On December 17, 2010, President Obama signed into law the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.” One of the provisions in this act is to increase bonus depreciation from 50% to 100% for certain assets placed in service after September 8, 2010 and before January 1, 2012. Another provision of this act is to extend the 50% bonus depreciation provision of the “Small Business Jobs Act of 2010” through December 31, 2012.
In this article, we look at what bonus depreciation is, and consider the effects on large contractors subject to the percentage-of-completion rules under Internal Revenue Code § 460.
Bonus Depreciation
Most business assets placed in service after 1986 are generally depreciated for tax purposes using the Modified Accelerated Cost Recovery System (MACRS). This method permits a certain percentage of the cost of an asset to be recovered over that asset’s estimated useful life. The percentages tend to be weighted, with a higher percentage applied during the first years of an asset’s service—i.e., less depreciation is taken as the asset ages.
For example, let’s consider an asset with a cost of $10,000 and with an estimated useful life of 5 years. Let’s say that this asset was placed in service July 1, 2010 and that the applicable convention is half-year. It is important to note that the convention under which an asset is depreciated can be either half-year or mid-quarter, and is determined by considering the amount of assets placed in service during the last three months of the tax year. If this amount is at least 40% of the total assets placed in service during the year, then the mid-quarter convention (and the related depreciation percentages) applies.
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