Resource Guide

Best Practices in Fixed Assets Management A Resource Guide for Claiming Bonus Depreciation

Nancy Faussett, CPA

Best Practices in Fixed Assets Management A Resource Guide for Claiming Bonus Depreciation 1

Table of ContentsIntroduction 2

Background 2

PropertyQualifyingforBonusDepreciation 3 GeneralBonusDepreciationProperty 3 Longer-Production-PeriodPropertyandCertainAircraft 4 AdditionalPropertyTypesQualifyingforBonusDepreciation 5

50%ExpensingversusBonusDepreciation 5

CalculationofBasisforBonusDepreciation 6

AMTDepreciationAdjustment 7

ElectionNottoClaimBonusDepreciation 7

ElectiontoClaim50%BonusDepreciationInsteadof100%Bonus 7

RetroactiveApplicationof50%BonusDepreciation 8

AccountingMethodChangesforClaimingBonusDepreciation 8

LuxuryVehiclesandBonusDepreciation 9

Long-TermContractsandBonusDepreciation 9

ShortTaxYears 9

Mid-QuarterConvention 10

StatesandBonusDepreciation 10

ElectingOutofBonusDepreciationforRefundableCredits 10

BonusDepreciationvs.Section179Expense 10 Similarities 10 Differences 11

ConsiderationsforClaimingBonusDepreciation 13

BNAFixedAssets™Solutions 15

BNASoftware 15

AboutBNA 15

AboutNancyFaussett 15

Best Practices in Fixed Assets Management A Resource Guide for Claiming Bonus Depreciation 2

IntroductionThereisanadditionaldepreciationdeductionallowedonqualifyingpropertyintheyearitisplacedinservice.Generally,thedeductionis50%(although,dependingonitsplaced-in-servicedate,itmaybe100%)oftheasset’sunadjusteddepreciablebasisanditreducestheasset’sbasisonwhichotherdepreciationmaythenbeclaimed.Thisadditionaldeductionistermed“additionalfirst-yeardepreciation”or“bonusdepreciation.”TherulesgoverningbonusdepreciationcanbefoundinIRSCodeSection168(k).ThisResourceGuidewillanswerallofyourquestionsaboutthisdeduction:

● Whatpropertyqualifiesforeitherthe50%orthe100%deduction?● WhatbasisdoIusetocalculatethededuction?● HowdoesthenewdeductionaffecttheAMTdepreciationadjustment?● Isthedeductionmandatory?● CanIchoosewhichassetsIwanttoclaimiton?● Doesashorttaxyearaffectitscalculation?● Howisthe40%testforthemid-quarterconventionaffectedbyit?● Isitappliedanydifferentlytolistedproperty?

Background Whenyoulookattherulesforbonusdepreciation,youwillseethatwhatstartedoutasasimpleboosttodepreciationhasbecomemoreandmorecomplexastowhichpropertyqualifiesforthededuction.Thereisnodoubtastoitspopularityasaneconomicincentiveforbusinesses.Whenoriginallycreated(bytheJobCreationandWorkerAssistanceActof2002),additionalFirst-Yeardepreciation,a.k.a.“bonusdepreciation,”wasonlyfor30%oftheasset’sdepreciablebasisanditwassupposedtobetemporary.Toqualifyforthe30%bonusdepreciation,qualifyingpropertyhadtobeacquiredafterSeptember10,2001andplacedinservicebeforeJanuary1,2005(althoughyouhadanadditionalyeartoclaimitoncertainproperty).

BonusdepreciationwasbroughtbackbytheEconomicStimulusActof2008.Itisimportanttonotethatitwasnotextendedbythe2008Actbutrathertheprovisionforbonusdepreciationwasallowedtoexpireandthenitwasreintroduced.Itwas notmaderetroactive.Sincethenithasbeenextendedthreetimes:firstbytheAmericanRecoveryandReinvestmentActof2009,thenbytheSmallBusinessJobsActof2010,and,mostrecently,bytheTaxRelief,UnemploymentInsuranceReauthorization,andJobCreationActof2010.Thismeansthatbonusdepreciationisnowavailableforqualifyingassetsplacedinservicethrough2012(withcertainaircraftandpropertyhavingalongerproductionperiodthrough2013).

Oneofthemostimportantchangesisthatthe2010Acttemporarilyincreases,to100%,thebonusdepreciationdeductionforqualifyingpropertyplacedinserviceafterSeptember8,2010,through2011(through2012forcertainaircraftandlong-production-periodproperty).

Note:Although100%expensingisonlyforabout16months,sincetheextensionofbonusdepreciationisfortwoyears,50%bonusdepreciationwillstillbeallowedduring2012(andduring2013forcertainaircraftandlong-production-periodproperty).

Best Practices in Fixed Assets Management A Resource Guide for Claiming Bonus Depreciation 3

Duetoitspopularity,moreandmorelegislationhasbeenpassedinthelastseveralyearstoallowtheuseofbonusdepreciationinspecificareasofthecountrythatCongressfeltneededfurthereconomicassistance.Ithasbeenusedtoaidhurricanevictimsandtoassistbusinesseslocatedinfederallydeclareddisasterareas.Furthermore,thereisalsoaspecial50%expensing,whichisquitesimilartobonusdepreciation,forveryspecifictypesofproperty.

Property Qualifying for Bonus Depreciation General Bonus Depreciation PropertyToclaimthebonusdepreciationdeduction,qualifyingpropertymustbenewpropertythatisacquiredandplacedinserviceafterDecember31,2007,andbeforeJanuary1,2013(althoughcertainpropertycanbeplacedinserviceupuntilJanuary1,2014,seethefollowingsection).

