Fixed-asset implications under the American Taxpayer Relief Act of 2012.

• Author: Miller, Marla K.

While much of the attention of the recent fiscal cliff debate was focused on the increased income tax rates for high-income individuals, there are many provisions in the new legislation that are favorable to businesses, particularly in the fixed-asset area. The American Taxpayer Relief Act of 2012 (ATRA), P.L. 112-240, which was signed on Jan. 2, 2013, provides many incentives for businesses to expand and purchase assets, including the extension of bonus depreciation, Sec. 179 small business expensing, and shortened tax depreciation lives for qualifying properties.

50% Bonus Depreciation Extended for One Year

Normally the cost of a capital asset is recoverable over the life of the asset. To encourage investment, Congress enacted bonus depreciation provisions that have allowed taxpayers to accelerate recovery of the costs of purchasing certain assets. The bonus deprecation amounts have varied from 30% to 100%, with the most recent first-year depreciation deduction being 50%. This favorable bonus depreciation provision was set to expire on Dec. 31, 2012. ATRA extended the 50% first-year bonus depreciation to qualified property acquired and placed in service before Jan. 1, 2014, and certain longer period production and transportation properties are eligible for 50% bonus depreciation through 2014 (Sec. 168(k)(2), as amended by ATRA Section 331(a)).

Bonus depreciation is available only for new property with respect to which the original use commences with the taxpayer. In addition, it must be property depreciated under the modified accelerated cost recovery system (MACRS) that has a recovery period of 20 years or less, water utility property, computer software depreciable over three years under Sec. 167(f), or qualified leasehold improvement property. It also includes certain property with a long production period as defined in Sec. 168(k)(2)(B). A taxpayer may elect out of the additional first-year depreciation for any class of property for any tax year. Also, the choice under Sec. 168(k)(4) to forgo bonus depreciation in exchange for an increase in the alternative minimum tax credit limitation was likewise extended.

The extension of bonus depreciation in ATRA is also beneficial for taxpayers purchasing a new vehicle. The "luxury auto" rules severely limit the amount of depreciation that can be taken on many vehicles. Under Sec. 280F, depreciation deductions that can be claimed for passenger autos are subject to dollar limits that are adjusted...