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Are There Reasons Not to Claim the 100 Percent Bonus Depreciation Deduction?

by Nancy Faussett, CPA

A major provision of the recently passed Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (a.k.a., the 2010 Tax Relief Act) is the temporary allowance of 100% expensing using bonus depreciation. This new deduction represents a huge opportunity for many businesses to take sizable deductions. However, it is possible that claiming the 100% bonus depreciation deduction is not the best option for your particular business.

While each business has its own individual concerns, this article will give you some of the issues you need to take into account when deciding whether or not to take advantage of this deduction. While the extension of the 50% bonus depreciation deduction for most property is for two more years, through 2012, the 100% allowance is only good for qualifying property acquired and placed in service after September 8, 2010, and through 2011 (although it is available through 2012 for certain aircraft and long-production-period property). Consequently, there is a very limited window of opportunity for claiming it. Extension of such a generous provision would be unlikely.

Consider the possibilities for claiming bonus depreciation. For one thing, if your business would like to expand and such expansion requires a large capital investment in machinery and equipment (or, even additional office furniture), there is no better time for maximizing your deductions and minimizing taxable income. However, you need to be careful that any additional purchases of fixed assets will qualify. For example, to claim bonus depreciation, the property must be new property. Purchasing another business's property (as in a going-out-of-business sale) won't qualify for the deduction.

Another consideration may be whether or not your business wants to take the maximum amount of depreciation on any newly acquired "luxury vehicles." While the 100% expensing under bonus depreciation is not available on luxury vehicles, there is currently an additional depreciation amount of up to $8,000 allowed in the year in which they are placed in service as long as you do not elect out of claiming bonus depreciation on five-year property.

When claiming bonus depreciation you will be able to choose between expensing all qualifying property or only certain classes of assets (for example, all 5-year assets). The election is one not to claim bonus depreciation as the deduction for bonus depreciation is not optional. If you do not want to claim the deduction on eligible property, you must make a formal election to that effect. (You may not make the election on an asset-by-asset basis.) Therefore, if, for example, the only five-year property your business acquires this year are luxury vehicles and you decide not to claim bonus depreciation, you may not want to make the election for five-year property. Again, each business has its own specific issues to consider.

To learn more about the rules for claiming bonus depreciation, be sure to download our recently updated free Resource Guide for Claiming Bonus Depreciation »

Next let's look at some of the reasons why you wouldn't want to claim such a seemingly valuable deduction. Consider the following three issues:

1. Does your business have a net operating loss (NOL) carryforward amount that is about to expire?
In such a case, it might be better to forgo the larger depreciation expense deduction when claiming bonus depreciation in order not to lose out on the NOL deduction. Decreasing the depreciation deduction by forgoing bonus depreciation will increase taxable income to absorb the NOL. After all, eventually the fixed assets, unless later disposed of, will be fully depreciated. This is simply a timing consideration for when the cost of your depreciable fixed assets will be deducted. Whereas an NOL may be lost due to a time restriction, depreciation can always eventually be claimed.

Solution: If you use BNA Fixed Assets™ software, it will easily calculate depreciation on your fixed assets both with and without claiming bonus depreciation so you can perform a side-by-side comparison. You can even select which classes of assets you want the system to calculate bonus depreciation on and which classes you prefer to claim regular depreciation instead.

2. Does your business want to take advantage of the election to forgo bonus depreciation and instead increase the credit limitation on the Section 53(c) Alternative Minimum Tax credit and, possibly, on the Section 38(c) General Business Credit for research expenditures (although only 50% bonus depreciation can be used for the latter)?
This is known as a Section 168(k)(4) election and, when it is made, all assets that would have qualified for bonus depreciation must be depreciated using the straight-line depreciation method.

Solution: Using BNA Fixed Assets can help you to decide whether it's better to claim bonus depreciation or make the Section 168(k)(4) election to forgo it in favor of increasing the available credits. You will need to prepare a present value analysis to compare the value of claiming bonus depreciation in the placed-in-service year versus claiming straight-line depreciation over the property's recovery period. You then compare these two options with the benefit of claiming additional AMT and research credits now versus in the future. BNA Fixed Assets helps you with this by easily making all of the required calculations for depreciation on the eligible property.

3. Does the state or states in which your business files its income tax return allow the deduction for bonus depreciation?
Many states have chosen to decouple from the federal rules concerning bonus depreciation. Such states will require you to maintain a separate depreciation schedule for state purposes. While this should not stop you from claiming bonus depreciation for federal purposes, it does represent an additional adjustment you will be required to make.

Solution: Using BNA Fixed Assets software avoids the pain of maintaining different depreciation schedules for different purposes. Once you have set up the parameters for depreciating your fixed assets for your individual state tax purposes, you only need to enter an asset one time and the system automatically depreciates it differently, when required, for each state book you identify.

About BNA Fixed Assets Software

BNA Fixed Assets software provides you with the ability to document your depreciation and amortization policies through Asset Type templates and allows you to automate the enforcement and implementation of these policies when performing data entry for fixed assets. This eliminates potential errors from misclassifying assets, automates the process of entering assets, enforces the use of a company’s depreciation and amortization policies, greatly reduces the volume of data required to enter each asset in the system, and, above all, guarantees compliance with GAAP rules and IRS regulations.

BNA Fixed Assets provides an annual automatic update of its fixed asset software as well as periodic updates as tax law changes. What’s more, the fixed asset depreciation software speeds the data entry process by allowing you to copy and paste data for multiple assets from an Excel spreadsheet into BNA Fixed Assets, for greater efficiency and accuracy. With BNA Fixed Assets, you’ll benefit from having the best solution available on the market today to maximize productivity, comply with GAAP rules and IRS regulations, and meet all of your financial and tax reporting requirements.

Learn more about BNA Fixed Assets Software »