Inaddition,suchpropertymustbeincludedinoneofthefollowingcategories:

● MACRSpropertywitharecoveryperiodof20yearsorless,● ComputersoftwarethatisnotSection197property(thatis,softwarethatisdefinedinSection167(f)(1)(B)),

● Waterutilityproperty,or● Qualifiedleaseholdimprovementproperty(generally,thisincludesmostleaseholdimprovementsmadetononresidentialrealpropertythatareplacedinservicemorethanthreeyearsafterthebuildingwasinitiallyplacedinservice).

Toclaimthetemporary100%bonusdepreciationdeductionunderSection168(k)(5),qualifyingpropertymustmeetalloftheabovequalificationsexceptthatitmustbeacquiredandplacedinserviceafterSeptember8,2010,andbeforeJanuary1,2012(orbeforeJanuary1,2013forcertainaircraftandlong-production-periodproperty).However,itmaybepossibletoelecttoclaim50%bonusdepreciationforsuchpropertyinsteadofthe100%bonusdepreciationdeduction.(Seethesectionentitled“Election to Claim 50% Bonus Depreciation Instead of 100% Bonus”inthisGuide.)

Furthermore,therearespecialrulescoveringspecificscenarios.Forpropertytoqualifyforthecurrentbonusdepreciationdeduction:

● Ifthepropertyisacquiredunderawritten,bindingcontractforitsacquisition,suchcontractmustbeenteredintoafterDecember31,2007andbeforeJanuary1,2013.

● Ifthepropertyismanufactured,constructed,orproducedbythetaxpayerandforusebythetaxpayer,thetaxpayermustbeginsuchactivityonthepropertyafterDecember31,2007,andbeforeJanuary1,2013(or,for100%bonusdepreciation,afterSeptember8,2010andbeforeJanuary1,2012).

● Thereisalimitedexceptionforcomponentsacquiredorself-constructedandqualifyingfor100%bonusdepreciation:Ifthetaxpayerbeginsthemanufacture,construction,orproductionoflarger

Note:RevenueProcedure2011-26clarifiesthatqualifyingrestaurantproperty(Section168(e)(7))andretailimprovementproperty(Section168(e)(8))areeligibleforeitherthe50%orthe100%bonusdepreciationdeduction,basedontheirplaced-in-servicedate.

Best Practices in Fixed Assets Management A Resource Guide for Claiming Bonus Depreciation 4

self-constructedpropertybeforeSeptember9,2010,thetaxpayermayelecttotreatanycomponentofthepropertyasbeingeligibleforthe100%bonusdeductionifthepropertyqualifiesandisacquiredorself-constructedafterSeptember8,2010andbeforeJanuary1,2012(orbefore2013forcertainaircraftandlong-production-periodproperty).Theelectionmustbemadebytheduedateofthereturn(includingextensions)andbyattachingastatementtothereturnindicatingitisbeingmadeunder“Section3.02(2)(b)ofRev.Proc.2011-26.”Suchstatementshouldindicatethecomponentsforwhichtheelectionisbeingmade.Furthermore,ifthetaxpayertimelyfileditsreturnonorbeforeApril18,2011,forthetaxyearinwhichthelargerself-constructedpropertyisplacedinservice,thereisanautomatic6-monthextensionfromtheduedateofthatreturn(excluding extensions)tomakethiselectionpursuanttoIRSReg.301.9100-2(b).

Thereiscertainpropertythatdoes notqualifyforbonusdepreciation:

● Propertythatis required to use theMACRSAlternativeDepreciationSystem(ADS)underSection168(g).Thisincludes,forexample,propertyusedpredominantlyoutsideoftheUnitedStatesandcertainimportedproperty.Italsoincludeslistedpropertythatisnotusedmorethan50%ofthetimeforqualifiedbusinessuse(Section280F(b)(1)).

● PropertythatisdescribedunderSection168(f),suchasfilmsandvideotapes.

● Propertyincludedinanyassetclassforwhichanelectionwasmadenot toclaimbonusdepreciation(seepage7foradiscussionofthiselection).

Longer-Production-Period Property and Certain Aircraft Bonusdepreciationisalsoallowedforcertainpropertyplacedinservicein2008through2013(withoneexception*).Qualifyingpropertyispropertyhavinglongerproductionperiodsandcertainaircraft.

Propertyhavinglongerproductionperiodsmustmeetthesamequalificationsofallotherpropertyqualifyingforbonusdepreciationasdescribedonthepreviouspage,beplacedinservicebeforeJanuary1,2014,and:

1. Havearecoveryperiodofatleast10yearsorbetransportationproperty,2. BesubjecttotheUniformCapitalizationrulesofSection263A,and3. MeettherequirementsofSection263A(f)(1)(B)(iii),meaningthatithasaproductionperiod

exceedingoneyearandcostsmorethan$1million.

PropertyhavingalongerproductionperiodcanqualifyfortheDecember31,2013placed-in-servicedeadlineonly to the extent of its adjusted basis attributable to manufacture, construction, or production after December 31, 2007 and before January 1, 2013.

Note:IfyouelecttouseMACRSADSforanyotherproperty,thisdoes not makesuchpropertyineligibleforbonusdepreciation.

*Exception:Qualifyinglonger-production-periodpropertyandcertainaircraftcanonlyclaimthetemporary100%bonusdepreciationdeductionifplacedinservicebeforeJanuary1,2013.

Best Practices in Fixed Assets Management A Resource Guide for Claiming Bonus Depreciation 5

Qualifyingaircraftmustalsomeetthesamerequirementsofallotherpropertyqualifyingforbonusdepreciation,beplacedinservicebeforeJanuary1,2014,and:

1. Notqualifyas“transportationproperty”(thatis,it cannot betangiblepersonalpropertyusedinthetradeorbusinessoftransportingpersonsorproperty)otherthanforagriculturalorfirefightingpurposes,

2. Bepurchasedandsuchpurchasemustrequireanonrefundabledepositofthelesserof10%ofthecostor$100,000,and

3. Haveanestimatedproductionperiodexceedingfourmonthsandacostexceeding$200,000.

Additional Property Types Qualifying for Bonus DepreciationBusinessesmayalsoclaimbonusdepreciationonthefollowingtypesofproperty:

● NewYorkLibertyZoneproperty:30%bonusdepreciation,underIRSCodeSection1400L(b),wasallowedonnonresidentialrealpropertyandresidentialrentalpropertythatisqualifiedLibertyZoneproperty.SuchpropertymusthavebeennewpropertyacquiredafterSeptember10,2001andplacedinservicebeforeJanuary1,2010.IfabindingcontracttoacquirethepropertyexistedbeforeSeptember11,2001,thepropertydidnotqualify.Also,toqualify,substantially(80%ormore)oftheproperty’susemustbeintheLibertyZone.

