On March 29, 2011, the IRS released awaited guidance (Rev. Proc. 2011-26) concerning the 100% bonus depreciation provision included in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
As part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA 2010) signed into law on December 17, 2010, new Internal Revenue Code Section 168(k)(5) allows a deduction of the entire cost of qualified property acquired after September 8, 2010 and before January 1, 2012, and which is placed in service by the taxpayer before January 1, 2012 ( January 1, 2013 in the case of certain longer-lived and transportation property).
At the American Bar Association Tax Section mid-year meeting on January 21, 2011, a discussion panel that included Treasury and IRS officials identified several issues regarding the new 100% bonus depreciation provisions that were addressed in Rev. Proc. 2011-26.
Opting Out of 100% Bonus Depreciation
First, the TRA 2010 provision did not provide a mechanism to elect out of 100% bonus depreciation, but still take the 50% bonus depreciation provided for in the Small Business Jobs Act of 2010 (JOBS Act). Rev. Proc. 2011-26 provides a limited exception allowing taxpayers to elect 50% first-year depreciation in lieu of 100% bonus depreciation for a tax year that includes September 9, 2010 on a class-by-class basis for assets placed in service from September 9, 2010 through December 31, 2010.
It is important to note that TRA 2010 provides only 100% bonus depreciation for assets acquired and placed in service from January 1, 2011 through December 31, 2011; therefore, there is no option for taxpayers to elect 50% bonus depreciation in lieu of 100% bonus depreciation for assets acquired and placed in service during the 2011 taxable year.
Rev. Proc. 2011-26 allows taxpayers to elect to deduct 50% bonus depreciation rather than 100% bonus depreciation on assets acquired and placed in service from September 9, 2010 through December 31, 2010. The election must be made for an entire class of property.
On an original return, the election is to be made on Form 4562, “Depreciation and Amortization.” The election is made by attaching a statement to the taxpayer’s timely filed tax return indicating that the taxpayer is electing to not deduct additional first-year depreciation and the class of property for which the taxpayer is making the election. Once the election is made, it generally may be revoked only with the written consent of the Commissioner of Internal Revenue.
If a taxpayer has timely filed its tax return for the year (by April 18, 2011) without making the election, an automatic six-month extension of time to make the election is provided in Section 301.9100-2(b) of the Regulations. Within the six-month time frame, an amended return must be filed, including the election, with the words “FILED PURSUANT TO §301.9100-2” at the top of the document.
Also, for taxpayers with tax years that began in 2009 and ended in 2010 (2009/2010 year) that failed to claim 50% bonus depreciation on their original return because of the late retroactive reinstatement of 50% bonus depreciation by the JOBS Act, Rev. Proc. 2011-26 provides that taxpayers may claim 50% bonus depreciation by filing either an amended return or Form 3115, Application for Change in Accounting Method. If the taxpayer fails to file either of these, the taxpayer will be deemed to have elected to opt out of bonus depreciation for that tax year.
Rev. Proc. 2011-26 also grants consent for taxpayers to revoke an election to opt out of bonus depreciation if an amended return is filed consistent with the revocation of the election by the later of: June 17, 2011 or before the taxpayer files its federal return for the first taxable year succeeding the 2009/2010 year.
Acquisition Dates for Property Qualified for 100% Bonus Depreciation
Qualified property acquired under a written binding contract entered into after December 31, 2007, which is acquired and placed in service between September 9, 2010 and December 31, 2011, is eligible for 100% bonus depreciation.
Even though property acquired pursuant to a written binding contract entered into before September 9, 2010 (but after December 31, 2007) is “qualified property” for 100% bonus depreciation, the percentage of bonus depreciation (50% vs. 100%) allowed turns on the acquisition date of the property. For purposes of determining when property is acquired, Rev. Proc. 2011-26 provides that: “a taxpayer acquires the qualified property when the taxpayer pays or incurs the cost of the property.” Accordingly, if a taxpayer paid for or took delivery (i.e., incurred the cost of the property) on or before September 8, 2010, the property is not eligible for 100% bonus depreciation under IRC Section 168(k)(5).
Example 1 - On October 3, 2010, Company A acquired (paid for) and placed in service a piece of equipment acquired pursuant to a written binding contract entered into on February 8, 2008. Assuming all other requirements of Code Section 168(k) are met, the equipment qualifies for 100% bonus depreciation. Company A may elect to take 50% bonus depreciation rather than 100%.
Example 2 – On September 1, 2010, Company B acquired (paid for) a piece of equipment acquired pursuant to a written binding contract entered into on February 8, 2008. Company B placed the equipment in service on October 3, 2010. Since Company B acquired the equipment prior to September 9, 2010, the equipment is not eligible for 100% bonus depreciation. Luckily for Company B, though, the equipment would still qualify for 50% bonus depreciation (as provided in the Small Business Jobs Act of 2010), assuming all other requirements of Code Section 168(k) are met.
Acquisition Dates for Self-Constructed Assets
In the case of assets that are manufactured, constructed or produced by the taxpayer, (i.e., self-constructed assets), the assets are deemed to be acquired when the taxpayer begins constructing, manufacturing or producing the property. Thus, if the construction, manufacture or production of the property began before September 9, 2010, the property will not be eligible for 100% bonus depreciation.
However, Rev. Proc. 2011-26 provides a limited exception for components of self-constructed property acquired or constructed after September 8, 2010 and before January 1, 2012. If before September 9, 2010, a taxpayer begins the manufacture, construction or production of the larger self-constructed property that is qualified property for use in its trade or business or for its production of income, the taxpayer may elect to treat any acquired or self-constructed component of that larger self-constructed property as being eligible for the 100% additional first-year depreciation deduction if the component is qualified property and is acquired or self-constructed by the taxpayer after September 8, 2010, and before January 1, 2012.
The taxpayer must make the election by the due date (including extensions) of the federal tax return for the taxpayer’s taxable year in which the larger self-constructed property is placed in service. The election is made by attaching a statement to that return indicating that the taxpayer is making the election provided in Section 3.02(2)(b) of Rev. Proc. 2011-26, and must state whether the taxpayer is making the election for all or some of the components described in Section 3.02(2)(b) of Rev. Proc. 2011-26.
Summary of Conclusions
The release of Rev. Proc. 2011-26 is welcome guidance for taxpayers with respect to application of the 100% bonus depreciation rules. Taxpayers that have not yet filed returns for tax years that include September 9, 2010 now have clear guidance as to how to complete those returns. Taxpayers that have already filed their returns for 2009 or 2010 tax years now have opportunities to amend their returns or revoke elections made in those returns to conform to the guidance of Rev. Proc. 2011-26.
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