Renewable Energy Insights > Troutman Sanders LLP

Bonus Depreciation Increased and Extended Under 2010 Tax Act

Businesses typically are allowed to deduct the costs of capital expenditures over time according to various depreciation schedules. In 2008, 2009 and 2010 businesses were allowed to deduct 50 percent of the cost of eligible property (generally, tangible personal property with recovery periods of 20 years or less) in the year of acquisition. The recently enacted Tax Relief Act of 2010 extends the first-year 50% write-off for eligible property placed in service during 2011 and 2012 (and in 2013 for aircraft and certain long-term-production-period property), and provides a new first-year 100% write off for certain property placed in service in 2011. Pursuant to the Economic Stimulus Act of 2008 (the “2008 Act”), the American Recovery and Reinvestment Act of 2009 (the “2009 Act”), the Small Business Jobs Act of 2010 (the “2010 Jobs Act”) and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Tax Act”), a taxpayer is allowed an additional first year depreciation deduction for certain “qualified property.”  The amount of the additional depreciation allowance is equal to 50% or 100% of the adjusted basis of the “qualified property.”  This memorandum summarizes the requirements and limitations of this depreciation allowance — commonly referred to as “bonus depreciation” — set forth in Section 168(k) of the Internal Revenue Code of 1986, as amended (the “Code”),[1] and the regulations issued thereunder.[2]

Section 168(k)(1) and (5) provide that the depreciation deduction for the first year that any “qualified property” is placed in service includes an allowance equal to either 50% or 100% of the adjusted basis of the property.  Property can qualify for the 50% bonus depreciation if it is acquired after December 31, 2007 and before January 1, 2013 (January 1, 2014 for aircraft and certain long-term-production-period property).   Property can qualify for a 100% allowance if it is acquired after September 8, 2010 and before January 1, 2012 (January 1, 2013 for aircraft and certain long-term-production-period property). The 50% and 100% bonus depreciation allowances are referred to herein as “Bonus Depreciation.”

Bonus Depreciation is in addition to the amount otherwise allowable as a depreciation deduction for the year the property is placed in service and for any later tax year.[3]  The otherwise allowable depreciation deductions for the first year and later years are determined by reducing the adjusted basis of the qualified property by the Bonus Depreciation.  Thus, before computing the amount otherwise allowable as a depreciation deduction for the year the property is placed in service and for later tax years, the adjusted basis of the property must be reduced by the Bonus Depreciation.[4]

Example.  On September 1, 2010, a calendar year taxpayer acquires and places in service qualified property that costs $1,000, and it is 5-year property subject to the half-year convention and the 200% double-declining balance method.  The taxpayer is allowed 50% Bonus Depreciation for the 2010 taxable year in the amount of $500.  The remaining $500 of cost is deductible under the rules applicable to 5-year property.  Thus, 20%, or $100, is also allowed as a depreciation deduction in 2010.  The total depreciation deduction for 2010 is $600.  The remaining $400 cost is recovered under the otherwise applicable rules for computing depreciation.[5]  Had the taxpayer acquired and placed in service the qualified property in 2010 but after September 8, 2010, the taxpayer would have been eligible for 100% Bonus Depreciation in 2010 in the amount of $1,000.

Although there is no explicit authority in Section 168(k) as to the application of depreciation conventions (e.g., half-year, mid-quarter), the examples in the legislative history  and the Regulations indicate that the depreciation conventions do not apply to Bonus Depreciation.  However, after computing the Bonus Depreciation, the remaining adjusted basis of the property is depreciated using the applicable depreciation provisions under the Code.[6]  Such applicable provisions include the applicable convention prescribed by Section 168(d).  Therefore, the half-year, mid-quarter and other depreciation conventions do apply to the other first-year depreciation deductions allowed for qualified property, as illustrated in the above Example.

The adjusted basis of qualified property acquired by a taxpayer in a “like kind” exchange or an involuntary conversion is eligible for Bonus Depreciation.[7] Thus, a taxpayer does not have to “purchase” property in order to claim Bonus Depreciation.

