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New IRS ruling lets you cash in on bonus depreciation

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in Small Business Tax,Small Business Tax Deduction Strategies

Bonus depreciation is back and better than ever. Now the IRS has issued a new ruling on this revived tax break. (IRS Revenue Procedure 2011-26)

Alert: The new IRS guidance provides certain options, including a downward election, plus coordination with other tax code sections.

In addition, the IRS has created an “escape hatch” for business vehicle owners who might face unfavorable tax results under the new rules.

Here’s the whole story: The new 2010 Tax Relief Act provides generous tax breaks for business owners who acquire qualified property. It authorizes the following:

  • 100% bonus depreciation deduction for qualified property placed in service between Sept. 9, 2010, through Dec. 31, 2011 (Dec. 31, 2012, for property with longer production periods, including certain aircraft and transportation property).
  • 50% bonus depreciation for qualified property placed in service from Jan. 1, 2012, through Dec. 31, 2012.

The new IRS ruling addresses several critical areas relating to 100% bonus depreciation. Here’s a recap.

1. Step-down to 50% bonus depreciation: In prior versions of the bonus depreciation tax break, you could elect to “step down” from 50% bonus depreciation to 30% bonus depreciation if it suited your needs. But there was no provision in the new tax law for a step-down from 100% bonus depreciation. Now the IRS says it will allow taxpayers to elect 50% bonus depreciation.

Note that this reverses the IRS position stated in the instructions to Form 4562, Depreciation and Amortization. The IRS spells out the exact procedures to follow in Rev. Proc. 2011-26 at www.irs.gov/pub/irs-drop/rp-11-26.pdf.  Ask your tax pro for assistance.

2. Component depreciation: If you began manufacture, construction or production of a larger item of self-constructed property before Sept. 9, 2010, the components may still qualify for 100% bonus depreciation. In other words, you can benefit for faster write-offs for qualified components. The components must be acquired or self-constructed after Sept. 8, 2010, and before Jan. 1, 2012 (Jan. 1, 2013, for certain property with longer production periods).

3. Qualified restaurant and qualified retail improvement property: Under the tax law, qualified restaurant and qualified retail improvement property aren’t treated as property eligible for 100% bonus depreciation. But the IRS now says that these properties may fall within the definition of “qualified leasehold property.” If so,  such “dual character” property will qualify for 100% (or 50%) bonus depreciation.

4. Business vehicles: Under the new tax law, the first-year depreciation deduction for vehicles increases by $8,000 due to the 100% bonus depreciation tax break. Therefore, most business car owners will be able to claim a deduction of $11,060 ($11,260 for a light truck or van) placed in service in 2011. However, a quirk in the tax law would have reduced deductions after Year 1.

Escape hatch: The IRS allows you to use a calculation for business vehicles based on claiming 50% bonus depreciation in Year 1 (even though 100% bonus depreciation was actually claimed). This procedure allows you to avoid reduced depreciation deductions after Year 1.

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