IRS Guidance on 100% Bonus Depreciation
Three months after Congress enacted 100% expensing (bonus depreciation) for qualified property, the IRS has released its position on certain issues raised by the statute, Revenue Procedure 2011-26. Manufacturers and large capital investors have hesitated to close deals in the absence of this IRS guidance. The key issue addressed by the guidance is fixing the acquisition date for property constructed by or for the taxpayer. In a nutshell, self-constructed property is considered acquired when construction begins. With a limited exception, the IRS will not allow 100% expensing of costs incurred on projects started before September 9, 2010. For our background memorandum on bonus depreciation, please go here.
Requirements for 100% Bonus Depreciation
Under the revenue procedure, “qualified property” is eligible for the 100% first year depreciation deduction if the property meets all of the following requirements:
Qualified Property. The property is “qualified property” – generally property eligible for MACRS depreciation deductions under section 168 of the Code that is acquired or constructed and placed in service in or after 2008, and was not subject to a written binding contract entered into before 2008 (i.e., the property would otherwise qualify for the 50% first year bonus depreciation deduction)
Acquisition. The property is “acquired” after September 8, 2010, and before January 1, 2012 (before January 1, 2013 in the case of certain long-lived property and certain aircraft). For 100% bonus purposes, a taxpayer “acquires” qualified property when the taxpayer pays or incurs the cost of the property. Qualified property that a taxpayer manufactures, constructs, or produces is treated as “acquired” for these purposes when the taxpayer begins constructing, manufacturing, or producing that property. As summarized in our prior alert on when construction begins, construction generally is considered to begin when physical work of a significant nature is first undertaken or the taxpayer has incurred a sufficient amount of project costs to satisfy a safe harbor.
Thus, projects where construction began before September 9, 2010 are not eligible for 100% bonus depreciation. (Certain components of such projects may be eligible, as noted below.) Projects where construction began after September 8, 2010 satisfy the acquisition requirement (and can qualify for 100% bonus so long as there is no binding contract dated before 2008). Projects to acquire qualified property pursuant to written binding contracts entered into after September 8, 2010 are deemed to meet the acquisition requirement.
Placed In Service. The taxpayer places the qualified property in service after September 8, 2010, and before January 1, 2012 (before January 1, 2013 in the case of certain long-lived property and certain aircraft). Existing regulations apply to determine date the property is deemed “placed in service” for tax purposes.
Original Use. The original use of the qualified property commences with the taxpayer after September 8, 2010. Existing regulations apply to determine date the property is deemed “placed in service” for tax purposes. The lessor in sale-leaseback is treated as the original user of the property so long as the lessee sells and leases the property back within 90 days after the property becomes commercially operational (placed in service).
Election for Certain Components
Congress gave permission to Treasury to issue rules “similar to” (and not necessarily identical to) those in existing regulations. Many developers were hoping Treasury would take a more taxpayer-friendly position on the acquisition date for self-constructed property.
For projects that were started before September 9, 2010, some advocated for allowing 100% bonus for at least those costs that were incurred after that date. The revenue procedure does not adopt that position, but does provide a limited exception for certain components.
If a taxpayer begins the manufacture, construction, or production of a project before September 9, 2010, the taxpayer may elect to treat any purchased or self-constructed component of the project as eligible for 100% bonus depreciation deduction, so long as the component is qualified property and is itself acquired or self-constructed by the taxpayer after September 8, 2010, and before January 1, 2012 (before January 1, 2013 in the case of certain long-lived property and certain aircraft).
50% Bonus Election
To minimize disputes regarding whether a taxpayer acquired or placed in service
qualified property after September 8, 2010, the revenue procedure allows a taxpayer to elect to claim the 50%, instead of the 100% first year bonus depreciation for all qualified property that is in the same class of property and placed in service by the taxpayer in its taxable year that includes September 9, 2010. For example, if a calendar-year taxpayer for its taxable year ending December 31, 2010, placed in service 5-year property before September 9, 2010, and other 5-year property after September 8, 2010, the taxpayer may elect to claim the 50% bonus for all of its 5-year property that is qualified property and placed in service during the 2010 taxable year.