The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, signed into law in December 2010, increased bonus depreciation deductions from 50% to 100%. This recovery of costs for certain qualifying property was to encourage investment and promote economic growth.
The IRS website explains that depreciation is an income tax deduction that allows a NY taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of property. Most tangible property, such as buildings, machinery, vehicles, furniture, and equipment are depreciable. For a NY taxpayer to depreciate property, the property must meet all the following:
- Taxpayer must own or lease the property.
- A taxpayer must use the property in business or income-producing activity, not personal use.
- Property must have a determinable useful life of more than one year.
New York taxpayers should consider the opportunities for accelerating cost recovery. The 50% bonus depreciation rules generally apply to “qualified property,” limited to: (i) tangible property with a recovery period of 20 years or less; (ii) original use of which began after December 31, 2007; (iii) which was acquired by the taxpayer after December 31, 2007 and before January 1, 2013; and (iv) was placed in service before January 1, 2013.
A New York business placing qualified property in service after September 8, 2010, and before January 1, 2012 may claim 100% bonus depreciation on the property. For placing property in service and original use, the taxpayer must acquire the qualified property after September 8, 2010, and before January 1, 2012. “Acquisition” occurs when the taxpayer pays or incurs the cost of the property, according to the taxpayer’s cash or accrual accounting method.
A taxpayer optimizes taxable income by knowing which assets to take the bonus depreciation and which to depreciate over time. A taxpayer acquires property for bonus depreciation purposes if the taxpayer begins constructing, manufacturing, or producing that property itself. A taxpayer must elect application of 100% bonus depreciation to components by attaching a statement to its return.
A taxpayer must elect out of bonus depreciation if it does not want or need the bonus depreciation. If a taxpayer previously chose not to deduct 50% bonus depreciation, it would not be eligible for 50% or 100% bonus depreciation for that class of property.
Contact an experienced New York tax attorney for advice on the correct filing of returns and elections, explanatory statements to ensure proper 100% bonus depreciation deductions for components.