Bonus Depreciation 2008:
Dèjá vu All Over Again
 
Written by Steven D. Beaucaire, MST
Vice President, Tax - Bedford Capital Consulting

The reemergence of 50% bonus depreciation is great news for taxpayers. This key component of the Economic Stimulus Act of 2008 was passed into law a few months ago. While it was rather straightforward for individuals when it came to receiving a rebate check in the mail this spring, bonus depreciation is considerably more detailed.

Not wanting to waste a good set of regulations, the old bonus depreciation regulations will apply until the IRS issues a new set. As it was before, bonus depreciation is mandatory unless the taxpayer elects out of it. The election out can be by class of asset or for all qualifying assets in a company. Similar to prior law, the Economic Stimulus Act of 2008 provides that in order to qualify:

1. The original use of the property must begin with the current taxpayer.
2. Used property cannot qualify, although current improvements to that property may qualify.
3. The property must be purchased and placed in service in 2008. The "written binding contract" (WBC) rules do apply to the placed-in-service dates. In other words, if the property is purchased or constructed pursuant to a WBC dated before January 1, 2008, it is not eligible for bonus depreciation. However, if the WBC is in 2008 and the property is placed in service after December 31, 2008, it is not eligible with one exception for long production period property, discussed below. The "written binding contract" rules do not apply to self-constructed property.
4. The property must have a General Deprecation System (GDS) life of 20 years or less.
5. Other qualifying property includes;
   1. water utility property,
   2. computer software other than software covered by §197 (purchased as part of a business), and
   3. Qualified Leasehold Improvements (QLI). QLI is depreciated using a 39-year life after the bonus deprecaition is taken. Unfortunately, Qualified Restaurant Improvements (QRI) were not extended at all.
6. The adjusted basis of property acquired in §167(i)(7) transactions can qualify if qualified in the hands in the transferee. This includes a technical termination of a partnership.

Given number 4 and 5c requirements above, a closer look at a cost segregation study might be the best solution. This is because the cost segregation study can properly classify assets into 5, 15, and 39-year lives and a firm with adequate tax knowledge can identify property that may be QLI.

Another benefit inlcudes no adjustment to Alternative Minimum Tax (AMT) depreciation, as you must use the bonus for both tax and AMT. A trap for the unwary exists where property required to be depreciated under the Alternative Depreciation System (ADS) is excluded from bonus depreciation. This would include foreign use property, property leased to a tax-exempt entity for a lease term exceeding 20 years (including options to renew), and property financed by a bond whose interest is tax exempt under §103. However, if ADS treatment is elected, then bonus depreciation is allowed on qualifying assets.

One component of the bonus depreciation law that did change from the prior law was the treatment of the long production period property (the exception mentioned above). Currently this is property whose:

1. cost exceeds $1,000,000,
2. class life exceeds ten years, and
3. production period exceeds one year. (Under prior law, the production period was two years.)

The law allows property meeting these requirements to waive the 2008 placed in service requirement if it is placed in service in 2009. However, property must still meet all the other requirements of bonus depreciation and only expenses paid in 2008 will qualify for bonus deprecation.

Despite the complexity of bonus depreciation rules, the benefit can be huge. Having a cost segregation study done using an engineering-based approach, backed up by tax expertise, can yield amazing benefits and help you navigate the pitfalls.