Bonus Depreciation generally is not affected by a short taxable year.[8] Accordingly, a taxpayer is not required to prorate the Bonus Depreciation based on the length of the taxable year in which the qualified property is placed in service.[9] In addition, Bonus Depreciation is determined without regard to any alternative minimum tax adjustments.[10]

A taxpayer may elect not to claim Bonus Depreciation with respect to qualified property.”[11] The election will apply to all qualified property in the same “class of property” placed in service during the same taxable year.[12] The term “class of property” means (i) each class of property set forth in Section 168(e) (e.g., 3-year property, 5-year property), other than water utility property and qualified leasehold improvement property, (ii) water utility property, (iii) computer software amortized under Section 167(f)(1), or (iv) qualified leasehold improvement property as defined in Section 168(k)(3).[13]

II. Qualified Property

In general, “qualified     property” must satisfy four requirements relating to the characteristics of the property, and the timing of the acquisition, placement in service and original use of the property.  In addition, an “anti-churning” rule applies.  Each of these requirements is considered in turn below.

A. Property Characteristics

(1) MACRS Eligible

In order for property to constitute “qualified property” and qualify for Bonus Depreciation the property must be subject to the general rules of MACRS.  Property that is subject to the “alternative depreciation system” described in Section 168(g) (“ADS”) is not “qualified property.”  ADS applies to, among other things, tangible property used predominantly outside the United States and any tax-exempt use property.[14] Subject to certain exceptions for short-term leases, “tax-exempt use property” includes any tangible property leased to any entity that is exempt from Federal income tax (e.g., domestic municipalities and most foreign entities).[15]

It should be noted that, property leased to a tax-exempt entity for less than three years may be excluded from ADS and eligible for both MACRS and Bonus Depreciation.  See Section 168(h)(1)(C).

The determination of whether or not property is subject to ADS is made after application of Section 280F(b).[16] Section 280F(b) provides that if any “listed property” is not used predominantly in a qualified business use for any taxable year, allowable depreciation is determined under ADS, and, accordingly, the property is not eligible for Bonus Depreciation.[17] “Listed property” includes the following property categories, as more specifically defined in the Code:

  • any passenger automobile,
  • any other property used as a means of transportation (e.g., corporate aircraft),
  • any property of a type generally used for purposes of entertainment, recreation or amusement,
  • any computer or peripheral equipment (as defined in Section 168(i)(2)(B)),
  • any cellular telephone (or other similar telecommunications equipment), and
  • any other property of a type specified by the IRS in regulations.

Excluded from the definition of “listed property” is computer or peripheral equipment used exclusively at a regular business establishment and owned or leased by the person operating such establishment, certain passenger automobiles and any property substantially all of the use of which is in a trade or business of providing to unrelated persons services consisting of the transportation of persons or property for compensation or hire.[18] Thus, for example, commercial aircraft is not listed property, but corporate aircraft is listed property.

Even if property is “listed property,” it is not subject to ADS (and hence is eligible for Bonus Depreciation) if the property is predominantly used in a “qualified business use” for the taxable year.  Property is treated as predominantly used in a qualified business use if more than 50% of the use of the property for the year is for a “qualified business use.”[19]  “Qualified business use” means any use in a trade or business of the taxpayer other than the (i) leasing of property to any 5-percent owner or related person, (ii) use of property provided as compensation for the performance of services by a 5-percent owner or related person, or (iii) use of property provided as compensation for the performance of services by any person that is not a 5-percent owner or related person, unless an amount is included in the person’s gross income with respect to such use. However, in the case of aircraft, the use of property will constitute “qualified business use” if at least 25% of the total use of the aircraft during the taxable year consists of qualified business use not described (i), (ii) and (iii).  Thus, an airplane will not fail the predominant use requirement solely because it is used by a 5-percent owner as compensation for services if such use does not exceed 75% of the aircraft’s total use and the remaining balance of the aircraft’s use is “qualified business use.”

