The IRS earlier this week issued Rev. Proc. 2011-26, which provides helpful guidance regarding 100 percent bonus depreciation as enacted by the 2010 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act. To qualify for 100 percent bonus depreciation, each of the following requirements must be satisfied:
- The property generally must be eligible for MACRS depreciation and have a recovery period of 20 years or less;
- The property generally must be acquired and placed in service after September 8, 2010 and before January 1, 2012; and
- The original use of the property must commence with the taxpayer.
For bonus depreciation purposes, a taxpayer generally is treated as acquiring property when the taxpayer pays or incurs the cost of the property. With respect to self-constructed property, however, a taxpayer generally is treated as acquiring the property when the taxpayer begins constructing, manufacturing or producing the property. Thus, if a taxpayer began constructing, manufacturing or producing self-constructed property before September 9, 2010, the larger self-constructed property and any components related to the larger property generally will not qualify for 100 percent bonus depreciation, subject to the special rule discussed below. For this purpose, property that is manufactured, constructed or produced for the taxpayer by another person under a written binding contract that is entered into before the manufacture, construction or production of the property is considered to be manufactured, constructed or produced by the taxpayer.
Rev. Proc. 2011-26 creates a special rule for components that are part of certain larger self-constructed property. Under this special rule, if a taxpayer began constructing, manufacturing or producing a larger self-constructed property before September 9, 2010 but acquires or self-constructs components after September 8, 2010 and before January 1, 2012, the taxpayer may in certain circumstances elect to treat those components as being eligible for 100 percent bonus depreciation. To be eligible for this election, the larger self-constructed property must be placed in service after September 8, 2010 and before January 1, 2012, and the original use of the larger self-constructed property must commence with the taxpayer. The election can be made with respect to any component that qualifies. This special rule may provide a meaningful benefit to owners of projects that otherwise would not have qualified for any 100 percent bonus depreciation because construction began before September 9, 2010.
Rev. Proc. 2011-26 also allows taxpayers to elect to claim reduced bonus depreciation deductions under certain circumstances. Prior law authorized a taxpayer to elect 30 percent bonus depreciation instead of 50 percent bonus depreciation. The 2010 Act allows for election out of 100 percent bonus depreciation altogether, but does not specifically permit a taxpayer to elect 50 percent bonus depreciation rather than 100 percent bonus depreciation. Rev. Proc. 2011-26, however, authorizes a taxpayer to elect 50 percent rather than 100 percent bonus depreciation with respect to property placed in service in the taxpayer's taxable year that includes September 9, 2010. Rev. Proc. 2011-26 also creates a procedure by which certain taxpayers that previously elected out of bonus depreciation for property placed in service in 2010 may now elect 50 percent bonus depreciation with respect to that property.
This guidance creates significant planning opportunities for owners of renewable energy projects and other property that might qualify for 100 percent bonus depreciation. If you have any questions about the guidance or related issues, please contact a key contributor.
IRS Circular 230 notice: The information contained herein was not intended or written to be used, and cannot be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or arrangement or (ii) for the purpose of avoiding penalties that may be imposed under federal tax law.