A Bonus for Companies Using Bonus Depreciation

The new Job Creation Act signed last year gives companies a bigger depreciation benefit, and more time to use it.

Businesses got more breathing room to capture a bonus depreciation deduction when President Obama signed the new tax and jobs bill into law last year. In general, the revamped and substantially liberalized provisions contained in The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extend the Bush tax cuts for an additional two years, in most cases.

Further, the law extends and expands the additional first-year depreciation to equal 100% — rather than 50% — of the cost of qualified property placed in service after September 8, 2010, and before January 1, 2012. (September 8 is the date on which President Obama first broached the subject of "full expensing" of the cost of qualified property.) It also extends some similar tax benefits as far out as 2014.

The thinking behind the extension was to continue to spur capital spending by U.S. companies. For the past several years, the tax code has allowed for enhanced depreciation deductions with respect to tangible and intangible property, as long as the items met certain requirements. One of the more popular deductions related to this kind of qualified property was the "first-year depreciation" deduction. Under the older rules, an additional first-year depreciation deduction was allowed in an amount equal to 50% of the adjusted basis of qualified property that was placed in service during a specified period. That deduction has been raised to 100% under the new rules, and the time line has been expanded.

While some critical dates have changed under the new law, the mechanics of the deduction remain the same. For instance, the rules apply for both regular tax and alternative minimum tax purposes, but not for purposes of computing earnings and profits (see Section 168(k) of the Internal Revenue Code). In addition, the property must fall into one of the following four categories: (1) property to which the MACRS depreciation system applies (most tangible personal property) with an "applicable recovery period" of 20 years or less; (2) water utility property; (3) computer software (if either "off-the-shelf" or not acquired in a transaction involving the acquisition of assets constituting a business or a substantial portion thereof); or (4) qualified leasehold property that meets three criteria:
• the original use of the property must commence with the taxpayer after December 31, 2007; and
• the taxpayer must purchase the property within the "applicable time period" (after 2007 and before 2011 under the old law; but before 2013 under the new law); and;
• the property must be placed in service after 2007 and before 2011 under the old law, but before 2013 under the new law (or before 2014 in the case of certain long-lived property and transportation property).

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