● GulfOpportunityZoneproperty:QualifiedGulfOpportunityZoneproperty(a.k.a.“GOZoneproperty”),underIRSCodeSection1400N(d),wasallowed50%bonusdepreciationifacquiredafterAugust27,2005andplacedinservicebefore2008(before2009,inthecaseofnonresidentialrealpropertyandresidentialrentalproperty).ThisprovisionwascreatedtoassistvictimsofHurricanesKatrina,Wilma,andRita.Inaddition,“specifiedGOZoneextensionproperty”qualifiesfor50%bonusdepreciationifitisplacedinservicebefore2012.Suchproperty,forthemostpart,isqualifyingpropertythatisgeneralbonusdepreciationproperty*oritmaybenonresidentialrealpropertyorresidentialrentalproperty.QualifyingpropertymustbeplacedinserviceinspecificareasoftheGOZone,definedinIRSSection1400N(d)(6)(C).Furthermore,ifabindingcontracttoacquirethepropertyexistedbeforeAugust28,2005,itwillnotqualify.*OnedifferenceisthatsubstantiallyalloftheuseofGOZonepropertymustbewithinaqualifyingbuildingandbeplacedinservicenolaterthan90daysafterthebuildingisplacedinservice.Furthermore,iftheGOZonepropertyisself-constructedproperty,thetaxpayermusthavebegunitsmanufacture,construction,orproductionafterAugust27,2005.IftheGOZonepropertyisasale-leaseback,thepropertythatwasoriginallyplacedinservicebyapersonafterAugust27,2005,andsoldandleasedbackbythatpersonwithinthreemonthsafterthedateitisoriginallyplacedinservice,istreatedasoriginallyplacedinservicenotearlierthanthedateonwhichthepropertyisusedundertheleaseback(seeIRSCodeSection1400N(d)(3)).

50% Expensing versus Bonus DepreciationThereisa50%specialdepreciationallowance,similartobonusdepreciation,allowedoncertaintypesofproperty.Generally,thesamerulesasforbonusdepreciationapply.Forexample,thedepreciablebasisoftheassetisreducedbytheamountofbonusdepreciationclaimed.Thefollowingtypesofpropertymayclaimthisdeduction:

Best Practices in Fixed Assets Management A Resource Guide for Claiming Bonus Depreciation 6

● QualifiedcellulosicbiomassethanolplantpropertyplacedinserviceafterDecember20,2006andbeforeJanuary1,2013.ThepropertymustbeusedonlyintheU.S.toproducecellulosicbiomassethanol.

● QualifiedcellulosicbiofuelplantpropertyplacedinserviceafterOctober3,2008andbeforeJanuary1,2013.ThepropertymustbeusedonlyintheU.S.toproducecellulosicbiofuels.

● QualifiedreuseandrecyclingpropertyplacedinserviceafterAugust31,2008.Qualifyingpropertymustbenew,haveausefullifeofatleast5years,andisanymachineryandequipment(includingthesoftwareneededtooperateit)thatisused“exclusivelytocollect,distribute,orrecyclequalifiedreuseandrecyclablematerials.”Thisdoesnotincludepropertyonwhichbonusdepreciationcanbeclaimed.QualifiedreuseandrecyclingpropertyisdefinedinIRSCodeSection168(m).

● QualifiedDisasterproperty:TheEmergencyEconomicStabilizationActof2008providedrelieffornewlyacquiredbusinesspropertylocatedinafederallydeclareddisasterareainwhichthedisasteroccurredafter2007andbefore2010,underIRSCodeSection168(n).Initially,thiswasintendedfora10-stateregionknownastheMidwesternDisasterArea,butaspartoftheAct,Congresswantedtoextendtherelieftofuturestormvictimswherethereisafederallydeclareddisaster.Thedeductionwasclaimedonqualifyingpropertyasdescribedaboveasgeneralbonusdepreciationproperty,plusitcouldbeclaimedonnonresidentialrealpropertyandresidentialrentalproperty.Qualifyingpropertymustbeplacedinservicebytheendofthethirdcalendaryearfollowingthedisasterdate(or,bythefourthcalendaryearifitisnonresidentialrealorresidentialrentalproperty).Ifabindingcontracttoacquirethepropertyexistedbeforethedateofthedisaster,thepropertydidnotqualify.Also,toqualify,substantially(80%ormore)oftheproperty’susemustbeintheactiveconductofthebusinesslocatedinthefederallydeclareddisasterarea.

● QualifiedRecoveryAssistanceproperty:TheFood,Conservation,andEnergyActof2008providedreliefforvictimsoftheseverestormsandtornadoesthatdecimatedtheKiowaCounty,Kansas,areainMay2007.QualifyingpropertymustbeacquiredafterMay4,2007,andplacedinserviceintheKansasdisasterareabefore2009(orbefore2010ifitisnonresidentialrealorresidentialrentalproperty).(SeeIRSPub4492-Aformoreinformation.)Thedeductionwasclaimedonqualifyingnewpropertyasdescribedearlierasgeneralbonusdepreciationproperty,plusitcouldbeclaimedonnonresidentialrealpropertyandresidentialrentalproperty.ThepropertycouldnotbeacquiredunderawrittenbindingcontractineffectbeforeMay5,2007.SubstantiallyalloftheuseofthepropertymustbeintheKansasdisasterarea.

