By Gale E. Chan, Madeline M. Chiampou, and Philip TingleThe IRS recently issued guidance clarifying when taxpayers are eligible
for 100 percent bonus depreciation. In addition, the guidance provides
procedures for electing 100 percent bonus depreciation and 50 percent
bonus depreciation for certain property.
The Internal Revenue Service (IRS) recently issued guidance
explaining when property is eligible for 100 percent bonus depreciation
and providing various elections for taxpayers eligible for bonus
In December 2010, the Tax Relief, Unemployment Insurance
Reauthorization and Job Creation Act of 2010 (Tax Relief Act) extended
the additional first-year depreciation (bonus depreciation) rules
through 2012. The bonus depreciation rules, which provide
for a 50-percent depreciation deduction in the year qualified property
is placed in service, were set to expire at the end of 2010.
In addition to extending the availability of bonus depreciation in
general, the Tax Relief Act provided for a new 100 percent depreciation
deduction for qualified property that is acquired and placed into
service by the taxpayer between September 8, 2010, and January 1, 2012.
Qualified property placed into service after December 31, 2011, and
prior to December 31, 2012, would be eligible for the 50-percent bonus
depreciation. Recently, the IRS issued Revenue Procedure
2011-26 (the Guidance) to clarify when 100 percent bonus depreciation is
available and to provide election procedures for taxpayers deciding to
elect 50-percent bonus depreciation for certain property. The Guidance is discussed further below.
For further discussion on the bonus depreciation rules and their extension last year, see Bonus Depreciation Reinstated for Property Placed in Service or Acquired in 2010 and Congress Passes Bill Extending Section 1603 Grant and Other Energy-Related Incentives.
The bonus depreciation rules generally apply to property with a
recovery period of 20 years or less and to certain longer production
period property. Special acquisition date rules apply to
self-constructed property, which includes property constructed for the
taxpayer by another person pursuant to a binding written contract
entered into prior to the property's construction, manufacture or
Under the bonus depreciation statute enacted by the Tax Relief Act-as
well as the explanation of the bonus depreciation rules provided by the
Joint Committee of Taxation's "General Explanation of Tax Legislation
Enacted in the 111th Congress" (JCS-2-11, March 2011)-it was somewhat
unclear when property, particularly self-constructed property and
components of self-constructed property, would be eligible for 100
percent bonus depreciation. The U.S. Department of
Treasury regulations under former bonus depreciation rules provided
that, if the manufacture, construction or production of a larger
self-constructed project begins before December 31, 2007, the larger
self-constructed property and any acquired or self-constructed
components related to the larger self-constructed property did not qualify for 50-percent bonus depreciation.
Prior to the issuance of the Guidance, it was unclear how this rule
extended to self-constructed property placed in service after September
8, 2010. Was the taxpayer required merely to have begun
construction on its property after December 31, 2007, and to place that
property in service between September 8, 2010, and the end of 2011?
Or was the taxpayer required to have both begun construction on the
property and to place the property in service after September 8, 2010? Also, how do these rules apply to components of the larger self-constructed property?
In addition, for non-self-constructed property (e.g., property
that the taxpayer purchases assembled and places into service), it was
unclear whether the taxpayer could have entered into a binding contract
to purchase such property prior to September 8, 2010, and be eligible
for 100-percent bonus depreciation. The 100-percent bonus
depreciation rule required that the property be "acquired" after
September 8, 2010, but the application of the rules requiring that no
binding contract be in place prior to a certain date was not certain.
The Guidance makes it clear that if a taxpayer enters into a written
binding contract after September 8, 2010 and before January 1, 2012 to
acquire (including to manufacture, construct or produce) qualified
property, the property will be treated as having met the acquisition
date requirements. Thus, the Guidance provides a general
rule that binding written contracts to acquire or construct property
must be entered into after September 8, 2010, to be eligible for
100-percent bonus depreciation. Furthermore, construction on self-constructed property must begin after September 8, 2010.
However, the Guidance creates an exception to the rule that
construction on qualified property must begin after September 8, 2010,
for components of self-constructed property that are acquired after
September 8, 2010, and before January 1, 2012. This
exception provides that, even if construction on the larger
self-constructed project began prior to September 8, 2010, if components
of that property were not acquired or construction on such components
did not begin until after September 8, 2010, the taxpayer may elect to
apply 100-percent bonus depreciation to those components.
In addition to the election for components, the Guidance also
provides an election that permits taxpayers to elect 50-percent bonus
depreciation in lieu of the required 100-percent bonus depreciation or
an election out of bonus depreciation completely. The
election is limited to property placed in service in a taxpayer's
taxable year that includes September 9, 2010, and will apply to all
property that is in the same class of property. The IRS
explained that this election is intended to assist taxpayers who may
have difficulty determining the exact date during a month on which the
taxpayer acquired or placed in service property (thus eliminating the
need to determine if property went into service after September 8, 2010,
for 100-percent bonus depreciation purposes).
The Guidance also provides procedures for those taxpayers who did not
elect 50-percent bonus depreciation for some or all qualified property
placed in service after December 31, 2009, on a return for a tax year
beginning in 2009 and ending in 2010 or for a tax year of less than 12
months beginning and ending in 2010, but now wish to make the 50-percent
bonus depreciation election.
Procedures to elect 100-percent bonus depreciation for components and
50-percent bonus depreciation are described in more detail in the
Finally, the Guidance clarifies that the 100-percent bonus depreciation deduction must be determined after reduction
of the eligible property's basis by the amount of any credits claimed
for the property that require an adjustment to basis (e.g., the
investment tax credit provided under Internal Revenue Code Section 48)
or by any cash grant payments received pursuant to Section 1603 of the
American Recovery and Reinvestment Tax Act of 2009.
content of this article is provided solely for informational purposes.
It is not intended as, and does not constitute, legal advice. The
information contained herein should not be relied upon or used as a
substitute for consultation with legal, accounting, tax, career, and/or
other professional adivsers. This article is provided "AS IS," and
McDermott Will & Emery makes no representation or warranty of any
kind with respect to its contents. McDermott Will & Emery expressly
disclaims all representations and warranties, whether express or
implied, including, but not limited to, warranties of merchantability,
fitness for a particular purpose, and non-infringement. In addition,
McDermott Will & Emery does not represent or warrant that the
content of this article is timely, accurate or complete.
article is republished with the permission of McDermott Will &
Emery LLP. Further duplication without the permission of McDermott Will
& Emery LLP is prohibited. All rights reserved.
Discover the features and benefits of LexisNexis® Tax Center
For quality Tax & Accounting research resources, visit the LexisNexis® Store
For more information about LexisNexis products and
solutions connect with us through our corporate