42.20 Bonus Depreciation

Bonus depreciation is an additional first-year depreciation allowance equal to a set percentage of the adjusted basis of eligible property. It is allowed for eligible property placed in service after 2007 and before 2013 (2014 for property with a longer production period). The percentage for bonus depreciation in 2011 was 100%. For 2012, the percentage is 50% unless Congress increases it to the 100% bonus allowed for 2011; see the e-Supplement at jklasser.com.

Bonus depreciation (also called a Section 168(k) allowance and a special depreciation allowance) can be claimed in addition to any first-year expensing. In figuring “adjusted basis” for purposes of bonus depreciation, any first-year expensing deduction is taken into account first. Then, you figure bonus depreciation on the cost of the property minus the first-year expensing allowance. Bonus depreciation is fully deductible for alternative minimum tax purposes (23.2); no adjustment is required.

Bonus depreciation allows the first-year dollar limit on write-offs for vehicles weighing less than 6,000 pounds to be increased by a fixed dollar amount reflecting bonus depreciation, provided business use exceeds 50%. The bonus allowance increases the total dollar limit for such vehicles placed in service during 2012 by $8,000, to $11,160 for a car or $11,360 for a light truck or van (43.4).

Eligible property.

Bonus depreciation can be claimed for any property with a recovery period of 20 years or less, computer software (other than a Section 197 intangible (42.17), buildings that replace or rehabilitate property damaged, destroyed, or condemned as a result of a federally declared disaster, and qualified leasehold improvements. Qualified leasehold improvements are improvements made more than three years after the building is placed in service to an interior portion of a nonresidential building pursuant to a lease by the lessee, sublessee, or lessor; the interior of the building is occupied exclusively by the lessee or sublessee.

You must be the original user of the property. Property placed in service after December 31, 2011 is not eligible for 100% bonus depreciation but 50% bonus depreciation is allowed if it is placed in service in 2012. Property placed in service in 2013 will not be eligible for bonus depreciation unless it is property with a “longer production period,” such as certain transportation property.

Bonus depreciation cannot be claimed for property that must be depreciated under ADS (42.9). For example, it may not be used for listed property used 50% or less for business since such property must be depreciated under ADS.

Claiming bonus depreciation.

You report bonus depreciation in Part II of Form 4562 labeled “Special Depreciation Allowance, unless the property is a computer or other “listed property” (42.10). For listed property, use Part V of Form 4562.

Election out of bonus depreciation.

Unlike regular depreciation, you are not required to use bonus depreciation and have the option of electing out of its use. If eligible for bonus depreciation, you can elect not to use it. The election out is made on a per-asset-class basis. Thus, for example, you can opt out of bonus depreciation for all five-year property while claiming it for seven-year property. To make the election out of claiming bonus depreciation, attach a statement to your return specifying the class of property for which the election not to claim additional depreciation is being made.

If you fail to make an election not to claim bonus depreciation, then you are deemed to have claimed it (even though you did not) and must reduce the basis of the property by the amount of bonus depreciation that could have been claimed.