Revenue Procedure 2011-26 Offers New Guidance
posted Apr 25, 2011 by KLR Tax Services Team
Revenue Procedure 2011-26 offers new guidance on 50% and 100%
The IRS has issued Revenue Procedure 2011-26, which provides guidance on claiming the 50% or 100% first-year depreciation bonus for qualifying business property.
The guidance explains the requirements for claiming 100% bonus depreciation and allows taxpayers to elect 50% bonus depreciation in lieu of 100% bonus depreciation for certain property placed in service in 2010. It also outlines special requirements for self-constructed property and procedures for claiming missed 50% bonus depreciation on property placed in service before the tax break was reinstated in late 2010.
When bonus depreciation is allowed, it’s generally available for new property (with certain exceptions) that falls within one of the following categories:
• Tangible personal property with a useful life of 20 years or less under the modified accelerated cost recovery system (MACRS),
• Off-the-shelf computer software,
• Water utility property, or
• Qualified leasehold improvements.
The current version of bonus depreciation was introduced by the Economic Stimulus Act of 2008, which provided an additional first-year depreciation deduction generally equal to 50% of the cost of qualifying property acquired and placed in service in 2008. In 2009, the American Recovery and Reinvestment Act extended 50% bonus depreciation through Dec. 31, 2009.
In 2010, two important developments affected bonus depreciation. First, in September, the Small Business Jobs Act (SBJA) reinstated 50% bonus depreciation for all of 2010, retroactive to the beginning of the year. Then, in December, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act extended 50% bonus depreciation through the end of 2012. The Tax Relief act also provided 100% bonus depreciation for qualifying property acquired and placed in service after Sept. 8, 2010, and before Jan. 1, 2012.
The act generally extends the placed-in-service deadline by one year for certain “longer-lived” property (with a recovery period of 10 years or more) and certain transportation property, such as aircraft. So, for example, you can claim 100% bonus depreciation for such property placed in service before Jan. 1, 2013, and 50% bonus depreciation for such property placed in service before Jan. 1, 2014.
Bonus depreciation automatically applies to qualifying property, but you can opt out by filing an election — on a per-asset-class basis — with a timely filed tax return. Opting out may be desirable if, for example, depreciation deductions will be more valuable in future years because you expect to be in a higher tax bracket.
Claiming 100% bonus depreciation
Under the Tax Relief act, 100% bonus depreciation is available for property that is both acquired and placed in service after Sept. 8, 2010, and before Jan. 1, 2012 (Jan. 1, 2013 for certain longer-lived and transportation property). Rev. Proc. 2011-26 provides that property is “acquired” when a taxpayer “pays or incurs the cost of the property.”
It also provides that, to claim 100% bonus depreciation, the original use of the property must commence with the taxpayer after Sept. 8, 2010. Essentially, this means the property must be new, rather than used — with certain exceptions for sale-leaseback transactions and expenditures for rebuilding or reconditioning property.
What about property acquired under a contract entered into before Sept. 9, 2010? The general bonus depreciation rules exclude property acquired pursuant to a binding written contract in place before Jan. 1, 2008. It appears that property acquired under a contract entered into after Dec. 31, 2007, but before Sept. 9, 2010, can qualify for 100% bonus depreciation if the taxpayer hasn’t paid for the property or incurred its cost (by taking delivery, for example) before Sept. 9, 2010.
Opting out of 100% bonus depreciation
Although you can opt out of bonus depreciation for one or more asset classes, the Tax Relief act doesn’t specify whether you can opt out of 100% bonus depreciation and take a 50% bonus instead.
Rev. Proc. 2011-26 clarifies the matter. It allows you to elect 50% bonus depreciation in lieu of 100% bonus depreciation, on a class-by-class basis, for all qualifying assets acquired and placed in service during the tax year that includes Sept. 9, 2010 (the 2010 tax year for calendar-year taxpayers). This is useful if it’s difficult to pinpoint which property was placed in service after Sept. 8, 2010. You can make the election with your timely filed return for the year. If you’ve already filed, the revenue procedure provides an automatic six-month extension to make the election.
In the following tax year (2011 for calendar-year taxpayers), 100% bonus depreciation is the only option. In other words, you can claim 100% bonus depreciation or opt out, but you can’t elect 50% bonus depreciation in lieu of 100% bonus depreciation.
Under the general bonus depreciation rules, 50% bonus depreciation is available for property a taxpayer manufactures, constructs or produces, provided the project commenced after Dec. 31, 2007. Rev. Proc. 2011-26 provides that self-constructed property is “acquired” when manufacturing, construction or production begins. In other words, 100% bonus depreciation is unavailable for self-constructed projects begun before Sept. 9, 2010, even if they’re placed in service after Sept. 8.
Rev. Proc. 2011-26 provides a special exception, however, that allows you to elect 100% bonus depreciation for one or more acquired or self-constructed components of a larger self-constructed property. To qualify, components must be acquired after Sept. 8, 2010, and before Jan. 1, 2012 (Jan. 1, 2013 for certain longer-lived or transportation property). The election must be made by the federal tax return due date (including extensions) for the tax year in which the larger self-constructed property is placed in service.
Claiming missed deductions
If your business is on a fiscal year that began in 2009 and ended in 2010 — or if you filed a return for a 2010 short tax year — you may have missed an opportunity to deduct 50% bonus depreciation for qualifying property placed in service in 2010. This may have happened because you filed your return before the SBJA reinstated bonus depreciation retroactively to the beginning of 2010.
Rev. Proc. 2011-26 allows you to claim these missed depreciation deductions by:
• Filing an amended return for the 2009 tax year or 2010 short taxable year before you file your return for the succeeding year, or
• Filing an Application for Change in Accounting Method (Form 3115) with your return for the first or second tax year succeeding the 2009 tax year or 2010 short tax year.
If you previously made an election to opt out of 50% bonus depreciation for the 2009 tax year or 2010 short tax year, you can revoke the election by filing an amended return by the later of your next tax return or June 17, 2011.
Don’t try this at home
The rules for claiming and opting out of bonus depreciation are complex. If you acquired qualifying property or placed it in service in 2010 or the first part of 2011 — or if you plan to do so later this year — please contact us. We can help you determine the optimal tax strategy for your business and ensure that the necessary paperwork is filed on a timely basis.