Part of Congress’ annual duties seems to be to change the laws relating to bonus depreciation. Under the Tax Relief Act of 2010, Congress updated, extended and changed the rules yet again. Yesterday, I received a good article on the most recent set of changes from Steven Beaucaire, MST, CCSP of Bedford Cost Segregation LLC. I thought this summarized the new rules and some of the issues quite well and will share it with you:
“Congress passed the Tax Relief Act of 2010 extending bonus depreciation and instituting the new 100% bonus rate for eligible property. Unfortunately, the legislation raised almost as many questions as it gave answers. In light of the confusion the IRS issued Revenue Procedure (Rev. Proc.) 2011-26 in March in an attempt to clarify some of the issues raised by taxpayers. Unfortunately this Rev. Proc. turned out to contain errors and create even more confusion. Despite this, most of the basic rules still apply. Let's review this before we get into the above.
In general taxpayers who placed-in-service "qualifying property" after September 8, 2010 and before December 31, 2011 can get 100% bonus depreciation for these assets. Not wanting to waste a good set of regulations, the old bonus depreciation regulations will apply until the IRS issues a new set. As it was before, bonus depreciation is mandatory unless the taxpayer elects out of it. The election out can be by class of asset or for all qualifying assets in a company. The basic rules are as follows:
1. The original use of the property must begin with the current taxpayer.
2. Used property cannot qualify, although current improvements to that property may qualify.
3. The property must be purchased and placed in service from January 1, 2008 through December 31, 2012. The "written binding contract" (WBC) rules do apply to the placed-in-service dates. In other words, if the property is purchased or constructed pursuant to a WBC dated before January 1, 2008, it is not eligible for bonus depreciation. However, if the WBC is before September 8, 2010 and the property is placed-in-service after September 8, 2010, it is eligible for 50% bonus depreciation with one exception, discussed below.
4. The property must have a General Depreciation System (GDS) life of 20 years or less.
The confusion started with property that might otherwise qualify for 100% bonus depreciation except for the fact that a written binding contract (WBC) was signed prior to September 8, 2010. Initially, some believed that as long as the WBC was after December 31, 2007, you could get 100% bonus depreciation (based on a Joint Committee report reference). Another school of thought believed that the WBC rules as developed by the Internal Revenue Service in Regs. 1.168(k)-1(b)(4) must be applied, as Regulations trump a Committee Report.
In Rev. Proc. 2011-26 the Internal Revenue Service took the position that Regs. 1.168(k)-1 must be applied not the Joint Committee reference. In other words the WBC rules apply to all dates including September 8, 2010. Included in the WBC rules is the 10% rule. In this, one determines whether greater than 10% of the hard costs were incurred before September 8, 2010. If the expenditures constituted more than 10% of the hard costs, the taxpayer was limited to 50% bonus depreciation, even if placed-in-service in 2011. If the expenditures were less than 10%, then all property was deemed to be placed-in-service after September 8, 2010 and could get 100% bonus depreciation if otherwise eligible.
Rev. Proc. 2011-26 also shed light on the ability of taxpayers to use a component election in segregating assets into 50% eligibility and 100% eligibility. If the WBC was signed before September 8, 2010, the taxpayer can elect to identify components of the larger asset where they were acquired or self-constructed after September 8, 2010. They can elect to take 100% depreciation on these assets. This is an election and a statement must be attached to the tax return however.
This summarizes what we know thus far as we are waiting for the IRS to enlighten us on the issues within Rev. Proc. 2011-26. This Rev. Proc. was recently put out for public comment so the IRS will not answer any question pertaining to this document. Bedford is aware of a few issues that will hopefully be addressed. A couple of examples include the related party exception and component election. We will have to wait for the IRS to issue clarification to their Rev. Proc.”
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