revoke the election by June 17, 2011 or, if later, by the time it files next year’s tax return.