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Special (Bonus) Depreciation

In addition to the Sec. 179 first year expensing, the tax law allows a temporary special additional first year depreciation—bonus depreciation. For tax years of 2008 and 2009, the amount of bonus depreciation allowed is 50% of the adjusted basis of eligible property.¹ For property acquired and placed in service on or before September 8, 2010, the bonus depreciation allowance is 50%. For property acquired and placed in service after September 8, 2010, the bonus depreciation allowance was increased to be 100%.² For 2011, the 100% bonus depreciation allowance applies (Sec. 168(k)(5)). For 2012, 50% applies (Sec.168(k))2. It is taken after the Sec. 179 expensing.

Certain vehicles subject to special annual dollar limit are allowed a fixed amount of bonus depreciation for 2010. The bonus depreciation of $8,000 is allowed for a new passenger car, light trucks, vans, and SUVs of 6,000 pounds or less for 2010. This bonus depreciation in effect increases the total dollar ceiling for 2010 vehicles to be $11,060³ ($10,960 for 2009) for passenger auto and $11,160 for trucks and vans. Business use of these vehicles must exceed 50% (reduced proportionally for personal-use if more than 50% to 100% business use).

To qualify, the property must meet several requirements: 1) the property must have a recovery period of 20 years or less; 2) the original use must begin with the taxpayer. The property generally must be purchased and placed in service for 2010.

For example, in 2010, you purchased a new machine costing $10,000 and you elected $2,000 under Sec. 179 expensing. You can take $4,000 bonus depreciation (($10,000 - $2,000) x 50%). The remaining adjusted basis is depreciated over the property’s recovery period.

You use Form 4562 to report bonus depreciation.

There is a rather particular election requirement for bonus deprecation: you must elect not to use it; otherwise you are deemed to have taken it (even if you did not). Hence you must reduce the basis of the property by the amount of the bonus depreciation that could have been taken. In other words, bonus depreciation must be computed if you did not elect out of it.

To make the election not to take the 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.

1 The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 (P.L. 111-5)
2 The Small Business Jobs Act of 2010 (P.L. 111-240) extended 50% for 2010 and Tax Relief Act extended 50% to 2012 and increased it to 100% after 9/8/2010 and through 2011.
3 IRS Fact Sheet FS-2011-2, January 4, 2011.