Bonus Depreciation Enhanced & Extended
Author: Jeremy Carnahan
Bonus depreciation was enhanced and extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act). The Small Business Jobs Act of 2010 previously extended 50 percent bonus depreciation through December 31, 2010. The 2010 Tax Relief Act increases the bonus depreciation percentage to 100 percent for the cost of qualifying property placed in service after September 8, 2010, and before January 1, 2012 (or before January 1, 2013, for certain longer-lived and transportation property). Fifty percent bonus depreciation is available for qualified property placed in service after December 31, 2011, and before January 1, 2013 (or before January 1, 2014, for certain longer-lived and transportation property).
The 100 percent rate creates an immediate expensing opportunity for new construction pursuant to a contract entered into after December 31, 2007, for qualifying property placed in service after September 8, 2010, and before January 1, 2012. For projects with a production period greater than one year and cost exceeding $1 million, the 100 percent bonus depreciation is extended to projects placed in service before January 1, 2013.
- For construction projects qualifying for the 100 percent bonus depreciation, five-year and seven-year personal property and 15-year land improvements are eligible for immediate expensing.
- Taxpayers should closely monitor construction projects completed in 2010 to ensure the benefits of 100 percent bonus depreciation were considered with regard to eligible property.
- Structural components of the building are depreciated over a 27.5-year (residential) or 39-year (nonresidential) life.
- Taxpayers should consider fast-tracking qualifying long-term construction projects to ensure they are completed before January 1, 2013.
- Taxpayers should consider the income tax benefits of purchasing qualifying equipment, machinery and other personal property before January 1, 2012.
- Engineering-based cost segregation studies identify and provide the necessary documentation to support the cost of items qualifying for shorter depreciable lives. The immediate expensing opportunity provided by the 2010 Tax Relief Act makes these studies even more attractive.
Cost Segregation Example
A taxpayer completes a new $30 million distribution warehouse during a period ineligible for bonus depreciation. A cost segregation study for this facility enables the taxpayer to advance depreciation deductions and save $565,000 of federal income taxes in the first year the warehouse is placed in service. If this project had qualified for 100 percent bonus depreciation, the first year’s federal income tax savings after the cost segregation study would have exceeded $4.5 million.
The 2010 Tax Relief Act provides enhanced and extended bonus depreciation. To learn more about how your business might benefit from the current depreciation rules, contact your BKD advisor.