(2) Property Type

“Qualified property” eligible for Bonus Depreciation must be either (i) property having a recovery period of 20 years or less, (ii) computer software (as defined in Section 167(f)(1)(B)) for which a deduction is allowable under Section 167(a), (iii) water utility property, or (iv) qualified leasehold improvement property.[20]

Property having a recovery period of 20 years or less includes most tangible personal property.

“Computer software” is any program designed to cause a computer to perform a desired function, except that such term does not include computer software acquired in a transaction (or series of related transactions) involving the acquisition of assets constituting a trade or business or substantial portion thereof.[21] Therefore, if computer software is not acquired in connection with the acquisition of a trade or business, it is both amortizable over 36 months under Section 167(f) and eligible for Bonus Depreciation.[22]

“Water utility property” means (i) property which is an integral part of the gathering, treatment, or commercial distribution of water and (ii) any municipal sewer.[23]

“Qualified leasehold improvement property” means any improvement to an interior portion of a building which is nonresidential real property and which meets the following requirements.[24] First, the improvements must be made under or pursuant to a lease between unrelated parties (as defined).  Second, the improvements must be made either by the lessee (or sublessee) or lessor of the relevant portion of the building.  For this purpose, a commitment to enter into a lease is treated as a lease, and the parties to such commitment are treated as lessor and lessee.[25]  As a result, improvements to property made by a person who commits to enter into a lease of such property and then assigns its rights to the property to the ultimate lessee will be treated as having been made by the “lessee” pursuant to a lease.  Finally, that portion of the building which is improved must be occupied exclusively by the lessee (or sublessee) and the improvement must be placed in service more than three years after the date the building was first placed in service.[26] “Qualified leasehold improvement property” does not include any improvement for which the expenditure is attributable to (1) the enlargement of the building, (2) any elevator or escalator, (3) any structural component benefiting a common area, and (4) the internal structural framework of the building.[27]

B. Acquisition Requirement

Property must satisfy an acquisition requirement in order to be considered “qualified property” eligible for Bonus Depreciation.  The property must meet one of two alternative acquisition requirements.  The property will be eligible for either 50% or 100% Bonus Depreciation depending on which requirement is met.

To qualify for 50% Bonus Depreciation, the property must be:

(i)         acquired by the taxpayer after December 31, 2007, and before January 1, 2013, but only if no written binding contract for the acquisition was in effect before January 1, 2008, or

(ii)        acquired by the taxpayer pursuant to a written binding contract which was entered into after December 31, 2007, and before January 1, 2013.[28]

To qualify for 100% Bonus Depreciation, the property must be:

(i)         acquired by the taxpayer after September 8, 2010, and before January 1, 2012, but only if no written binding contract for the acquisition was in effect before January 1, 2008, or

(ii)        acquired by the taxpayer pursuant to a written binding contract which was entered into after December 31, 2007, and before January 1, 2012.  (As discussed below, to qualify for 100% Bonus Depreciation, the property must also be placed in service after September 8, 2010.)

If a taxpayer manufactures, constructs or produces property for its own use, the taxpayer must begin the manufacture, construction or production of the property after December 31, 2007 and before January 1, 2013.[29]  A binding contract entered into before January 1, 2008 to acquire one or more components of a larger self-constructed property will not preclude the larger self-constructed property from satisfying the acquisition requirements, but the portion of the basis attributable to the component is not eligible for Bonus Depreciation.[30] Property that is manufactured, constructed or produced for the taxpayer by another person under a written binding contract that is entered into prior to the manufacture, construction or production of the property is considered to be manufactured, constructed or produced by the taxpayer.[31]

A contract is binding only if it is enforceable under State law against the taxpayer or a predecessor, and damages thereunder are not limited to a specified amount.[32] The fact that there may be little or no damages because the contract price does not significantly differ from the fair market value of the property will not be taken into account.[33] For example, if a taxpayer entered into an irrevocable written contract to purchase an asset for $100 and the contract contained no provision for liquidated damages, the contract would be considered binding notwithstanding that the asset had a fair market value of $99 and under local law the seller would only recover the difference between the contract price and the asset’s fair market value in the event the purchaser failed to perform.  If the contract provided for a full refund of the purchase price in lieu of any damages allowable by law in the event of breach or cancellation by the seller, the contract would not be considered binding.

