100 Percent Bonus Depreciation and the Corporate Election to Increase the Minimum Tax Credit Limitation

A corporation may make an election to forgo bonus depreciation for property placed in service during 2011 and 2012 and instead increase the limitation on the use of any unused minimum tax credit from tax years beginning before 2006.

November 2011
by Donald Williamson/The Tax Adviser

On December 17, 2010, President Barack Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (Tax Relief Act), which extends the 50 percent bonus depreciation deduction to qualifying property placed in service through 2012. In addition, to provide even more incentive for capital investment, Congress provided a 100 percent bonus depreciation deduction for qualified property acquired and placed in service after September 8, 2010, through December 31, 2011.

This article sets out the basic requirements for claiming bonus depreciation under the revised rules permitting the expensing of qualified property in 2011 and describes a potentially overlooked alternative that allows a corporation to elect out of bonus depreciation for 2011 and 2012 and instead increase its minimum tax credit by an amount that is potentially refundable. With this alternative available, corporations should analyze whether claiming 100 percent bonus depreciation or electing to claim additional minimum tax credit on their 2011 tax returns will maximize their tax benefit.

Background — Bonus Depreciation

Since 2008, taxpayers have been able to claim (or elect to forgo) a 50 percent bonus depreciation deduction for the acquisition or construction of qualified property at the time they place the property in service. The bonus depreciation deduction has been 50 percent of the basis of the qualified property, with the remaining basis depreciated under the general modified accelerated cost recovery system (MACRS) rules.

For this purpose, “qualified property” is any of the following:

  • Tangible property with a MACRS recovery period of 20 years or less;
  • Water utility property with a MACRS recovery period of 20 years;
  • Qualified leasehold improvement property; or
  • Computer software depreciable over a 36-month period.

Under this definition, the only commonly encountered types of tangible MACRS property that are excluded from being qualified property are nonresidential real property (commercial buildings depreciable over 39 years) and residential rental property (such as apartment buildings, depreciable over 27.5 years). Property will not be qualified property if it is required to be depreciated under the alternative depreciation system (ADS) rather than the general MACRS rules. In addition, to claim or forgo bonus depreciation:

  • The property must have been acquired by the taxpayer after 2007 and before 2013;
  • The property must be placed in service by the taxpayer before 2013 or, in the case of certain long production period property or specified aircraft, before 2014; and
  • The original use of the property must have commenced with the taxpayer after 2007. “Original” use for this purpose is met if a taxpayer converts personal use property to business use but not by used property acquired from another person.

Example 1: In 2010, taxpayer D acquires and places in service $10,000 of new property with a MACRS recovery period of five years. The depreciation on the property for 2010 is $6,000: $5,000 (50 percent bonus depreciation) plus 20 percent of the remaining basis of $5,000 using the normal 200 percent declining balance and half-year convention for determining the date the property was placed in service.

In determining when property is acquired and placed in service for purposes of qualifying for bonus depreciation within the period provided under Sec. 168(k), property manufactured, constructed or produced by the taxpayer for its own use is considered acquired only if the construction, manufacture or production began after 2007 and before 2013. If property is sold and leased back within three months after the property was placed in service, it is considered placed in service not earlier than the date of leaseback. Similarly, in the case of a lessor placing property in service, where the lessor or any later purchaser sells the property within the following three months (or if multiple units of property are subject to the same lease, within three months after the last unit is placed in service, so long as the time between when the first unit and last unit were placed in service is no more than 12 months), the property is treated as originally placed in service not earlier than the date of the last sale if the user (lessee) of the property after the last sale in the three-month period is the same as when the property was placed in service.

The amount of bonus depreciation is the same for both regular taxable income and alternative minimum taxable income (AMTI) for the year the qualified property is placed in service, with any remaining basis depreciated using the general MACRS rules for purposes of computing both taxable income and AMTI. A taxpayer may elect out of bonus depreciation for any class of property for any tax year by attaching a statement to its timely filed income tax return for the year the property is placed in service.

Extension of Bonus Depreciation Rule by Jobs Act and 2010 Act

The bonus depreciation rules generally expired at the end of 2009, but on September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010 (the Jobs Act), which extended the placed-in-service dates for property to be qualified property to December 31, 2010. Property that qualifies for bonus depreciation under this extension is referred to as “extension property.” Then the Tax Relief Act further extended the placed-in-service date to December 31, 2012. Property qualifying under this extension is referred to as “round 2 extension property.”

In addition, the Tax Relief Act provided 100 percent bonus depreciation for qualified property acquired and placed in service after September 8, 2010 and on or before December 31, 2011.

Except for the change in the rate and the specific effective dates within which property must be acquired and placed in service, the rules for 100 percent bonus depreciation are the same as for 50 percent bonus depreciation. There are no limits on either the amount of qualified property to which a taxpayer can apply the 100 percent bonus deduction or the size or type of taxpayer permitted to take the deduction. In Example 1, if the property had been acquired and placed in service in 2011, depreciation for the year would be $10,000 under 100 percent bonus depreciation.

As with 50 percent bonus depreciation, a taxpayer electing out of 100 percent bonus depreciation may do so only by electing out for all property placed in service in 2011 with the same recovery period and may not claim 50 percent bonus depreciation in lieu of 100 percent bonus depreciation.

Although there is no general limitation on the amount of bonus depreciation allowed for any qualified property, Sec. 280F limits depreciation (including bonus depreciation) for certain passenger automobiles in the year they are placed in service. For an automobile placed in service in 2010 and 2011, the general limit is $3,060, increased by $8,000 if the automobile is qualified property. Therefore, for 2010 and 2011, a taxpayer may deduct no more than $11,060 for bonus depreciation, regular depreciation and any Sec. 179 expensing.

The interaction of claiming 100 percent bonus depreciation on an automobile, coupled with the maximum allowance permitted under Sec. 280F, initially created a situation where no depreciation could be claimed on the vehicle after 2011 until the asset’s recovery period expired in 2016. However, the IRS eased this harsh result by permitting subsequent depreciation over the vehicle’s recovery period based on a presumption that the taxpayer had claimed only 50 percent bonus depreciation in the year of purchase. In spite of the IRS’s more liberal interpretation of the interaction between Secs. 168(k) and 280F, taxpayers who qualify may wish to elect out of bonus depreciation and claim a Sec. 179 expense allowance for the automobile. However, as previously noted, any election out of bonus depreciation will apply to any other property acquired in 2011 with the same recovery period as the automobile.

This article has been excerpted from The Tax Adviser. View the full article here.

 Rate this article 5 (excellent) to 1 (poor). Send your responses here.