Bonus Depreciation (PDF)
History of bonus depreciation
Congress has used bonus depreciation several times to encourage business investment. For example, bonus depreciation was available immediately after September 11, as well as for certain property used in the New York Liberty Zone or the Gulf Opportunity Zone.
If recent history is any indicator, the depreciation bonus will have a significant impact on business purchasing. According to a 2003 survey of National Utility Contractors Association (NUCA) members who said they were aware of the depreciation bonus, 67% of the respondents said bonus depreciation had prompted their companies to invest in new equipment in the prior 12 months.
Additionally, Bureau of Economic Analysis (BEA) data show that in the second quarter of 2002, the quarter immediately following the enactment of the last temporary stimulus law, business purchasing reversed its negative trend, began to increase, and continued to do so for the rest of the year.
A taxpayer is allowed to recover through annual depreciation deductions the cost of
certain property used in a trade or business or for the production of income. The amount of the depreciation deduction allowed with respect to tangible property for a taxable year is determined under the modified accelerated cost recovery system (â€œMACRSâ€). Under MACRS, different types of property generally are assigned applicable recovery periods and depreciation methods.
The recovery periods applicable to most tangible personal property range from three to 25 years. The depreciation methods generally applicable to tangible personal property are the 200-percent and 150-percent declining balance methods, switching to the straight-line method for the taxable year in which the taxpayerâ€™s depreciation deduction would be maximized.
2008 depreciation legislation
The new law as passed by Congress, provides qualifying taxpayers 50 percent first-year bonus depreciation of the adjusted basis of qualifying property. To be eligible to claim bonus depreciation, property must be (1) eligible for the modified accelerated cost recovery system (MACRS) with a depreciation period of 20 years or less; (2) water utility property; (3) computer software (off-the-shelf); or (4) qualified leasehold property.
The property must be purchased and placed in service during 2008. Thus, the original use of the property must begin with the taxpayer and must occur after December 31, 2007, and before January 1, 2009. The placed in service date is extended one year, through December 31, 2009, for property with a recovery period of 10 years or longer, for transportation property (tangible personal property used to transport people or property), and for certain aircraft. There cannot be a binding written contract before January 1, 2008, to acquire the property. Property qualifies only if it is acquired under a binding written contract entered into during 2008. In addition, the taxpayer must begin the manufacture, construction or production of qualifying property for the taxpayerâ€™s own use during 2008.
Bonus depreciation must be claimed for both regular tax and alternative minimum tax (AMT) liability unless the taxpayer makes an election out. Once made, an election out cannot be revoked without IRS consent.
Example: On September 1, 2008, a calendar-year reporting business bought and placed in service a $100,000 five-year property class piece of equipment. The business may claim a first-year (2008) depreciation allowance of $60,000 — i.e., a $50,000 bonus depreciation ($100,000 times 50%) plus a $10,000 normal first-year MACRS depreciation calculated on the new adjusted basis ([$100,000 minus $50,000] times 20%). In the second year (2009), the MACRS depreciation would be $16,000 ([$100,000 minus $50,000] times 32%). And, so on.
In the above example, the “effective” depreciation percentage for the first year is 60% [($50,000 bonus depreciation plus $10,000 normal first-year depreciation) divided by the $100,000 original adjusted basis]. In the second year, the “effective” depreciation is 16.00% [$16,000 divided by $100,000]. And, so on
Example: An individual purchases a new tractor in January of 2008 for $100,000 to use for his farming business. The asset would normally be depreciated over a 5 year period or 20% each year. Under the law with the new change the total depreciation that could be taken for 2008 is $60,000:
â€¢ $100,000 (asset) x 50% (bonus) = $50,000 bonus depreciation
â€¢ $50,000 (new asset cost for calculation) x 20% = $10,000 regular depreciation
Total Under the Bonus Depreciation Provisions in 2008 = $60,000
This bill is also the perfect opportunity to stand up for little guy. Hometown Iowa businesses are going to be hit with an income tax increase of up to $30 million if the Legislature does not â€œcoupleâ€ or mirror the federal tax changes in regards to bonus depreciation. Amendment H-8039 (to SF 2123) by Rants changes the date in the Iowa Code to reflect February 14, 2008 to include all federal tax changes including those in the Recovery Rebates and Economic Stimulus for the American People Act of 2008 (Public Law No. 110-185).