IRS issues guidance on electing out of 50% additional first-year depreciation.

• Author: Donovan, Jack

The IRS has issued Rev. Proc. 2008-65, which provides guidance on new Sec. 168(k)(4), added by Section 3081 of the Housing and Economic Recovery Act of 2008, P.L. 110-289. Sec. 168(k)(4) allows corporations to elect out of claiming the 50% additional first-year depreciation for new property acquired after Match 31, 2008, and placed in service before January 1, 2009. Under Sec. 168(k)(4), corporations may elect to increase their business credit limitation under Sec. 38(c) (but only for certain research credits determined under Sec. 41(a)) or their alternative minimum tax (AMT) credit limitation under Sec. 53(c). Rev. Proc. 2008-65 is effective October 10, 2008.

Eligible Qualified Property

Eligible qualified property for purposes of Sec. 168(k)(4) is property that is eligible for bonus depreciation under Sec. 168(k)(2), with certain modifications to reflect the revised dates in Sec. 168(k)(4). Thus, eligible qualified property is tangible property (and certain computer software):

* With a MACRS recovery period of 20 years or less;

* The original use of which begins after March 31, 2008;

* That is acquired after March 31, 2008, and before January 1, 2009, provided no written binding contract was in effect before March 31, 2008 (special rules apply to passenger aircraft and to property with a long production period); and

* That is manufactured, constructed, or produced for the taxpayer's own use and is manufactured, constructed, or produced after March 31, 2008, and before January 1, 2009.

If new property is placed in service after March 31, 2008, and is the subject of a sale-leaseback transaction within three months of the placed-in-service date, the taxpayer-lessor is treated as the original owner and the original placed-in-service date by the taxpayer-lessor is not earlier than the date on which the property is used by the lessee under the leaseback.

Sec. 168(k)(4) Election

Rev. Proc. 2008-65 provides ordering rules for making the elections out of bonus depreciation under Sec. 168(k)--the election under Sec. 168(k)(2)(D)(iii) and the Sec. 168(k)(4) election. Under the procedure, a corporate taxpayer applies the election out of bonus depreciation under Sec. 168(k)(2)(D)(iii) first. The taxpayer makes that election on an asset-class basis. If an election is made under Sec. 168(k)(2)(D)(iii) for a certain class of property, that class of property is not qualified property under Sec. 168(k)(2) or eligible qualified property under Sec. 168(k)(4).

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