Bonus Depreciation

There is a special first-year depreciation allowance that can be claimed for eligible property placed in service in 2012. The allowance does not change the amount of depreciation over the property's life; it merely accelerates it so you get the greatest benefit up front. The bonus depreciation allowance, for 2012 is 50% of the adjusted basis of the property (but could be restored by Congress to 100% for 2012).

While bonus depreciation is automatic (you don't have to elect it), you can choose not to use it. Instead, you can waive it for any or all classes of assets (for example, you can waive it for all 5-year property). However, you cannot use it for some assets within the class but not for others within the same class.

No adjustment is required for alternative minimum tax purposes (see Chapter 28). C corporations (but not other businesses) can elect not to claim bonus depreciation in order to accelerate pre-2006 alternative minimum tax credits.

Eligible Property

Generally, eligible property means tangible personal property with a recovery period of 20 years or less.

Computer software acquired separately from hardware also qualifies for bonus depreciation. However, software that is Section 197 property does not qualify for bonus depreciation.

A leasehold, restaurant, or retail improvement also qualifies for bonus depreciation as long as it is an improvement to the interior portion of nonresidential realty (i.e., commercial realty) made pursuant to the lease by the lessee, it is placed in service more than 3 years after the building is first placed in service, and the interior of the building is occupied exclusively by the lessee or sublessee.

To qualify for bonus depreciation, you must meet 3 conditions:

1. The original use of the property must commence with you (i.e., bonus depreciation cannot be claimed for used property). There is a limited exception for sale-leaseback arrangements.
2. The acquisition must be made in 2012 (i.e., after December 31, 2011, and before January 1, 2013). If you manufacture, construct, or produce property for your own use, the manufacturing, construction, or production must have begun after December 31, 2011.
3. The property must be placed in service before January 1, 2013. However, property considered to have a “longer production period,” such as property with a recovery period of at least 10 years, has until January 1, 2014, to be placed in service.
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