Accounting Today - February 2011

BY GEORGE G. JONES AND MARK A. LUSCOMBE Maximizing the

Now that the drama has ended and year-end legislation to extend the Bush-era tax cuts has been enacted, work remains for those “in the trenches” to sort out appropriate reactions. For most businesses, the response will be multifaceted.

Business owners, investors and managers have been given additional incentives to invest in business operations. Indirectly, by encouraging businesses, Congress hopes that jobs and productivity will increase. While most of the incentives may be thought of as extensions of previously existing provisions, such as bonus depreciation and Section 1202 stock, Congress raised the benefits in many cases and did so unexpectedly, creating the need to reset certain planning considerations. From that perspective, this month’s column takes a look at aspects surrounding changes in bonus depreciation, Section 179 expensing and Section 1202 stock.

Indirectly, by
encouraging
businesses,
Congress
hopes that
jobs and
productivity
will increase.
“
”

George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.

100% BONUS DEPRECIATION

One hundred percent bonus depreciation under the 2010 Small Business Jobs Act set a window of between Sept. 9, 2010, and Dec. 31, 2010, for the acquisition and use of qualifying property — a span too short to cover most special order equipment, not to mention too brief to fit within many credit application timetables. The 2010 Tax Relief Act extends 100 percent bonus depreciation for one year, through Dec. 31, 2011.

One hundred percent bonus depreciation now applies to qualified property acquired after Sept. 8, 2010, and before Jan. 1, 2012, and placed in service before Jan. 1, 2012 (or before Jan. 1, 2013, for longer-period production property and certain noncommercial aircraft). The new law also provides for 50 percent bonus depreciation for one additional year, through 2012.

Property acquired before Sept. 9, 2010, and placed in service after Sept. 8, 2010, does not qualify for the 100 percent rate. The property must be both acquired and placed in service after Sept. 8, 2010, and placed in service before Jan. 1, 2012, in order to qualify for the 100 percent bonus depreciation rate.

ciation allowance is only available for new property, the original use of which begins with the taxpayer. Code Sec. 179 expensing is not so limited. However, no limit exists on the total amount of bonus depreciation that may be claimed in any given tax year. Section 179 expensing in practice is limited to use by small businesses because of its dollar cap on qualifying property.

Binding contract. Bonus depreciation, at either the 50 percent rate or the 100 percent rate, may not be claimed on property acquired pursuant to a written binding contract that was in effect before Jan. 1, 2008. There is no separate cutoff date for the 100 percent rate. Thus, property acquired after Sept. 8, 2010, under a written binding contract entered into before Sept. 9, 2010, will qualify for the 100 percent rate as long as the contract is entered into after Dec. 31, 2007, and acquisition (delivery) under the contract takes place after Sept. 8, 2010, and before Jan. 1, 2012.

Self-constructed property. If a taxpayer manufactures, constructs or produces property for the taxpayer’s own use, the overall Dec. 31, 2007, acquisition date for bonus depreciation is satisfied if the taxpayer begins manufacturing, constructing or producing the property after Dec. 31, 2007, and before Jan. 1, 2013. For 100 percent bonus depreciation, however, there are two opinions on whether manufacturing, construction or production must begin after Sept. 8, 2010 (as well as having the property placed in service before Jan. 1, 2012, or before Jan. 1, 2013, in the case of longer-period production property). One requires that all activity must start after Sept. 8, 2010. The opposing position argues that all acquisition requirements under Section 168(k)( 5) are met if the taxpayer begins manufacturing after Dec. 31, 2007, and before January 2012. IRS guidance may be needed on this issue.

Luxury vehicle depreciation cap. The $8,000 increase in the first-year depreciation cap for vehicles on which bonus depreciation is claimed remains unchanged, as it has been since 2008, when bonus depreciation had been introduced at a 50 percent rate. The

$8,000 increase, raising the first-year cap to $11,060, continues to apply to vehicles placed in service post-Sept. 8, 2010, and in 2011 even though bonus depreciation has doubled to the 100 percent rate. This cap not only limits bonus depreciation but also may limit it sufficiently that electing out of bonus depreciation for that class of asset (five-year) may make sense.

Refundable credits in lieu of bonus depreciation. The new law also includes an election to accelerate Alternative Minimum Tax credit in lieu of bonus depreciation provided for “Round 2 extension property.” Round 2 extension property is property that is eligible qualified property solely by reason of the two-year extension of the bonus depreciation allowance by the Tax Relief Act of 2010.

CODE SEC. 179 EXPENSING

Congress once again has also tinkered with the dollar and investment limits under Code Sec. 179 to encourage business spending. The 2010 Small Business Jobs Act increased the Code Sec. 179 dollar and investment limits to $500,000 and $2 million, respectively, for tax years beginning in 2010 and 2011. The 2010 Tax Relief Act provides for a $125,000 dollar limit (indexed for inflation) and a $500,000 investment limit (indexed for inflation) for tax years beginning in 2012. Congress also is hoping that after that one-year decrease in 2012, businesses will be able to function on Code Sec. 179 expensing at pre-2001 levels of $25,000 with a $200,000 investment limit after 2012. The 2010 Tax Relief Act also extends the treatment of off-the-shelf computer software as qualifying property if placed in service before 2013.

Taxable income limitation. The Code Sec. 179 deduction is limited to the taxpayer’s taxable income derived from the active conduct of any trade or business during the tax year, computed without taking into account any Code Sec. 179 deduction, deduction for self-employment taxes, net operating loss carryback or carryover, or deductions suspended under any provision. Any amount