Bonus depreciation eligibility computation rules.

• Author: Smith, Annette B.

The Job Creation and Worker Assistance Act of 2002 (Act) provides an additional "bonus" depreciation allowance of 30% of the adjusted basis of qualified property, for the year in which the property is placed in service. This 30% is in addition to the usual annual depreciation allowance that applies to the remaining 70% of the property's adjusted basis (e.g., the first-year depreciation under Sec. 168, subject to the half-year convention (see Notices 2001-70 and 2001-74 for electing out of the mid-quarter convention)). The new bonus depreciation provision is retroactive (i.e., it affects certain returns filed for tax years ending in 2001).

Eligible Property

Four categories of property are eligible for bonus depreciation:

* Tangible personal property, subject under Sec. 168 to MACRS depreciation, with recovery periods of three, five, seven, 10, 15 or 20 years;

* Software depreciable over 36 months under Sec. 167(f)(1)(A);

* The Sec. 1250 property portion of certain leasehold improvements; and

* Water-utility property (as defined in Sec. 168(e)(5)).

"Qualified leasehold improvement property" is any improvement to a building's interior that is nonresidential real property, provided certain requirements are met:

1. The improvement must be made under (or pursuant to) a lease, either by the lessee (or sublessee) or lessor of that portion of the building.

2. That portion of the building must be occupied exclusively by the lessee (or any sublessee).

3. The improvement must be placed in service more than three years after the date the building was first placed in service.

Qualified leasehold improvement property does not include any improvement attributable to the enlargement of the building, any elevator or escalator, any structural component benefiting a common area or the building's internal structural framework.

A binding commitment to enter into a lease is in fact a lease, and the parties are a lessor and a lessee. A lease between related persons is not a lease.

New York "Liberty Zone" qualified leasehold improvement property, which qualifies for special treatment under the New York City tax relief provisions of the Act, is not eligible for bonus depreciation.

Property subject to the alternative depreciation system of Sec. 168(g) on a mandatory basis (as opposed to an elective basis) does not qualify for bonus depreciation.

Only New Property Eligible

The Act provides that the property's "original use" must commence with the taxpayer on or after...