Calculation of Basis for Bonus Depreciation Thekeytocorrectlycalculatingtheamountofbonusdepreciationisdeterminingtheasset’sbasisthatiseligibleforthededuction.Thebasisonwhichtoclaimthedeductionis:

Costtimes Business&Investment-Use%less Section179Expenseless CreditReductions(forexample,thedisabledaccesscredit) AdjustedBasisforBonusDepreciation

Best Practices in Fixed Assets Management A Resource Guide for Claiming Bonus Depreciation 7

Afterthebonusdepreciationamountisdeducted,depreciationiscalculatedonanyremainingbasis.

AMT Depreciation AdjustmentThedeductionforbonusdepreciationisalsoallowedforAlternativeMinimumTax(AMT)purposes.Infact,businessesthataresubjecttoAMTareexemptfromtheAMTdepreciationadjustmentonanyqualifyingpropertyonwhichtheyclaimbonusdepreciation.NotonlyisbonusdepreciationallowableforAMTpurposes,butwhentheasset’sremainingbasisisdepreciatedforregulartaxpurposes,thesamedepreciationdeductionisallowedforbothregularandAMTtaxpurposes.

Beaware,therefore,ifyouelectnot toclaimbonusdepreciationandyouaresubjecttoAMT,suchpropertyisnotexemptfromtheAMTdepreciationadjustment.

Election Not to Claim Bonus DepreciationThedeductionforbonusdepreciationisnotoptional.If you do not want to claim the deduction on eligible property, you must make a formal election to that effect.Ifyoufailtomaketheelectionanddonotclaimtheadditionalfirst-yeardepreciation,thenthepropertyisnonethelesstreatedasifyouhadclaimedtheadditionaldepreciationamount.Insuchasituation,youwillneverbeabletodepreciatetheasset’sentirebasisbecausebeforecalculatingdepreciationeachyearontheasset,youmustfirstreduceitsbasisbythedeductionthatyoudidnotclaim!

Youmaketheelectionnottoclaimbonusdepreciationbyattachingastatementtothetaxreturn.Theelectionmustbemadebytheduedate(includingextensions)ofyourtaxreturn.Oncetheelectionismade,itgenerallymayberevokedonlywiththewrittenconsentoftheCommissionerofInternalRevenue.

Whileyoucannotmaketheelectionnottoclaimthedeductiononanasset-by-assetbasis,youcanelectnottoclaimitforanyclassorclassesofassets.Simplyindicatewhichclass(forexample,all5-yearassets)orclassesontheelectionstatement.Whentheelectionismade,itappliestoall propertyinthatclassplacedinserviceduringthattaxyear.Theelectionismadeeachyearfornewlyacquiredassetsifyoudonotwanttoclaimthededuction.

Election to Claim 50% Bonus Depreciation Instead of 100% BonusAslongasthetaxpayerdoesnotmaketheelectionnottoclaimbonusdepreciation(seetheprevioussectionentitled“Election Not to Claim Bonus Depreciation”),thetaxpayermayelecttodeduct50%,insteadofthe100%,bonusdepreciationforanyclassorclassesofqualifyingassets.This election is only available for a tax year that includes September 9, 2010.

Theelectionmustbemadebytheduedate(includingextensions)ofyourtaxreturnfortheyearthatincludesSeptember9,2010.Itismadeinthesamemannerastheelectionnottoclaimbonusdepreciationand,therefore,cannotbemadeonanasset-by-assetbasis.ThiselectionisallowedperRevenueProcedure2011-26.

If,onorbeforeApril18,2011,ataxpayerhasalreadytimelyfileditsfederaltaxreturnforthetaxyearthatincludesSeptember9,2010,thereisanautomatic6-monthextensionfromtheduedateofthatreturn(excludingextensions)tomakethiselectiontoclaim50%bonusdepreciationinsteadofthe100%

Best Practices in Fixed Assets Management A Resource Guide for Claiming Bonus Depreciation 8

depreciationdeduction.Tomaketheelection,thetaxpayermustfileanamendedreturnandattachanelectionstatementindicatingitisfiledpursuanttoIRSReg.301.9100-2(b).

Retroactive Application of 50% Bonus DepreciationTheSmallBusinessJobsActof2010,whichwassignedintolawonSeptember27,2010,retroactivelyextended50%bonusdepreciationforqualifyingpropertyplacedinservicein2010.BecausetheActwassignedsolateintheyear,manytaxpayerswereunabletotakeadvantageofit.Inresponse,theIRS,inRevenueProcedure2011-26,hasdecidedtoallowtaxpayerstoretroactivelyapply50%bonusdepreciationtoqualifyingpropertyplacedinserviceafter2009onthefollowingtaxreturns:

● 2009taxreturnsforyearsthatbeganin2009andendedin2010,and● 2010taxreturnsforshortyearsthatbeganandendedin2010.

Aslongasthetaxpayerdidnotmaketheelectionnottoclaimbonusdepreciationonsuchtaxreturns,thetaxpayermaynowclaim50%bonusdepreciationbyfilingeither:

● Anamendedtaxreturnthatisfiledbeforethetaxpayerfilesitstaxreturnforthefirsttaxyearsucceedingthe2009taxreturnorthe2010shorttaxyearreturn,or

● Form3115,Application for Change in Accounting Method,withthetaxpayer’stimelyfiledtaxreturnforthefirstorsecondyearsucceedingthe2009taxyearorthe2010shortyearreturn.However,tofileForm3115,thetaxpayermuststillownthepropertyasofthefirstdayoftheyearofthechange.

However,suchataxpayerwillbetreated as if the election not to claim bonus depreciation had been filedaslongasthetaxpayer:

● Deducteddepreciation(otherthanbonusdepreciation)onthatreturn,and● DoesnotfileeitheranamendedreturnoraForm3115,asdescribedabove,toclaimbonusdepreciation.

