Some implications of 100% bonus depreciation.

• Author: Wong, Alan

Given the often complex interaction of the many rules regarding modified accelerated cost recovery system (MACRS) depreciation, additional first-year (bonus) depreciation, Sec. 179 expensing, and state decoupling, optimization of the depreciation deduction has become more of an art than a science. This item highlights some of the implications and peculiarities of the newest addition to the mix: 100% bonus depreciation.

Background

On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312, extended the bonus depreciation deduction to qualified property placed in service before 2013 (previously extended by the Small Business Jobs Act of 2010, P.L. 111-240, to qualified property placed in service before 2011) and created a new, 100% bonus depreciation deduction for qualified property acquired after September 8, 2010, and placed in service before January 1, 2012. Effective March 29, 2011, Rev. Proc. 2011-26 was issued to provide guidance on the application of these new provisions.

Too Much of a Good Thing?

As with previous iterations of bonus depreciation, taxpayers may elect to forgo the bonus on all qualified property in a given class that is placed into service in the same tax year (Sec. 168(k)(2)(D)(iii)). This may come as a relief to some taxpayers who, having placed a significant amount of assets into service, find that the prospect of a 100% deduction for these assets frustrates their plans (for example, to use expiring NOLs). Other taxpayers, however, might find it more advantageous to be able to just dial back the bonus deduction from 100% to 50% or even to 30%. Rev. Proc. 2011-26, Section 4.02, does provide a limited exception to Sec. 168(k)(2)(D)(iii), allowing a taxpayer to elect 50% bonus for all qualified property in a given class that is placed into service in the tax year that includes September 9, 2010. However, the stated purpose of this exception is simply to avoid disputes about the exact date an asset was placed into service during the initial year that 100% bonus became available; it is not a general step-down along the lines of Regs. Sec. 1.168(k)-1(e)(1)(ii)(B), which permitted an election to deduct 30%, rather than 50%, bonus at the discretion of the taxpayer. Barring future guidance, it is unclear whether a taxpayer will be able to elect a bonus depreciation percentage lower than 100% for qualified property placed into service in a tax year beginning after...