As we get closer to the tax deadline, we want to remind you that it may be extremely beneficial to use the new election introduced in Rec. Proc. 2011-26 that allows a taxpayer to claim 100% bonus depreciation on certain assets where they would otherwise be limited to 50% bonus.

Generally, under the bonus depreciation regulations, when construction of a building or improvements begins before September 8, 2010 you are not eligible for 100% bonus depreciation treatment on any of the construction components. These original bonus depreciation rules provide a safer harbor that states if more than 10% of the construction costs were incurred before September 8, 2010, you are not eligible for 100% bonus depreciation.

However, under the new rules of Rec. Proc. 2011-26 Section 3.02(2)(b), a taxpayer can make an election that allows them to claim 100% bonus depreciation on any qualifying improvement’s construction costs or component acquired and placed in service after September 8, 2010, regardless of when construction began. For a cash based taxpayer, this can be easily determined by how much was paid for after this date. For accrual based taxpayers, a more detailed analysis is necessary by a cost segregation engineer to determine what construction components were actually completed after September 8, 2010.

Example: Our client is a cash basis service provider that constructed qualified leasehold improvements in 3 locations in 2010. All locations cost $1M and were placed in service after September 8, 2010 and before January 1, 2011. On September 8,2010, location A is completed and paid for, location B was 25% completed and paid for, and location C was 50% completed and paid for. The remainder of the construction is completed and the buildings are placed in service before January 1, 2011.

Without making the election in 2011-26: The client is limited to $1,500,000 deductions
($1,000,000 * 3 Locations) * 50% = $1,500,000
With making the election is 2011-26: The client claims $2,125,000 deductions
Location A = $1,000,000 * 50% = $500,000
Location B = $250,000 * 50% + $750,000 * 100% = $875,000
Location C = $500,000 * 50% + $500,000 * 100% = $750,000

As you can see from the significant difference in deductions, this election should be considered. One final thought, there is still time to amend a 2010 return but you need to act fast. In order to get the 100% bonus, you need to file your calendar year 2010 amended return by September 15, 2011! Please feel free to contact us with any questions related to this timely issue.

Author: Gian Pazzia, CCSP, Principal