March 30th, 2011

The Internal Revenue Service March 29 unveiled eagerly awaited guidance on two pieces of legislation that provided taxpayers generous bonus depreciation incentives, offering flexibility for taxpayers caught in difficulties over whether to take 50 percent depreciation, an additional 100 percent depreciation available in some cases, or neither.

In Revenue Procedure 2011-26, IRS offered guidance under the Small Business Jobs Act of 2010 (Pub. L. No. 111-240), and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Pub. L. No. 111-312).

In general, the two laws extend the time that taxpayers already could take 50 percent bonus depreciation and add additional 100 percent bonus depreciation in some cases. Under the guidance, taxpayers can elect to take 50 percent depreciation for an entire year that includes a key date of Sept. 9, 2010, if they are having difficulties sorting out which property might qualify for which type of depreciation before and after that date.

Flexibility Seen Helpful

Dustin Stamper, a manager in Grant Thornton LLP’s Washington National Tax Office, called the flexibility “fairly helpful for taxpayers who don’t want to parse out which items were placed into service before Sept. 9 and after Sept. 9.” He said in general, however, “I don’t think there were too many big surprises here. The bonus rules have been around for quite a few years now and people are pretty comfortable with them.”

Stamper said the guidance contained several examples on how to apply an exception for self-constructed property, and said, “It might have been helpful to have some details around what really qualifies as a component.”

In this area, Stamper noted, “We didn’t get as favorable an interpretation on self-constructed property as we’d hoped. You won’t be eligible for 100 percent bonus depreciation for self-constructed property if construction began before Sept. 8, 2010, even if the property is placed in service in 2011, though the service is interestingly allowing folks to carve out components of the property and make them eligible.”

One area deserving of praise, however, is IRS’s decision that qualified restaurant property and qualified retail improvement property are eligible for the bonus depreciation, the Grant Thornton practitioner said.

IRS Explains Decision

IRS described the flexibility on which type of depreciation to elect in a section of the guidance addressing an election not to deduct additional first year depreciation.

To minimize disputes regarding whether a taxpayer acquired or placed in service particular property after Sept. 8, 2010, IRS said, it would allow a taxpayer to elect to deduct the 50 percent, instead of the 100 percent, additional first year depreciation for qualified property.

That property must be in the same class and placed in service by the taxpayer in its taxable year that includes Sept. 9, 2010, the agency said. Taxpayers cannot make an election not to deduct additional first year depreciation for that class of property for that taxable year, IRS noted.

Rev. Proc. 2011-26 is effective March 29, 2011, IRS said. The guidance is scheduled to be published in Internal Revenue Bulletin 2011-16 on April 18.