A contract that is subject to a condition will be considered binding, as long as the condition is not within the control of either party or a predecessor.[34] A contract will be considered binding even if the parties to a contract make insubstantial changes to its terms and conditions or there remain insubstantial terms to be negotiated by the parties.[35]

C. Placed In Service Requirement

To be considered “qualified property” eligible for Bonus Depreciation, the property must be placed in service within a specified time period.  In general, to be eligible for 50% Bonus Depreciation, the property must be placed in service before January 1, 2013.[36]  To be eligible for 100% Bonus Depreciation, the property must be placed in service after September 8, 2010 and before January 1, 2012.[37]

The 2010 Tax Act provides for a one-year extension of the applicable placed-in-service deadline for certain property with long recovery periods, transportation property and certain aircraft.  Such property must be placed in service by the end of 2012 to qualify for 100% Bonus Depreciation and by the end of 2013 to qualify for 50% Bonus Depreciation.  The one-year extended in-service deadline applies to property (i) which otherwise qualifies for Bonus Depreciation, (ii) has a recovery period of at least 10 years or is “transportation property,” and (iii) either (A) has an estimated production period exceeding two years or (B) has an estimated production period exceeding one year and a cost exceeding $1 million.[38] “Transportation property” is tangible personal property used in the trade or business of transporting persons or property.[39] The one-year extended in-service deadline also applies to certain classes of aircraft having a production period exceeding four months.[40]

A special rule limits the amount of costs eligible for Bonus Depreciation for property qualifying for the extended in-service date.  Only the portion of the basis in the property that is properly attributable to the costs incurred before January 1, 2013 (“progress expenditures”) are eligible for 50% Bonus Depreciation.[41]  As a result, any additional amount invested after January 1, 2013 in property that is eligible for the extended in-service date will not qualify for 50% Bonus Depreciation.[42]

D. Original Use Requirement

Property must satisfy an “original use” requirement to be “qualified property” eligible for Bonus Depreciation.  The original use of the property must commence with the taxpayer on or after January 1, 2008.[43]

The term “original use” means the first use to which the property is put, whether or not such use corresponds to the use of the property by the taxpayer.[44]  Further guidance on the meaning of “original use” can be found in the definition of “new section 38 property” in the investment tax credit regulations.  See Treas. Reg. § 1.48-2.  Thus, the cost of acquiring reconditioned or rebuilt property would not satisfy the original use requirement,[45] but capital expenditures incurred to recondition or rebuild such property would satisfy the original use requirement.[46]

If, in the normal course of business, a taxpayer sells fractional interests in property to unrelated parties, the original use of such property begins with the first user of each fractional interest (i.e., each fractional interest owner is considered the original user of its proportionate share of the property).[47]

(1) Sale-Leasebacks and Syndications

For sale-leaseback transactions, there is an exception to the requirement that the original use of property commence with the taxpayer.  If property originally placed in service by a person after December 31, 2007 is sold and leased back by such person within three months after the date such property was originally placed in service, the property is treated as originally placed in service not earlier than the date the property is used under the leaseback.[48]  If the sale-leaseback exception applies, the original use of the leased property will be deemed to commence with the lessor under the leaseback on the first day of the lease, and not with the lessee upon its use of the property prior to the commencement of the lease.

Accordingly, the sale-leaseback exception qualifies a lessor for Bonus Depreciation provided the sale-leaseback transaction is completed within three months after the property is placed in service by the lessee.