And,finally,ifthetaxpayertimelyfiledeitherthe2009orthe2010returnasdescribedabove,andelectednottoclaim50%bonusdepreciationforaclassofproperty,thetaxpayermaynowrevokethatelectionaslongasanamendedreturnisfiled by the later ofJune17,2011,orbeforefilingareturnforthefirstyearsucceedingthe2009returnor2010shortyearreturn.

Accounting Method Changes for Claiming Bonus Depreciation TheIRSregulationsspecifywhichchangestodepreciationandamortizationconstituteachangeinaccountingmethodunderIRSCodeSection446,General Rule for Methods of Accounting.Depreciationisgenerallyconsideredamethodofaccounting.

Asexplainedintheprevioussection,theIRSisallowingtaxpayerstoretroactivelyapply50%bonusdepreciationtoqualifyingpropertyplacedinserviceafter2009oncertain2009and2010taxreturns.Thetaxpayermayeitherfileanamendedreturnoranaccountingmethodchangetodoso.Inadditiontothis,thereareseveralotherchangestoorfromclaimingbonusdepreciationthatarealsoconsideredtobeachangeinaccountingmethod,butonlyundercertaincircumstances:

● Achangefromnotclaimingbonusdepreciationtoclaimingitprovidedthetaxpayerdidn’telectoutofit(thiswasfor2000and2001returnsandthenagainwasallowedforcertaintaxreturnsin2006).

Best Practices in Fixed Assets Management A Resource Guide for Claiming Bonus Depreciation 9

● Achangefromclaimingthe30%bonusdepreciationtoclaimingthe50%bonusdepreciation,orviceversa.

● Achangefromclaimingbonusdepreciationtonotclaimingitiftheassetdoesn’tqualify.

Luxury Vehicles and Bonus DepreciationTheallowableamountofdepreciationonaluxuryvehicle(definedinSection280F(d)(5))onwhichbonusdepreciationisclaimedisincreasedifthevehicleisplacedinservicein2008through2012.Thisadditionaldepreciation,upto$8,000,isonlyfortheyearinwhichthevehicleisplacedinservice.

Foraqualifyingluxuryautomobileplacedinserviceineither2011or2010,youmaydeductupto$11,060($3,060regularlimit+$8,000additionalallowance)ofdepreciationfortheplaced-in-serviceyear.Ifthevehicleisatruckorvanbuiltonatruckchassis(includingSUVs),thenthemaximumallowabledepreciation,ifplacedinservicein2011,is$11,260($3,260regularlimit+$8,000additionalallowance)and,ifplacedinservicein2010,it,is$11,160.Qualifyingluxuryautomobilesplacedinserviceineither2009or2008mayclaimamaximumdepreciationdeductionof$10,960intheplaced-in-serviceyearandqualifyingtrucksandvansplacedinserviceineither2009or2008mayclaimamaximumdepreciationdeductionof$11,060intheplaced-in-serviceyear.

Theadditionalamountofdepreciationisavailableonly if you did not elect out of bonus depreciation for5-yearpropertyandifthepropertyqualifiesasbonusdepreciationproperty(thatis,itcan’tbeusedproperty,forexample).Furthermore,ifthebusinessuseofthevehiclefallsto50%orless,theadditionaldepreciationclaimedissubjecttorecapture.

Forluxuryvehiclesthatqualifyfor100%bonusdepreciation(thatis,thoseacquiredandplacedinserviceafterSeptember8,2010,andbeforeJanuary1,2012),therewasanunusualresultinthecalculationforthefirstfiveyearsfollowingtheplaced-in-serviceyear.Ifcalculatedunderpriorrules,nodepreciationwouldhavebeenallowedinthoseyears.Tomitigatethisresult,RevenueProcedure2011-26providesasafeharbormethodofaccountingforthesevehicles.Underthesafeharbormethodofaccounting,asbefore,intheplaced-in-serviceyear,thetaxpayerdeductsthelesserof100%bonusdepreciationorthemaximumannualamountallowed.However,intheyearsfollowingtheplaced-in-serviceyear,thetaxpayershouldcalculatedepreciationasif50%bonusdepreciationhadbeenapplied,subjecttothemaximumallowablelimits.

Long-Term Contracts and Bonus DepreciationTheSmallBusinessJobsActof2010allowsbonusdepreciationonassetswitharecoveryperiodofsevenyearsorlesstobedisregardedwhencomputingthepercentage-of-completionforlong-termcontracts.Inotherwords,thecostofqualifiedpropertytakenintoaccountasacostallocatedtothecontractistobecalculatedasifbonusdepreciationhadnotbeenclaimedbutratherMACRShadbeenappliedtoitsentiredepreciablebasis.Thisappliestosuchpropertyplacedinserviceafter2009andbefore2011(before2012forlonger-production-periodproperty).Thiswillallowcontractorstobenefitfrombonusdepreciationeveniftheydonotfinishacontractwithinthesameyear.

Short Tax Years Ifatanytimethereisashorttaxyearoflessthan12monthsduringwhichyouplacequalifyingpropertyinservice,thefullamountofthebonusdepreciationmaystillbeclaimed.Thereisnoprorationrequired.

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Mid-Quarter ConventionInordertodetermineifthemid-quarterconventionapplies,youneedtocalculateifmorethan40%ofthetotaldepreciablebasisofqualifyingpropertyisplacedinserviceduringthelastthreemonthsoftheyear.Forthispurpose,donotreducethebasisofsuchpropertybythebonusdepreciationdeduction.

States and Bonus DepreciationWheneverthereisachangetofederaltaxlaw,itisnecessarytolookateachofthestatesandseewhetherornottheyhavechosentofollowit,inwholeorinpart.Thisisparticularlytrueofthedeductionforbonusdepreciationasmanystateshavechosentodecouplefromthefederalrules.Foradditionalinformation,refertothearticleStateConformitywithFederalBonusDepreciationRulesontheBNASoftwarewebsite.

