Post-JGTRRA bonus depreciation.

• Author: Beck, Allen M.
• Position: Jobs and Growth Tax Relief Reconciliation Act of 2003

Depreciation

One of the primary business incentives offered by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), Section 201 (a), is a provision under Sec. 168(k)(4) that allows a taxpayer to take a 50% deduction for "bonus" depreciation during the first year ah asset is placed in service. The provision applies to property acquired after May 5, 2003 and before 2005 (2006 for certain long-lived property).

Eligibility

To be eligible, property must be placed in service for the first time (i.e., used property is not eligible) and generally must be subject to the modified accelerated cost recovery system (MACRS) rules (i.e., property required to be depreciated under the alternative depreciation system (ADS) does not apply). Also, the property must fall into one of the following categories:

1. The recovery period cannot exceed 20 years.

2. Computer software (as defined in Sec. 167(f)(1)(B)) subject to general depreciation rules (i.e., depreciable over 36 months).

3. Water utility property.

4. Qualified leasehold improvement property.

The last category is narrowly defined by Sec. 168(k)(3) and includes only improvements to the interior of a nonresidential building subject to the following conditions:

* It must be made pursuant to a lease either by the lessee (or sublessee) or the lessor;

* The part of the building improved must be occupied by the lessee (or sublessee);

* The building must have been in service for more than three years; and

* The improvement cannot result in ah enlargement to the building, nor can it be an elevator of an escalator, or ala improvement to a common area or the building's internal structural framework.

Computations

The 50% bonus depreciation is Taken "off the top," by multiplying the depreciable basis by 50%. The remaining basis is then depreciated over the recovery period for that asset, as specified by the MACRS rules.

In addition, the bonus depreciation may be taken in conjunction with first-year Sec. 179 expensing. The JGTRRA increased the threshold under Sec. 179 to $100,000 from $25,000, subject to phaseout once the total property placed in service during the tax year exceeds $400,000.

Example: T, an individual, buys and places in service on July 1,2003, a new asset costing $200,000 and no other property. T can take a $100,000 Sec. 179 expense in 2003, leaving a basis of $100,000. The bonus depreciation deduction of 50% is then applied, leaving a basis of $50,000 to be depreciated under the MACRS...