May 3rd, 2011

The new IRS Revenue Procedure 2011-26 gives detailed guidance on handling the deduction for bonus depreciation in specific situations. While mainly concerned with the new 100% bonus depreciation deduction, Revenue Procedure 2011-26 also discusses the 50% bonus deduction. This important revenue procedure does the following:

• Clarifies that qualifying restaurant property and retail improvement property are eligible for bonus depreciation,
• Provides a limited exception for components of larger self-constructed property to qualify for the 100% bonus depreciation deduction even if construction began on the larger property before September 9, 2010,
• Explains how to depreciate luxury vehicles that qualify for the 100% bonus deduction, in the years following their placed-in-service years,
• Provides an election to use 50% bonus depreciation on certain property that qualifies for the 100% bonus deduction, and
• Explains how to apply 50% bonus depreciation retroactively on certain 2009 and 2010 tax returns.

The last two items above are time sensitive and, therefore, are the focus of this article. You do not want to miss out on these new opportunities for claiming bonus depreciation on returns that may have already been filed!

Election to Claim 50% Bonus Depreciation Instead of 100% Bonus

As long as the taxpayer does not make the election not to claim bonus depreciation, the taxpayer may elect to deduct 50%, instead of the 100%, bonus depreciation for any class or classes of qualifying assets. This election is only available for a tax year that includes September 9, 2010.

The election must be made by the due date (including extensions) of your tax return for the year that includes September 9, 2010. It is made in the same manner as the election not to claim bonus depreciation and, therefore, cannot be made on an asset-by-asset basis.

If, on or before April 18, 2011, a taxpayer has already timely filed its federal tax return for the tax year that includes Sept. 9, 2010, there is an automatic 6-month extension from the due date of that return (excluding extensions) to make this election to claim 50% bonus depreciation instead of the 100% depreciation deduction. To make the election, the taxpayer must file an amended return and attach an election statement indicating it is filed pursuant to IRS Reg. 301.9100-2(b).

Retroactive Application of 50% Bonus Depreciation

The Small Business Jobs Act of 2010, which was signed into law on September 27, 2010, retroactively extended 50% bonus depreciation for qualifying property placed in service in 2010. Because the Act was signed so late in the year, many taxpayers were unable to take advantage of it. In response, the IRS, in Revenue Procedure 2011-26, has decided to allow taxpayers to retroactively apply 50% bonus depreciation to qualifying property placed in service after 2009 on the following tax returns:

• 2009 tax returns for years that began in 2009 and ended in 2010, and
• 2010 tax returns for short years that began and ended in 2010.

As long as the taxpayer did not make the election not to claim bonus depreciation on such tax returns, the taxpayer may now claim 50% bonus depreciation by filing either:

• An amended tax return that is filed before the taxpayer files its tax return for the first tax year succeeding the 2009 tax return or the 2010 short tax year return, or
• Form 3115, Application for Change in Accounting Method, with the taxpayer’s timely filed tax return for the first or second year succeeding the 2009 tax year or the 2010 short year return. However, to file Form 3115, the taxpayer must still own the property as of the first day of the year of the change.

However, such a taxpayer will be treated as if the election not to claim bonus depreciation had been filed as long as the taxpayer:

• Deducted depreciation (other than bonus depreciation) on that return, and
• Does not file either an amended return or a Form 3115, as described above, to claim bonus depreciation.

And, finally, if the taxpayer timely filed either the 2009 or the 2010 return as described above, and elected not to claim 50% bonus depreciation for a class of property, the taxpayer may now revoke that election as long as an amended return is filed by the later of June 17, 2011, or before filing a return for the first year succeeding the 2009 return or 2010 short year return.