Moreover, in certain situations, the original use of property subject to a lease will commence with a taxpayer who purchases its interest in the property from the lessor.  If property is originally placed in service by a lessor, including by operation of the sale-leaseback exception, after December 31, 2007, and is sold by the original lessor or any subsequent purchaser of the original lessor’s interest in the property within three months after the date the property was originally placed in service by the original lessor, and the user of the property does not change, the purchaser of the property in the last sale during the three-month period is considered the original user of the property.[49] Therefore, the original use of leased property will commence with the purchaser of a lessor’s interest in a lease transaction, provided the lessee remains the same and the sale occurs within three months of the time the property was originally placed in service by the original lessor.  The original use of property will commence with the purchaser even if the original use of the property was deemed to commence with the original lessor by operation of the sale-leaseback exception.  Accordingly, if the sale-leaseback exception is considered, a taxpayer can be deemed the original user of property that has been in use by a lessee for a period of up to six months.

Example.  X, a taxable entity, purchases railcars on June 2, 2011 from the manufacturer and begins to use the property in its business.  X enters into a sale and leaseback of the railcars on September 1, 2011 with a leasing company, Y.  Y sells some of the railcars (subject to the lease) to another lessor, Z, on December 1, 2011.  The railcars are qualified property and Y and Z are eligible to claim 100% Bonus Depreciation with respect to the railcars for the following reasons.  First, the railcars meet the “property type” requirement of Bonus Depreciation because they have a recovery period of 20 years or less and they are eligible for MACRS depreciation.  The railcars also meet the “acquisition” requirements because they were acquired by Y and Z after September 8, 2010 and before January 1, 2012. Last, the placement in service and original use requirements have been met.  The lessee, X, placed the railcars in service in its trade or business on June 2, 2011 (the “original in-service date”).  Since the sale-leaseback transaction occurred within three months of the original in-service date, the original use of the railcars retained by Y is deemed to commence with Y on September 1, 2011 (the date of the leaseback).  The original use of the railcars sold by Y to Z is deemed to commence with Z on December 1, 2011 (the date of the sale) because the original use of the railcars subject to the sale-leaseback is deemed to commence with Y, Y sold the railcars to Z within three months of the sale-leaseback transaction, and the user of the railcars (X) did not change.  Accordingly, each of Y and Z is entitled to claim 100% Bonus Depreciation with respect to their railcars for 2011.

E. Disqualified Transactions

Property does not qualify for Bonus Depreciation when the user of the property (or a related party) would not have been eligible for Bonus Depreciation if the user (or a related party) were treated as the owner.[50] For example, if in 2010 Company A sells to a related party property that was under construction by Company A prior to January 1, 2008 (and hence would not qualify for Bonus Depreciation in Company A’s hands), the fact that the transferee acquires the property after December 31, 2007 does not cure the taint of the earlier construction.  The transferee is not eligible for Bonus Depreciation.  Similarly, if in 2010 Company A sells to a related party property that was subject to a binding written contract prior to January 1, 2008 (and hence would not qualify for Bonus Depreciation in Company A’s hands), the fact the transferee itself was not a party to that written contract does not cure the taint.  The transferee is not eligible for Bonus Depreciation.  In addition, if a person sells property and leases it back in a sale-leaseback, and the property would not have qualified for Bonus Depreciation if no sale-leaseback had occurred (e.g., because the seller-lessee had acquired the property or began construction of the property before January 1, 2008), the lessor is not entitled to Bonus Depreciation.

***

 


[1]       Unless otherwise noted, all references to Sections are to sections of the Code.

[2]       The amendments to Section 168(k) made by recent legislation reflect the intention of Congress to provide for bonus depreciation rules that are substantially identical to the bonus depreciation rules enacted in 2002 and 2003 and embodied in Section 168(k) prior to amendment by the 2008 Act and later legislation. The amendments to Section 168(k) for the most part merely change the date references in Section 168(k) that applied to the former bonus depreciation rules. See Section 103(a) of the 2008 Act and Section 401 of the 2010 Tax Act. A comprehensive set of Treasury Regulations were promulgated under Section 168(k) in connection with the former rules.  See Treas. Reg. § 1.168(k)-0 et. seq. (the “Regulations”).   The IRS has issued a notice confirming that the existing regulations do apply.  See IRS News Release (IR-2008-58) (April 11, 2008).

[3]       Bonus Depreciation is allowed for both regular tax and alternative minimum tax purposes for the taxable year in which the qualified property is placed in service.  Section 168(k)(2)(G).

