Depreciation detailed: more highlights from the 2002 Tax Act.

• Author: Josephs, Stuart R.
• Position: Federal Tax

May's California CPA, Page 33, discussed the new 30-percent additional first year depreciation deduction for qualified property generally acquired after Sept. 10, 2001 and before Sept. 11, 2004 and pointed out that "A taxpayer can elect out of this new deduction for any class of property for any tax year."

The 2001 IRS Form 4562 Instructions (Revised March 2002) direct an electing taxpayer to:

"Attach a statement to your return indicating the class of property for which you are electing not to claim the additional depreciation deduction."

The 2001 Form 2106 Instructions (Revised March 2002) are similar.

Also, Rev. Proc. 2002-33, IRB 200220, May 20, 2002 contains the following additional procedures.

Election Out: This election applies to all qualified property that is in the same class and placed in service in the same tax year. In addition, the depreciation adjustments under IRC Sec. 56 apply to that property for AMT purposes. Each qualified property owner (e.g., each consolidated group member, partnership or S corp.) makes this election separately.

"Class of property" means:

1. Except for the property discussed in (3) and (4) below, each class of property described in Sec. 168(e), such as five-year property;

2. Computer software depreciated under Sec. 167(0(1);

3. Qualified leasehold property (defined in new Sec. 168(k)(3) and depreciated under Sec. 168); and

4. Water utility property (defined in Sec. 168(e)(5) and depreciated under Sec. 168).

Generally, the election must be made by the due date, including extensions of the return for the year in which the taxpayer places qualified property in service as prescribed by Form 4562 Instructions. Special procedures apply for tax years beginning in 2000 or 2001.

An automatic extension of six months from the due date, excluding extensions, of the return for the qualified property's placed-in-service year is granted to make this election if that return is timely filed and the taxpayer satisfies the corrective action and procedural requirements in Regs. Sec. 300.9100-2(c) and (d), respectively.

If a taxpayer files a 2000 or 2001 return after May 31, 2002, the general procedures (described above) apply. However, the instructions for the 2001 Form 4562 (quoted above) must be followed. If such a return was filed before June 1, 2002, the special procedures explained below apply.

An election out is revocable only with the IRS' prior written consent, which must be sought by requesting a letter ruling and...