On July 22, 2015, the Senate Committee on Finance voted 23-3 to extend bonus depreciation and enhanced Section 179 deduction for 2015. The Senate is looking to be more proactive with passing tax extenders rather than waiting until December like in recent years. Currently, bonus depreciation and $500,000 limits for Section 179 deductions are extended through 2014.
Bonus depreciation may result in substantial present value tax savings for businesses that already had plans to purchase or construct qualified property. Unlike section 179 expensing, you do not need net income to take bonus depreciation deductions. Further, bonus is not limited to smaller businesses or capped at a certain dollar level, but it is not available for used property, property used outside of the US, tax-exempt use property, or tax-exempt financed property. Also, many states are likely to opt out of this provision for state income tax purposes.
Bonus depreciation has generally been available since Sept. 11, 2001, with a period of expiration in 2005, 2006, and 2007, and has ranged from 30 percent to 100 percent over the years, as shown in this chart:
|Start date||End date||Bonus amount|
Newly constructed or original use property with a recovery period of 20 years or less (real or personal), qualified leasehold improvements, certain computer software, and water utility property are eligible for bonus depreciation. Only new property is eligible for bonus depreciation; used property is not eligible.
Long production property
While placed-in-service dates for long production property generally are in effect for property placed in service before Jan. 1, 2016, only costs incurred before Jan. 1, 2015, are eligible for bonus—this is known as the progress expenditure rule. For example, a building owner contracts for $2 million of qualified tenant improvements and begins construction in 2013, during the 50 percent bonus window. By the end of 2013, they incurred $1.2 million. Construction is completed in 2014 and the improvements are placed in service in June of that year. Under the progress expenditure rule, $1.2 million is eligible for 50 percent bonus.
Long production property is property that has a recovery period of at least 10 years, an estimated production period of more than two years, or an estimated production period of more than one year and a cost of more than $1 million. Transportation property is tangible personal property used in the trade or business of transporting persons or property.
Qualified leasehold, retail, and restaurant property
Qualified leasehold improvements are generally bonus eligible, if made under a lease to the interior portion of a building occupied by a tenant and placed in service more than three years after the building was first placed in service. Qualified restaurant property and qualified retail improvement property are not eligible for bonus depreciation; however, under section 179, taxpayers may expense up to $250,000 of the cost for these improvements as well as qualified leasehold improvements. This benefit applies to property placed in service during 2010 to 2014. The treatment details for these three types of property are summarized below.
1The section 179 amount is limited to $250,000; phase out begins at $1,000,000 of total qualified property. Qualified property does not include air conditioning or heating units. The total section 179 amount for years 2010-2014 is $500,000; phase out begins at $2,000,000 of total qualified property.
Electing out of bonus and section 179
For taxpayers that want to spread out their cost-recovery deductions, one alternative is to elect out of bonus depreciation and selectively expense the cost of eligible acquisitions under section 179. Keep in mind many states have not adopted the recent higher federal section 179 limits, and there may be other restrictions to the deductions.
|Qualified Leasehold Improvement Property (QLIP)||Qualified Leasehold Improvement Property (QLIP)||Qualified Retail
Improvement Property (QRIP)
|Qualified Restaurant Property (QRP)|
|Life of Real Property||39||15||15||15||15|
|Depreciation Method||Mid-month, straight-line||Half-year, straight-line||Half-year, straight-line||Half-year, straight-line|
|179 Eligible1||No||Yes – 1/1/10-12/31/14||Yes – 1/1/10-12/31/14||Yes – 1/1/10-12/31/14||No|
|Building Age Requirement||3 years or older||3 years or older||3 years or older||None||3 years or older|
Landlord and tenant can’t be related party, improvement must be to an interior portion of a nonresidential building, enlargement / elevators / escalators / common area / internal structural framework excluded
Improvement must be to an interior portion of a nonresidential building, portion of improvements must be open to the general public and used in the retail trade or business of selling tangible personal property to the general public, enlargement/elevators/escalators/common area/internal structural framework excluded
A building, or an improvement to a building, if more than 50% of building’s square footage is devoted to preparation of, and seating for on-premises consumption of, prepared meals