[4]       Treas. Reg. § 1.168(k)-1(d)(2).

[5]       Joint Committee on Taxation, “Technical Explanation of the Revenue Provisions of H.R. 5140, The Economic Stimulus Act of 2008,” JCX-16-08 (February 8, 2008) (hereafter, the “2008 Act Explanation”). See also “Joint Explanatory Statement of the Committee of Conference for The American Recovery and Reinvestment Act of 2009 – Division B” (February 13, 2009) (hereafter, the “2009 Act Explanation”) at 28; Joint Committee on Taxation, “Technical Explanation of the Tax Provisions In Senate Amendment 4594 to H.R. 5297, the Small Business Jobs Act of 2010,” JCX-47-10 (September 16, 2010) (hereafter, the “2010 Jobs Act Explanation”), at 9; and  Joint Committee on Taxation, “Technical Explanation of the Revenue Provisions Contained in the ‘Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010’ Scheduled for Consideration by the United States Senate,” JCX-55-10 (December 10, 2010) (hereafter, the “2010 Tax Act Explanation”), at 54.

[6]       See Treas. Reg. § 1.168(k)-1(d)(2).

[7]       Treas. Reg. § 1.168(k)-1(f)(5).

[8]       Treas. Reg. § 1.168(k)-1(d)(1)(i).

[9]       However, the depreciation deduction allowable for the remaining adjusted basis of qualified property is affected by a short taxable year. See Treas. Reg. § 1.168(k)-1(d)(2).

[10]     Section 168(k)(2)(G).

[11]     See Section 168(k)(2)(D)(iii); Treas. Reg. § 1.168(k)-1(e).

[12]     Id.

[13]     Treas. Reg. § 1.168(k)-1(e)(2).

[14]     Section 168(g)(1).

[15]     Section 168(k)(2)(D)(i)(I) provides a limited exception for property that is subject to ADS by virtue of an election to apply ADS to the property in lieu of the general rules of MACRS. For example, if a taxpayer elects to apply ADS to certain property, and the property was otherwise eligible for depreciation pursuant to the general rules of MACRS, the property will remain eligible for Bonus Depreciation. Congress did not intend to penalize taxpayers who choose to apply the slower ADS depreciation system rather than the more generous MACRS general depreciation system.

[16]     Section 168(k)(2)(D)(i)(II).

[17]     Section 168(k)(2)(C)(i)(II) provides that Section 280F(b) must be applied before determining whether property is eligible for Bonus Depreciation.  Although Section 280F(c) excludes from ADS treatment certain property leased or held for leasing by persons regularly engaged in the business of leasing such property, there is nothing in the legislation or the legislative history underlying the bonus depreciation rules that suggests that Section 280F(c) is relevant for purposes of Bonus Depreciation. Accordingly, absent guidance to the contrary, we believe the Bonus Depreciation provisions should be applied after the application of Section 280F(b), without regard to Section 280F(c).

[18]     Section 280F(d)(4).  The term “related person” includes a number of different categories of persons such as member of a family, two corporations that are part of the same controlled group and an individuals and a corporation if the individual owns more than 50 percent in value of the corporation’s outstanding shares.

[19]     Section 280F(d)(6)

[20]    Section 168(k)(2).

[21]     Section 167(f)(1)(B) refers to the definition of “computer software” set forth in Section 197(e)(3)(B) with the caveat that such term does not include an “amortizable section 197 intangible.”  An “amortizable section 197 intangible” means any “section 197 intangible” which is held in connection with the conduct of a trade or business or an activity described in Section 212. A “section 197 intangible” includes only software that is acquired in a transaction (or series of related transactions) involving the acquisition of assets constituting a trade or business or substantial portion thereof. Therefore, computer software that is not acquired in connection with the conduct of a trade or business is not an “amortizable section 197 intangible” and is eligible for Bonus Depreciation.

[22]     Rev. Proc. 2002-33, § 2.03.

[23]     Section 168(e)(5).

[24]     Section 168(k)(3); Treas. Reg. § 1.168(k)-1(c)(1).

