Bonus Depreciation & 15 Year Qualified Improvements

What is bonus depreciation? It is an acceleration of the write off of an asset in the first year of recovery. For example, a $10,000 5-year MACRS asset would be depreciated as below with and without bonus:

What is 15-Year Qualified Improvement Property? In general, it is an a reduction in life of real property that would otherwise be 39-year MACRS property to help encourage investment in certain property types. The three areas are: Leasehold Improvements Retail Restaurants

Bonus Depreciation & 15 Year Qualified Improvement Legislation Job Creation and Worker Assistance Act of 2002 Jobs and Growth Tax Relief Reconciliation Act of 2003 American Jobs Creation Act of 2004 Tax Relief and Health Care Act of 2006 Emergency Economic Stabilization Act of 2008 American Recovery and Reinvestment Tax Act of 2009 Hiring Incentives to Restore Employment (HIRE) Act of 2010 Small Business Jobs and Credit Act of 2010 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 Education

Relevant IRS Guidelines to Bonus Rev. Proc. 2011-26 – Guidance on 50% versus 100% bonus depreciation that was issued in March of 2011  Whether or not the property meets the original use requirement of section 168(k)(2)(A)(ii), as required by section 168(k)(5) Whether or not the property meets the acquired and written binding contract requirements of section 168(k)(2)(A)(iii), as required by section 168(k)(5) The property meets the placed in service requirement of section 168(k)(5) Under the economic performance rules of Treas. Reg. section 1.461-4(d)(6)(iii), a property is treated as “acquired” on the date it is provided to the taxpayer OR the taxpayer can treat the property as acquired as they make payments under Treas. Reg. section 1.461-4(d)(6)(ii). The method used to determine when property is acquired under these regulations is a method of accounting and must be used consistently from year to year and can only be changed with the consent of the Commissioner.  

Other Questions Is the property long production period property? Is the property self constructed property?  

Example #1 Restaurant moves into a leased building on February 1, 2011, fully occupied by the restaurant, from an unrelated party that was a former grocery store.  The interior is gutted and transformed to a restaurant dining and kitchen area.  Additionally, a new staircase is constructed to a new roof access where a rooftop patio is constructed with a deck and railings along with an expansion of the building size for a larger kitchen.  All work is completed on August 1, 2011.  The interior improvements are both qualified restaurant improvements (QRI)and qualified leasehold improvements (QLI).  Either description can apply but the QLI treatment allows for 100% bonus depreciation.  The structural improvements to the roof patio and building addition are not QLIs but can be QRIs because the building is fully occupied by a restaurant.  The structural improvements are depreciated over 15 years as QRI, straight-line method, but no bonus depreciation.  

Example #1 – Revised  Change the completion date to January 15, 2012.  The structural improvements are depreciated over 39 years.  The QLI costs completed in 2011 receive 100% bonus depreciation and those costs completed in 2012 receive 50% bonus depreciation.

Example #2 Client leases an existing office building to a new unrelated tenant that requires a major reconfiguration to the building.  Construction begins on September 1, 2011.  The space is not completed until November 30, 2012.  There were $8,000,000 of total costs with $2,000,000 completed in 2011.  As a qualified leasehold improvement with a 39 year class life and costs exceeding $1,000,000, the project is long production property by taking more than a year to complete.  As such, 100% bonus depreciation applies to both amount completed in 2011 but also to the amount completed in 2012.  All costs will be placed in service on November 30, 2012.   

Example #2 – Revised  Change the completion date to July 1, 2012.  The project is no longer long production property.  The 2011 costs are 100% bonus depreciation and the 2012 costs are only 50% bonus depreciation.  All costs are placed in service on July 1, 2012.  Since the 15 year qualified leasehold improvement life expired in 2011, the depreciable life is 39 years for the remaining basis.   Change the completion date to February 1, 2013.  The project is long production property but not placed in service before the December 31, 2012 deadline.  No bonus depreciation applies.  The entire qualified leasehold improvement is depreciated over 39 years.

Example #3 Client builds new facility.  Signs general contract on August 1st, 2010, starts construction on August 15, 2010, construction complete on May 1, 2011, moves in on June 1, 2011. What is eligible for 50% bonus and what is eligible for 100% bonus?  

Example #4 Client builds new facility:  Signs general contract on July 1, 2011, starts construction on July 15, 2011, construction complete on February 15, 2012, moves in on March 1, 2012. What is eligible for 50% bonus and what is eligible for 100% bonus?  

Example #5 Client buys existing facility in third quarter of 2011 but doesn’t move in because facility needs significant re-hab. Enters into numerous contracts of which some of the work will be done by the end of 2011 and some will be done in 2012.  

Other Examples from the Audience