Businesses typically are allowed to deduct the costs of capital expenditures over time according to various depreciation schedules. In 2008 and 2009 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 Small Business Jobs Act extends the first-year 50-percent write-off for eligible property placed in service during 2010 (as well as during 2011 for aircraft and certain long-term-production-period property).
Pursuant to the Economic Stimulus Act of 2008 (the “2008 Act”), the American Recovery and Reinvestment Act of 2009 (the “2009 Act”) and the Small Business Jobs Act of 2010 (the “2010 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 percent of the adjusted basis of the “qualified property.” This memorandum summarizes the requirements and limitations of this additional 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”), and the regulations issued thereunder.
Section 168(k)(1) provides that the depreciation deduction for the first year that any “qualified property” is placed in service includes an allowance equal to 50 percent of the adjusted basis of the property. Property generally can qualify for the 50 percent bonus depreciation if it is acquired after December 31, 2007 and before January 1, 2011. The 50 percent bonus depreciation allowances are sometimes 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. 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.