Normally, when you buy long lived property, you can’t deduct the full cost of the property in the year you purchase it. The purchase price is deducted over the expected life of the property. In late 2010 through 2011, business owners were allowed to immediately deduct 100% of the cost of certain assets. This was known as 100% bonus depreciation. 100% bonus depreciation ended on December 31, 2011. Bonus depreciation is alive and well in 2012; however, it has been reduced to 50% from 100%. 50% bonus depreciation lasts through December 31, 2012. It is extended to December 31, 2013 for property having a longer production period (discussed later).
What is Eligible Property?
To be eligible for bonus depreciation, the property must meet three criteria:
1. The asset must be qualified property
- The asset must have a recovery period of 20 years or less. This includes most tangible personal property. It excludes almost all real estate.
- General purpose buildings used in agriculture, such as machine sheds and shops, are 20 year property and are eligible for bonus depreciation
- Off the shelf software qualifies
- Qualified leasehold improvement property qualifies
2. The ORIGINAL use must commence after December 31, 2007
- The asset must generally be NEW. Used property doesn’t qualify.
- New property initially used by a taxpayer for personal use and subsequently converted to business use meets the original use requirement
- Expenditures to recondition or rebuild assets satisfies the original use requirement, but purchases of reconditioned or rebuilt assets do not qualify. However, an asset that contains used parts will not be considered used if the cost of the used parts is 20% or less of the total cost.
3. The asset must be acquired and placed in service on or before December 31, 2012
- The placed in service requirement is extended to December 31, 2013 for property that has a longer production period and has an expected life of at least 10 years OR is commercial transportation property or certain aircraft.
- A longer production period is defined as exceeding two years OR an estimated production period exceeding one year and a cost exceeding $1 million.
- Only costs attributable to production before January 1, 2013 will qualify for this exception.
Qualified leasehold improvement property also qualifies for 50% bonus depreciation. Qualified leasehold improvement property meets the following tests:
- The improvement is to an interior of a building
- The building is nonresidential
- The improvement is made pursuant to a lease by either the lessee, sublessee, or by the lessor to property to be occupied by the lessee or sublessee
- The improvement is placed in service more than three years after the date the building was first placed in service by any person
- Leases between related parties do not qualify
Call us if you would like to discuss how this applies in your business.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230