Claiming bonus depreciation on self-constructed long production period assets.

• Author: Bakale, Anthony S.

The Small Business Jobs Act of 2010, P.L. 111-240, extended 50% bonus depreciation for assets placed in service before January 1, 2011. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, RL. 111-312 (TRA 2010), created 100% bonus depreciation for assets placed in service after September 8, 2010, and before January 1, 2012, and extended 50% bonus depreciation for assets placed in service after December 31, 2011, and before January 1, 2013.

Both acts contain binding contract exceptions. The first exception is that bonus depreciation of either 50% or 100% cannot be claimed for assets acquired after December 31, 2007, and placed in service before (or after) the applicable dates if the asset was acquired under a written binding contract entered into prior to January 1, 2008. Under TRA 2010, a taxpayer cannot claim 100% bonus depreciation for assets acquired after September 8, 2010, and placed in service before January 1, 2012, if the taxpayer acquired the asset under a written binding contract entered into before September 9, 2010. In the case of certain assets (longer production period property, transportation property, and certain aircraft), 50% bonus depreciation is available if the asset is acquired under a binding contract entered into after December 31, 2007, and before January 1, 2013, and the asset is placed in service prior to January 1, 2014. A similar binding contract rule applies to these assets with respect to 100% bonus depreciation with appropriate date modifications.

Although the binding contract rules seem simple enough to apply with respect to acquired property, the waters become a bit muddied when the taxpayer's qualified property is self-constructed. Self-constructed property can be broken down into two general categories. The first category is enumerated in Sec. 168(k) (2)(B) ("Certain property having longer production periods"). The other category would include everything else (or property that does not have a longer production period) that is otherwise qualified property. This item addresses self-constructed property having a longer production period, since the general rules are applicable to the latter category. In March 2011 the IRS issued Rev. Proc. 2011-26, in part to clarify how the binding contract rules apply to self-constructed longer production period assets and to provide an election to "compo-nentize" the costs associated with such projects to account for the different phases of bonus depreciation available to the taxpayer for such projects.

Self-Constructed Assets

First, a little background is needed on self-constructed longer production period assets. In order to qualify for bonus depreciation, these assets must meet the general qualification rules for Sec, 168(k). Under Sec. 168(k)...