Electing Out of Bonus Depreciation for Refundable Credits TheHousingandEconomicRecoveryActof2008allowscorporationstoforgothebonusdepreciationdeductionandinsteadincreasethecreditlimitationsonboththeSection38(c)GeneralBusinessCreditforresearchexpendituresandtheSection53(c)AlternativeMinimumTaxcredit.ThisprovisionunderIRSCodeSection168(k)(4),whichwasextendedbytheTaxRelief,UnemploymentInsuranceReauthorization,andJobCreationActof2010,appliestocorporations(andcertainautomotivepartnerships)withtaxyearsendingafterMarch31,2008.ItisknownasaSection168(k)(4)election.

TolearnmoreabouttheSection168(k)(4)election,downloadthefreeWhitePaper:ElectingOutofBonusDepreciationforRefundableCreditsfromtheBNASoftwarewebsite.

Bonus Depreciation vs. Section 179 ExpenseAprimarygoaloftaxplanningistomaximizeyourdeductions.IfyouareabletoclaimeitherbonusdepreciationorSection179expenseonanasset,whichisbetter?Actually,youmaybeabletoclaimthembothand,infact,youmaybeabletoclaimbothonthesameasset.*ThissectionoftheResourceGuidelooksatboththesimilaritiesanddissimilaritiesofthesetwodeductions.Decidingwhichprovisiontoapplytowhichassetstogivethetaxpayerthemostbenefitisimportantforgoodtaxplanning.

WiththecurrentincreaseinSection179limits,morebusinessesthanevercannowbenefitbyclaimingit.Fortaxyearsbeginningin2010and2011,onecanclaimamaximumSection179expenseofupto$500,000andthatamountisnotreduceduntilthecostofSection179propertythatisplacedinserviceintheyearexceeds$2,000,000.

SimilaritiesBothbonusdepreciationandSection179expenseareclaimedonqualifyingfixedassetsandbothareoptional.Youdon’thavetoclaimeithereveniftheassetqualifies.However,inthisaspecttheyare,infact,

*Note:IfclaimingbothSection179expenseandbonusdepreciationonthesameasset,theSection179amountreducestheasset’sbasisfirst,beforebonusdepreciationcanbecalculated.

Best Practices in Fixed Assets Management A Resource Guide for Claiming Bonus Depreciation 11

somewhatdifferentbecauseifyoudonotwanttoclaimbonusdepreciation,youmustelecttooptoutofit.IfyoudonotwanttoclaimSection179,yousimplydon’tclaimit.

BothdeductionsareclaimedonIRSForm4562,althoughondifferentlines.However,thetwoamountsareultimatelycombinedonthelastlineoftheformandenteredasacombinedamountonyourincometaxreturnas“depreciationexpense.”

ThereisamaximumamountofdepreciationthatcanbeclaimedonluxuryvehiclesunderSection280F.Forthispurpose,“depreciation”includesbothSection179expenseandbonusdepreciation.Inotherwords,youcannotclaimeitherSection179orbonusdepreciationinadditiontotheallowabledepreciationamount.(Inmostinstances,therefore,thereisnopointinclaimingSection179expenseonaluxuryvehicleastheamountofdepreciationwithoutanySection179usuallyexceedstheallowableamount.)

BothbonusdepreciationandSection179expenseareclaimedonqualifyingpropertyintheyearinwhichthepropertyisplacedinserviceandonlyinthatyear.Furthermore,neitherdeductionisreducedifthereisashorttaxyearoflessthan12months.

DifferencesTherearemanymoredifferencesthansimilaritieswhenitcomestothesetwodeductions.ThefollowingpointsrepresentsignificantdifferencesbetweenthedeductionforbonusdepreciationandthatforSection179expense:

● Newversususedproperty:Bonusdepreciationcanonlybeclaimedonpropertywhoseoriginalusebythetaxpayerclaimingthedeductionbeginsonoraftertheeffectivedate.Bonusdepreciationmayalsobeclaimedonanyadditionalcoststhatthetaxpayermayexpendtoreconditionorrebuildtheoriginalproperty.However,ifthetaxpayerpurchasesreconditionedorrebuiltproperty,suchpropertydoesnotqualifyforthededuction.Ifthenewlyacquiredpropertycontainsusedparts,itwillstillbetreatedasnewpropertyaslongasthecostoftheusedpartsisnotmorethan20%ofthecostoftheproperty(Reg.1.168(k)-1(b)(3)(i)).Section179expensecanbeclaimedonneworusedproperty,althoughthepropertymustbeacquiredbypurchase(andnotfromarelatedparty).

● Qualifyingproperty:WhilecertainpropertycanqualifyforbothbonusdepreciationandSection179expense,otherpropertymayonlyqualifyforoneofthem.Generally,dependingonitsplaced-in-servicedate,thefollowingpropertyqualifiesforbonusdepreciation:

» MACRSpropertywitharecoveryperiodof20yearsorless,» ComputersoftwarethatisnotSection197property(thatis,softwarethatisdefinedinSection167(f)(1)(B)),

» Waterutilityproperty,or» Qualifiedleaseholdimprovementproperty(generally,thisincludesmostleaseholdimprovementsmadetononresidentialrealpropertythatareplacedinservicemorethanthreeyearsafterthebuildingwasinitiallyplacedinservice).

Inadditiontotheabove,certainaircraftandsomeassetshavinglongerproductionperiodscanqualifyforbonusdepreciation.Certainnonresidentialrealpropertyorresidentialrentalpropertymayalsoqualifyforbonusdepreciationdepending on its location(suchasGOZoneproperty).

