When deciding how much depreciation to use this year for tax planning, taxpayers have direct expensing up to $500,000 of qualified property, regular depreciation and bonus or special, first year depreciation.
Bonus depreciation is an additional amount of tax deductible expense that is awarded above and beyond what would normally be available as depreciation.
Bonus depreciation is always taken in the first year that the depreciable item is placed in service. In fact, bonus depreciation is required to be taken unless a taxpayer elects out of it.
Congress passed legislation in September 2010 that reinstated 100 percent bonus depreciation for 2011. For the 2012 calendar year bonus depreciation will return to 50 percent.
To qualify, the property must be property to which Modified Accelerated Cost Recovery System (MACRS) applies with an applicable recovery period of 20 years or less. MACRS is the current depreciation system used for federal taxes.
Examples of this kind of property are farm buildings, machinery, livestock, trucks, tile and single purpose agricultural or horticultural structures. The property also must have original use commence prior to Jan. 1, 2012. It can be taken on new property only. Therefore used farm machinery would not qualify.
For example if a farmer purchases a new tractor or builds a new machine shed for $100,000, the total bonus depreciation taken as an expense on the schedule F would be $100,000.
End of depreciation
Of course, if the taxpayer uses the 100 percent bonus depreciation on certain property they are not allowed to take any more depreciation expense for that item. Consequently, they won’t be able to take depreciation expense for that property in future years even if it still is in use.
Keep in mind for a building it needs to be built and available for use by the end of the year. Purchasing the building materials and having them on the farm does not qualify. Similarly with a tractor, if a farmer paid for the machine and it is sitting on the dealer’s lot it would not qualify.
Property that is required to be depreciated under the alternate depreciation system (ADS), including farmers with fruit trees or vineyards who elected out of the uniform capitalization rules, are not eligible for bonus depreciation.
There is no phase out based on qualified property placed into service like there is for direct expensing (section 179 first year expensing). There is also no business income limitation.
Automobiles used 100 percent for business purposes can take an extra $8,000 of additional or bonus depreciation and do not take the 50 percent of purchased cost.
As stated before, bonus depreciation is required to be taken unless a taxpayer elects out of it. Election out of it can be taken for all property or property by class (3, 5, 7, 10, 15, or 20 year property) but everything within a class must be treated the same.
Bonus depreciation is taken on the carryover basis from traded-in property, so the total cost can be taken. If a farmer traded in an old tractor for a new tractor, the total cost of the new tractor would qualify for bonus depreciation, not just the amount paid to boot.
As always, it is a good idea to discuss this with the appropriate tax advisor.