Articles

June 1, 2011

To Bonus or Not to Bonus, That Is a Question

Whether 'tis nobler to take 50% or 100% bonus depreciation or to take Sec 179 against a sea of troubles...

We can sympathize with Hamlet, this question can be quite confusing and troublesome, but let's see if we can simplify the answers to his questions:

What is Bonus? Bonus is accelerated depreciation taken on: New property (with recovery periods less than 20 years) placed in service:

  • Before September 8, 2010 — 50% bonus
  • After September 8, 2010 thru December 31, 2011 — 100% bonus
  • After January 1, 2012 thru December 31, 2012 — 50% Bonus

That's fine, but, Hamlet is a partner in real estate ventures and their major expenditures are for leasehold improvements, can they bonus? They can bonus if their leasehold improvements are for:

  • Non-residential
  • 1250 property interiors
  • Under a lease
  • Occupied by non-related parties
  • In a building that is at least 3 years old

What if they were in the retail business? If the interiors are open to the public and used in the retail trade, the qualified leasehold improvements is eligible for bonus depreciation, or they can Sec 179 and take 15 years recovery.

What if they were in the restaurant business?
If more than 50% of the building is used for preparation and consumption of food, the qualified leasehold improvements is eligible for bonus depreciation, or they can Sec 179 and take 15 years recovery.

What is this Sec 179 you speak of? Sec 179 refers to Internal Revenue Code Section 179 which allows you to expense $500,000 of qualified property additions in tax years 2010 and 2011. Up to $250,000 can be applied to real property. Section 179 property does not have to be a brand new property. You must hurry because in 2012 Sec 179 is scheduled to go to $125,000 and after 2012 back to the old rules — $25,000.

What is qualified property for Sec 179? Depreciable tangible personal property that is

  • Purchased for use in the active conduct of a trade or business;
  • Off-the-shelf computer software;
  • Qualified leasehold improvements;
  • Qualified retail property; or
  • Qualified restaurant property.

Sounds like bonus depreciation? Sounds like you've been listening, but there are differences:

  • Bonus depreciation election must be made for all property in the same class.
  • Cannot create a loss with Section 179 election.
  • Section 179 has a dollar-for-dollar phase out for additions in excess of $2,000,000.
  • Bonus depreciation is not adjusted for Alternative Minimum Tax.
  • Certain states allow only $25,000 of Section 179 and no bonus depreciation.
  • Section 179 must be recaptured if there is an early disposal of the asset; no recapture of bonus depreciation.