Best Practices in Fixed Assets Management A Resource Guide for Claiming Bonus Depreciation 12

Generally,Section179propertyisanytangibleSection1245property.Itincludescertainoff-the-shelfcomputersoftwarebutdoesnot includeairconditioningorheatingunits.Furthermore,qualifyingSection179propertydoesnot includepropertyineligiblefortheearlierInvestmentTaxCredit,suchasanypropertywhichisusedpredominantlytofurnishlodging.Asyoucansee,generallythesamepropertyqualifiesforbothofthesedeductions.Itistheexception,ratherthantherulewherespecificpropertywon’tqualifyforbothdeductions.Forexample,propertyusedpredominantlytofurnishlodgingmayqualifyforbonusdepreciationbutnotforSection179expense.

● Taxableincomelimit:TheamountofSection179expensedeductedmaynotexceedtheentity’sincomefromtheconductofanactivetradeorbusinessfortheyear.Tocalculatethelimit,taxableincomeiscalculatedwithoutanySection179expenseandbeforeanynetoperatinglosscarryforwardorcarryback.NotethatanyexcessSection179amountclaimedbutnotdeductedmaybecarriedforwardindefinitely.Thereisnosuchlimitontheamountofbonusdepreciationthatmaybeclaimedand,infact,thedeductionforbonusdepreciationmaycreateanetoperatinglossfortheyear.

● Activetradeorbusiness:Asexplainedabove,thetaxableincomelimitfordeductingSection179expenseisbasedontheentitybeinginvolvedinanactivetradeorbusiness.Thedefinitionofatradeorbusinessisafor-profitactivityforwhichordinaryandnecessaryexpensesaredeductibleunderSection162.Simplyholdingpropertyfortheproductionofincomeisnotconsideredatradeorbusinessforthispurpose.Ataxpayerisconsideredtoactivelyconductatradeorbusinessifthetaxpayerparticipatesinitsmanagementoroperationsinameaningfulway.Soleproprietors,forexample,cannotdeductSection179expenseforabusinesstheyownunlesstheyactivelyparticipateinit.Thereisnosimilarrequirementforabusinessdeductingbonusdepreciation.

● Limitondollaramount:WhereasthereisastateddollarlimitationforSection179expense(basedontheyearinwhichthetaxyearbeginsandinwhichthequalifyingpropertyisplacedinservice),theonlylimitonthedollaramountofbonusdepreciationisthatitisgenerally50%oftheadjusteddepreciablebasisoftheasset.*(Onesuchadjustmenttotheasset’sdepreciablebasisisthereductionforanySection179expenseclaimed.)Fortaxyearsbeginningin2010and2011,theallowableamountofSection179expenseis$500,000.Fortaxyearsbeginningin2012,theallowableamountofSection179expensewillbereducedto$125,000,indexedforinflation.

*Note:TheTaxRelief,UnemploymentInsuranceReauthorization,andJobCreationActof2010temporarilyincreased,to100%,thebonusdepreciationdeductionforqualifyingpropertyplacedinserviceafterSeptember8,2010,through2011(through2012forcertainaircraftandlong-production-periodproperty).

Best Practices in Fixed Assets Management A Resource Guide for Claiming Bonus Depreciation 13

● Investmentlimit:ForeverydollaroverastatedamountinvestedinqualifyingSection179propertyplacedinserviceduringtheyear,theallowableSection179expenseisreduceddollarfordollar.Fortaxyearsbeginningin2010and2011,theallowableSection179expenseisreducedbytheamountbywhichthecostofqualifyingSection179propertyexceeds$2,000,000.Fortaxyearsbeginningin2012,theinvestmentlimitwillbe$500,000,indexedforinflation.Thereisnoinvestmentlimitwhenclaimingthebonusdepreciationdeduction.

● Sportutilityvehicles(SUVs):Thereisa$25,000capontheamountofSection179expensethatmaybeclaimedoncertainsportutilityvehicles(SUVs).Thisamountisnotindexedforinflation.Toqualifyforthislimitation,thevehiclemustbedesignedtocarrypassengersoverpublicstreets,cannotbealuxuryvehicleunderSection280F,andmusthaveagrossvehicleweightof14,000poundsorless(aslongasitismorethan6,000pounds).ThereisnosuchlimitwhenclaimingbonusdepreciationonSUVs.

● Noncorporatelessor:ThereisanexceptionunderIRSSection179(d)(5),whichprohibitsanoncorporatelessorfromclaimingtheSection179expensedeductionunlessthetaxpayersatisfiesoneoftworequirements:» Thepropertymusthavebeenmanufacturedorproducedbythelessor,or» Theleaseterm,includingoptionstorenew,islessthan50%oftheproperty’sclasslifeand theSection162expenseswithrespecttotheproperty(otherthanrentsorreimbursedamountsfortheproperty)exceed15%oftheproperty’srentalincomeforthefirst12monthsofthelease.

Therearenononcorporatelessorrulesforclaimingthebonusdepreciationdeduction.

● EffectiveDate:TheamountoftheallowableSection179expensedeductiondependsontheyearinwhichthetaxpayer’sfiscalyearbeginsandinwhichthepropertyisplacedinservice.ThedeductionforbonusdepreciationiseffectiveforqualifyingpropertyplacedinserviceafterDecember31,2007,andbeforeJanuary1,2013(althoughcertainpropertycanbeplacedinserviceupuntilJanuary1,2014).Furthermore,certainproperty,suchasGOZoneorNewYorkLibertyZoneproperty,hasitsowneffectivedates.

● Recapture:Whenanassetisdisposedof,anygainrealizedisrecapturedasordinaryincometotheextentofbothbonusdepreciationandanySection179claimed.However,ifthebusinessuseofanassetdecreasesto50%orlessbeforetheendoftheasset’srecoveryperiod,anySection179expenseamountclaimedissubjecttorecapture,butthisdoesnotapplytobonusdepreciation.

