Guidance Issued on 100% Bonus Depreciation Rules

The IRS issued guidance on how taxpayers can deduct 100% of the cost of qualified business property placed in service in 2011 under rules enacted last year (Rev. Proc. 2011-26).

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) allows taxpayers to deduct 100% of the cost of certain business property acquired after September 8, 2010, and before January 1, 2012, and placed in service before January 1, 2012 (or before January 1, 2013, in the case of certain property). In addition, the act extended the placed-in-service date for property to qualify for a 50% additional first-year depreciation deduction to include property placed in service before January 1, 2013 (or before January 1, 2014, in the case of certain property).

The revenue procedure spells out the requirements property must meet to be eligible for 100% bonus depreciation, including the acquisition date, the placed-in-service date, and the date when original use of the property commences with the taxpayer. Special requirements apply to self-constructed property.

The revenue procedure also specifies how the 100% bonus depreciation rules coordinate with other Code sections, including various tax credits, grants in lieu of energy credits under Section 1603 of the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), and the Sec. 280F limitations on passenger automobiles.

Taxpayers can elect not to deduct additional first-year depreciation, and the revenue procedure outlines the time and manner for making that election.

The revenue procedure also allows taxpayers to elect the 50% first-year bonus depreciation, instead of the 100% bonus depreciation, for certain qualified property placed in service in the taxpayer’s tax year that includes September 9, 2010.

Some taxpayers with tax years beginning in 2009 and ending in 2010 that filed their 2009 federal tax returns before the enactment of the Small Business Jobs Act (P.L. 111-240) are uncertain how to claim or not claim the 50% additional first-year depreciation for qualified property placed in service after December 31, 2009, in tax years ending in 2010. The revenue procedure provides procedures for claiming (or not claiming) the 50% bonus depreciation for this property.

Rev. Proc. 2011-26 is effective March 29, 2011.