While most companies have already adopted their capital expenditure budgets, you may want to revisit that budget given the last minute changes in the tax law allowing expanded deductions for property additions.
Moreover, the changes could impact the 2010 tax return. Since 2008, Companies have been allowed to take advantage of “bonus” depreciation at rates ranging from 30% to 50%. Now, bonus depreciation has been increased to 100% for qualified property acquired and placed in service after September 8, 2010.
Rules for Defining Property
The definition of qualified property is complex, but there are four main rules:
- The property must be of a specific type (property useful life less than 20 years under MACRS, or computer software),
- The original use of the property must commence after December 31, 2007 (property may be self-constructed, reconditioned or rebuilt with sufficient investment to satisfy this requirement),
- The property must be acquired after September 8, 2010 (self-constructed assets must have commenced after December 31, 2007), AND
- The property must be placed in service before January 1, 2012.
There may be situations where it would be advantageous to opt out of these new provisions. Opting out can be done each year and by class (i.e. 5 year, 7 year, 15 year). If you opt out no bonus depreciation is allowed for the class, 50% or 100%.
These decisions will also affect a company’s 2011 quarterly estimated tax payment calculations. We recommend that companies evaluate the income tax impact of all qualified property additions after September 8, 2010 and the capital expenditure budget for 2011. We would be pleased to assist you with that analysis.