[25]     Section 168(k)(3)(C)(i); Treas. Reg. § 1.168(k)-1(c)(3)(vi).

[26]     Section 168(k)(3)(A); Treas. Reg. § 1.168(k)-1(c)(1)(iii).

[27]     Section 168(k)(3)(B); Treas. Reg. § 1.168(k)-1(c)(2).

[28]   Section 168(k)(2)(A)(iii). A binding contract entered into before January 1, 2008 to acquire one or more components of a larger property will not prevent the larger property from qualifying for Bonus Depreciation, but the portion of the basis attributable to the component is not eligible for Bonus Depreciation.  2008 Act Explanation at 19 (footnote 19); Treas. Reg. § 1.168(k)-1(b)(4)(ii)(E).

[29]     Section 168(k)(2)(E)(i). For this purpose, construction is considered to begin when physical work of a significant nature begins. Physical work does not include preliminary activities such as planning, designing, securing financing, exploring or researching.  Under a safe harbor, physical work of a significant nature will not be considered to begin before the taxpayer incurs more than 10% of the total cost of the property (other than the cost of preliminary activities).  Treas. Reg. § 1.168(k)-1(b)(4)(iii)(B).

[30]    Treas. Reg. § 1.168(k)-1(b)(4)(iii)(C).

[31]     Treas. Reg. § 1.168(k)-1(b)(4)(iii).

[32]     However, a contractual provision that limits damages to an amount equal to at least 5 percent of the total contract price will not be treated as limiting damages to a specified amount. Treas. Reg. § 1.168(k)-1(b)(4)(ii)(B).

[33]     Id.

[34]     Treas. Reg. § 1.168(k)-1(b)(4)(ii)(B).

[35]     Id.

[36]     Section 168(k)(2)(A)(iv).

[37]   Section 168(k)(5) and 168(k)(2)(A)(iv).

[38]     Section 168(k)(2)(B).

[39]     Section 168(k)(2)(B)(iii).

[40]   Section 168(k)(2)(C).

[41]     Section 168(k)(2)(B)(ii); Treas. Reg. § 1.168(k)-1(d)(1)(ii). For purposes of determining the amount of eligible progress expenditures, rules similar to Section 46(d)(3) as in effect prior to the Tax Reform. Act of 1986 apply. See 2008 Act Explanation at 11 (footnote 20), 2009 Act Explanation at 29-30; 2010 Jobs Act Explanation at 8 (footnote 40); 2010 Tax Act Explanation at 55 (footnote 65).

[42]   As drafted, the 2010 Tax Act does not impose a comparable progress expenditure rule for property eligible for 100% Bonus Depreciation. It is not clear whether Congress intended this result. However, absent a technical correction or other guidance, progress expenditures incurred before January 1, 2013 with respect to property eligible for the extended in-service deadline may be eligible for 100% Bonus Depreciation.

[43]     Section 168(k)(2)(A)(ii) and 168(k)(5).

[44]     Treas. Reg. § 1.168(k)-1(b)(3)(i);  2008 Act Explanation at 10; 2009 Act Explanation at 28-29, 2010 Jobs Act Explanation at 10; 2010 Tax Act Explanation at 55.

[45]     The question of whether property is reconditioned or rebuilt property is a question of fact. The Regulations state that property that contains used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20 percent of the total cost of the property. Treas. Reg. § 1.168(k)-1(b)(3)(i).

[46]     Id.

[47]     Treas. Reg. § 1.168(k)-1(b)(3)(iv).

[48]     Section 168(k)(2)(E)(ii); Section 168(k)(4)(C).

[49]     Section 168(k)(2)(E)(iii); Treas. Reg. § 1.168(k)-1(b)(3)(iii)(B).  2010 Tax Act Explanation at 55 (footnote 62).

[50]     Section 168(k)(E)(iv); 2008 Act Explanation at 12; 2009 Act Explanation at 30; 2010 Jobs Act Explanation at 11; 2010 Tax Act Explanation at 54-55.

23 December 2010