Will 100% Bonus Depreciation be Renewed?

As we quickly approach the end of 2011, one of the questions we most frequently receive from our clients is, “will 100% bonus depreciation be extended?”   We have observed a noticeable resurgence of acquisition and construction activity in 2011, particularly by businesses in various retail trades due both to pent-up demand and an eagerness to take advantage of the generous 100% bonus depreciation deductions before they expire on December 31st.  Unfortunately, Congress may have set an unintentional precedent last year by waiting until the 9th inning to act, with the eventual passing and signing into law of the most recent iteration of a tax extenders bill on December 17th of last year.  The looming questions now are:
  • Will Congress wait again until 11th hour to act?
  • Will the congressional decision ultimately surprise or disappoint those eagerly searching for additional motivation to invest in the continued expansion of their businesses?
The Job Creation Act of 2010, among other things, simultaneously increased the 1st year bonus depreciation deduction percentage from 50% to 100% for the 2011 tax year and retroactively carried back these provisions to an effective start date of October 9, 2010.  By increasing “bonus” from 50% to 100%, the law effectively allows companies to write off and take as a deduction in the first year 100% of the cost of acquiring new equipment, machinery, furniture, computers, and other property used in their business or trade.  These first year deductions can be taken for eligible property without limitation on the cost, so long as the property is acquired and placed in service within the eligible time frame.

This Job Creation Act even allows the new bonus rules to be applied for Alternative Minimum Tax purposes.  In fact, the 1st year Bonus Depreciation treatment can even be taken for building assets if the property meets requirements established for certain leasehold improvements.  Qualified leasehold improvement property can be defined as improvements to the interior of a non-residential building made pursuant to a lease (between unrelated parties), exclusive of any common area spaces, and placed into service more than 3 years after the building was first placed in service.  Some restaurants and retailers responded enthusiastically by resuming with growth plans that may have been sidetracked or set aside in 2009 and 2010, expanding in 2011 into leaseholds spaces, the cost of which could often be written off that same year.

Will this business-friendly “bonus” depreciation tax rule continue to be available?  It’s anyone’s guess as to whether Congress will manage to pull another rabbit out of its deep legislative hat.  On this particular issue, we have yet to observe too many indicators that make us feel warm and fuzzy about the possibilities.  Every tax extender bill of significance introduced so far this year with a provision for extending 100% bonus depreciation has either died an ugly death or has been vanquished into obscurity.  But there is still some time and if the past is any indication of the future, then we know to sometimes expect the unexpected.  No doubt our eyes and ears will remain focused on this issue in the meantime.  Nonetheless, all is not lost regardless of the outcome.  Many seem to forget that the 50% bonus rules continue to be valid and do not expire until the end of 2012 (2013 for certain long-production period assets).  So do not panic just yet.  Even at its 50% level in 2012, bonus depreciation should continue to present businesses with a compelling incentive for continued investment in new business property, at the very least for one more year to come.

Because these provisions are not recognized by all states, taxpayers should check state laws for the extent to which federal bonus depreciation rules are accepted.

Does your business make use of the 100% bonus depreciation provision?