Industry Insights

For qualified property acquired and placed in service after September 8, 2010, and before January 1, 2012, additional first-year bonus depreciation is available equal to 100 percent of the property’s adjusted basis. For qualified property acquired during 2012 or between January 1, 2008, and September 8, 2010, the bonus depreciation rate is 50 percent of the property’s adjusted basis. Other bonus depreciation provisions apply for property placed in service after September 10, 2001, and before 2008. Without additional legislation, bonus depreciation will expire at the end of 2012 (or the end of 2013 for certain property with long production periods).

Qualified property eligible for bonus depreciation generally is new Modified Accelerated Cost Recovery System (MACRS) property with a recovery period of 20 years or less, certain utility property, computer software or leasehold improvement property, as defined. Bonus depreciation also is applicable for both regular and alternative minimum tax purposes.

The Internal Revenue Code (IRC) says property, under certain conditions, may be exchanged for another property of like kind without gain recognition. When this occurs, the basis of the exchanged property is carried over to the new property, and the basis of the new property is increased by any additional consideration given to acquire it.

Surprisingly, IRC regulations provide that both the basis of the old property carried over to the new property and any additional consideration given to acquire the new property qualify for bonus depreciation, assuming all other conditions for claiming bonus depreciation are satisfied.

For example, in 2009, AB Corporation purchased and placed in service an item of equipment (five-year MACRS property) for $200,000. On December 15, 2011, AB Corporation acquires and places in service a new, improved model of the equipment costing $225,000 by trading in the equipment purchased in 2009 plus $50,000 cash. As the new equipment is of like kind, there is no gain recognized on the exchange. The undepreciated basis of the old equipment is $76,800. AB Corporation’s depreciable basis in the new equipment is $126,800—the basis of the old equipment ($76,800) traded, plus cash paid ($50,000).

Since the new equipment is qualified property, the company can claim 100 percent bonus depreciation on both the $50,000 cash expenditure and the $76,800 remaining basis of the old equipment.

Note:  For taxpayers required to use percentage of completion in calculating job profit, accelerating expenses—such as taking bonus depreciation—could accelerate job profit and thus taxable income. IRC regulations state taxpayers are required to recalculate their percentage of completion and job profit when bonus depreciation is taken for property placed in service after December 31, 2010.

Consult your BKD advisor to fully understand the benefits you could realize by utilizing bonus depreciation.