Note. The Small Business Jobs Act increased the maximum deduction for Code Sec. 179 expensing to $500,000 and the investment limit to $2 million for tax years beginning in 2010 and 2011.
The 2010 Small Business Jobs Act allows all businesses to take a bonus first-year depreciation deduction of 50-percent of the adjusted basis of qualified property purchased and placed in service for use in your trade or business after December 31, 2009, and generally before January 1, 2011. Bonus depreciation is allowed only for: (1) tangible property to which MACRS applies that has an applicable recovery period of 20 years or less, (2) water utility property, (3) certain computer software, and (4) qualified leasehold improvement property. It is not allowed for intangible property, with the exception of certain computer software.
Bonus depreciation can be claimed for both regular and alternative minimum tax (AMT) liability. It is also important to note that, since bonus depreciation is treated as a depreciation deduction, it is subject to recapture as ordinary income under certain provisions of the Internal Revenue Code. And if you have a tax year that is less than 12 months, the amount of the bonus depreciation allowance is not affected by a short tax year.
Computing your bonus depreciation
To figure your allowable 50-percent bonus depreciation deduction, you must multiply the unadjusted depreciable basis of the property by 50-percent. This is the amount of additional first-year depreciation you can deduct in 2010. For example, you purchase qualifying property for your business in 2010 that costs $150,000. You are allowed an additional first-year depreciation deduction of $75,000.
Note. The "unadjusted depreciable basis" is the property's cost (including amounts you paid in cash, debt obligations, or other property or services, plus any amounts you paid for items such as sales tax, freight charges, installation, or testing fees).
After you have computed the 50-percent bonus depreciation allowance for the property, you can use the remaining cost to compute your regular MACRS depreciation for 2010 and subsequent years. Under MACRS, the cost or other basis of an asset is generally recovered over a specific recovery period. In this case, the property must have a recovery period of 20 years or less.
Example. Assume that in 2010 a taxpayer purchases new depreciable property and places it in service. The property's cost is $1,000 and it is 5 year property subject to the half-year convention. The amount of additional first-year depreciation allowed under the provision is $500. The remaining $500 of the cost of the property is deductible under the rules applicable to 5 year property. Thus, 20 percent, or $100, is apportioned to 2010, which computes to an additional $50 regular depreciation deduction in 2010 under the half-year convention. Accordingly, the total depreciation deduction with respect to the property for 2010 is $550. The remaining $450 cost of the property is recovered under otherwise applicable rules for computing depreciation in subsequent years.
Code Sec. 179 expensing
The 50-percent bonus depreciation allowance is taken after any Code Sec. 179 expense deduction and before you compute regular depreciation under MACRS rules. Therefore, the cost (basis) of the property must be reduced by the amount of any Code Sec. 179 expense allowance claimed on the property before computing the 50-percent bonus depreciation allowance (multiplying the property's basis by 50-percent). Regular depreciation under MACRS is then computed after you have reduced the basis by any Code Sec. 179 expensing allowance and the 50-percent bonus depreciation allowance.
Example. On April 14, 2010, Tom bought and placed in service in his business qualified tangible property that cost $1 million. He did not elect to claim the Code Sec. 179 expensing deduction and he claims no other credits or deductions related to the property. He may deduct 50-percent of the cost ($500,000) for purposes of 2010 bonus depreciation. He will use the remaining $500,000 of the property's cost to figure his regular MACRS depreciation deduction for 2010 and the years thereafter.
Example. The facts are the same as above, except Tom uses the Code Sec. 179 expensing deduction. On April 14, 2010, Tom bought and placed in service in his business qualified tangible property that cost $750,000. He elects to deduct $250,000 of the property's cost as a Code Sec. 179 deduction. Tom will apply the 50-percent bonus depreciation allowance to $500,000 ($750,000 - $250,000), which is the cost of the property after subtracting the section 179 expensing deduction. Tom will then deduct 50-percent of the cost after section 179 expensing ($250,000) for purposes of 2010 bonus depreciation. He will use the remaining $250,000 of the property's cost to figure his regular MACRS depreciation deduction for 2010 and the years thereafter.
Computing bonus depreciation can be a complicated process, as many variables may come into play. Our tax professionals can help determine the best way for your business to utilize the new bonus depreciation allowance together with other tax incentives to achieve significant tax savings.
This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice. Please contact Doeren Mayhew with any questions.