Considerations for Claiming Bonus Depreciation Thereareanumberofchallengesassociatedwithclaimingbonusdepreciation:

● Theneedtodeterminewhichassetsqualifyforthebonusdepreciationdeduction,

Best Practices in Fixed Assets Management A Resource Guide for Claiming Bonus Depreciation 14

● Theneedtocalculatethebonusdepreciationamount(whichmaybe30%,50%,or100%)andcorrectlyapplythebonusdepreciationrulesforqualifyingassets,basedontheirplaced-in-servicedate,

● Theneedtoselecttheclassorclassesofassetsonwhichyouwanttoclaimbonusdepreciation,● Theneedtorunareporttodeterminetheamountofbonusdepreciationclaimedforagivenyear,● Theneedtobeabletodetermineifluxuryvehiclescanorcannotclaimadditionaldepreciationifbonusdepreciationisapplied,

● Theneedtoknowwhethercertainproperty(suchasGOZoneproperty)qualifiesforbonusdepreciation,

● Theneedtodecidewhetheryoushouldapplybonusdepreciationand/orSection179toanasset,● Theneedtodetermineifthestateincometaxreturnallowsbonusdepreciationtobeclaimed,and● Theneedtocorrectlydeterminethebasisandgain/lossamountsforassetsonwhichbonusdepreciationisclaimed.

Theriskoferrors,noncompliance,andinefficienciesinvolvedwithfixedassetsmanagementandtaxdepreciationcalculationincreasessignificantlywhenorganizationsrelyuponmanualprocessandspreadsheetsratherthanexperttaxsystemstoenforcetheirfixedassetspolicies.Thismayoccurasaresultofinsufficientdocumentationofdepreciationpolicies,aswellasthelackofstandardizedenforcement.Inmanyorganizations,staffmembersresponsibleforthedataentryassociatedwithfixedassets,mustmanuallyenterthenecessarydataforeachassetacquired(e.g.,propertytype,assetlife,depreciationmethod,averagingconvention,andanyallowablebonusdepreciationandSection179expense).Unfortunately,thesestaffmembersmaynotbesufficientlyknowledgeableofallofthecurrentfixedassetsdepreciationrulesforbothfinancialandtaxreporting,increasingtheriskofcalculationerrorsandregulationnoncompliance.

Astaxregulationshavecontinuedtoevolveduringthepastseveralyears,bonusdepreciationcompliancehasbecomemuchmorecomplicated.Bonusdepreciationhasbeenallowedonawiderangeofveryspecificassettypesthatchangeovertimeandthathavedifferenteffectivedates.Theallowablebonusdepreciationamountchangesfrom30%to50%to100%andthenbackto50%.Thefactthatbonusdepreciationwasallowedtoexpire,wasthenreintroduced,andlaterextendedthreetimes,indicatesthatitisimperativethatorganizationswhichmakeuseoftheseprovisionsknowwhattherulesarewhendepreciatingtheirfixedassetsandhavetheenforceablepolicies,procedures,andexperttaxsystemsinplacetoensurecomplianceandtakefulladvantageofavailabletaxsavings.

Best Practices in Fixed Assets Management A Resource Guide for Claiming Bonus Depreciation 15

BNA Fixed Assets™ Solutions BNAFixedAssetsprovidesyouwiththeabilitytodocumentyourdepreciationandamortizationpolicies(includingbonusdepreciation)throughAssetTypetemplatesandallowsyoutoautomatetheenforcementandimplementationofthesepolicieswhenperformingdataentryforfixedassets.Thiseliminatespotentialerrorsfrommisclassifyingassets,automatestheprocessofenteringassets,enforcestheuseofacompany’sdepreciationandamortizationpolicies,greatlyreducesthevolumeofdatarequiredtoentereachassetinthesystem,and,aboveall,guaranteescompliancewithGAAPrulesandIRSregulations.

BNAFixedAssetsprovidesautomaticannualupdatesofitsfixedassetsmanagementsoftware.What’smore,BNAFixedAssetssolutionsspeedthedataentryprocessbyallowingyoutocopyandpastedataformultipleassetsfromanExcelspreadsheetintoBNAFixedAssets,forgreaterefficiencyandaccuracy.WithBNAFixedAssets,you’llbenefitfromhavingthebestsolutionavailableonthemarkettodaytomaximizeproductivity,complywithGAAPrulesandIRSregulations,andmeetallofyourfinancialandtaxreportingrequirements.LearnmoreaboutBNAFixedAssetsatwww.bnasoftware.com/fixedassets.

BNA Software Foundedin1983,BNASoftwaredevelopsexpertsolutionsfortaxandaccountingprofessionals.Withcategory-leadingsoftwareandtop-ratedtechnicalsupport,BNASoftwareisthesolutionofchoiceforprofessionalfirmsandcorporationsofeverysize.Morethan60,000customersincludingtheIRS,dependuponBNASoftwareforthehighestdegreeoftax,regulatory,andcomplianceexpertiseavailableinthemarket.

About BNA BNASoftwareispartofBNA,America’spremierindependentpublisheroflegalandregulatorynewsandanalysisformorethan80years.Thecompany’sclientsincludealloftheFortune100andallofthetop50accountingfirms.BNAhastheworld’slargestteamofresearchersfocusedsolelyontrackingandanalyzinglegislativeandregulatorydevelopments.LearnmoreaboutBNASoftwareatwww.bnasoftware.com.

About Nancy Faussett NancyFaussett,CPA,hasover25yearsoftaxaccountingexperience.WithBNASoftwaresince2001,Nancyservesasin-houseexpertonfixedassets,depreciation,andvariousareasofcorporateandindividualincometaxation.NancyhasalsobeenpublishedinStrategicFinanceandtheACTJournal.PreviouslyshewasvicepresidentoftaxpreparationforGeneralBusinessServicesandlaterworkedasadepreciationandtaxspecialist.

Visitusathttp://www.bnasoftware.comorcall800-424-2938(option3)tospeakwithasalesrepresentative.

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©2011BNASoftware,adivisionofTaxManagementInc.,Arlington,VA.Allrightsreserved.Allcompanyandproductnamesmaybetrademarksoftheirrespectiveowners.

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