Industry Insights

In general, for qualified property acquired and placed in service after September 8, 2010, and before January 1, 2012, additional first-year bonus depreciation equal to 100 percent of the property’s adjusted basis is available. For qualified property acquired between January 1, 2008, and September 8, 2010, or during 2012, 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 2013, in the case of 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 up to 20 years, certain utility property, computer software or leasehold improvement property, as defined. As an added bonus, bonus depreciation is applicable for both regular and alternative minimum tax purposes.

The Internal Revenue Code (IRC) states property, under certain conditions, may be exchanged for another property of a like kind without gain recognition. When this occurs, the basis of the exchanged property is carried over to the new property. Further, 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 exchanged 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 five-year MACRS property for $200,000. On December 15, 2011, the company 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 exchanged equipment is $76,800. The company’s depreciable basis in the new equipment is $126,800, consisting of the basis of the old equipment traded ($76,800), plus cash paid ($50,000).

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

For more information on bonus depreciation, contact your BKD advisor.