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Depreciation questions from yesterday's class on the new tax law, or, no, you can't convert that big SUV to personal use after taking 100% bonus depreciation

January 06, 2011

Roger McEowen and I yesterday presented a seminar-webcast through the Iowa Bar Association on the new tax law extending the Bush-era tax cuts. I had never presented a webcast before, and it was a bit strange. We had an in-room audience of 6 or 7, and over 300 over the wire. I think it went all right, and we got some great questions that are worth repeating.

If a taxpayer enters into a contract to build a new machine shed prior ot September 8th, but it is not completed or placed into service until after September 8th, does the 50% Bonus or the 100% Bonus apply? Does it make any difference if there is a down payment made when the contact was signed?

This is sort of a trick question. Assuming the property is qualifying property -- that is, with a life up to 20 years, rather than 39-year real estate -- if construction is under way by 9/8, or it was under contract, it only qualifies for 50% bonus. That could possibly be the case with an agricultural structure, but probably not otherwise. A down payment should make no difference. Correction: as noted in the comments, the Joint Committee on Taxation says that property placed in service after 9/8/2010 qualifies for 100% bonus depreciation as long as there was no binding contract in place at 1/1/2008.

Can 50% bonus depreciation be elected after 9/8/10 in lieu of 100% bonus?

The law as written doesn't provide a choice of 50% depreciation for assets qualifying for 100% depreciation.

Perhaps the most interesting question:

Does 100% bonus depreciation get recaptured if a piece of property is converted to personal use after the first year?

This question arose after I had explained that there appears to be nothing that keeps you from taking 100% bonus depreciation on the cost of a "large" sport-utility vehicle, one big enough (>6,000 lbs) to not be subject to the limits on deductions for passenger automobiles. The unstated thought: buy a big SUV, use it for business one year, deduct the whole thing, and take it home on January 1 next year.

Interestingly, the general rule of the tax law is that there is no recapture of bonus depreciation. Old temporary regulation Sec. 1.168(k)-1T(f)(6)(iv) covers that issue. The regular depreciation rules normally work the same way (old Reg. Sec. 1.168(i)-4(c)).


While the big sport-utes aren't subject to the Sec. 280F depreciation limits for passenger cars, they are still "listed property" under Sec. 280F(d)(4):

(A) In general. Except as provided in subparagraph (B) , the term “listed property” means—

(i) any passenger automobile,

(ii) any other property used as a means of transportation

If the business use of listed property falls below 50% in any year during its life, Section 280F(b)(2) requires you to recapture into income all depreciation you have taken in excess of the amount that you would have been allowed under the "alternative depreciation system" -- that is, computed on a straight line basis over (for an SUV) a five-year life, with the first year counting as a half-year. So for a $50,000 SUV, if you took $50,000 bonus depreciation in Year 1 and took it out of service in Year 2, you would have $45,000 of taxable income in year 2.

So, clever idea, but nope.

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I believe that 100% bonus depreciation can apply if a binding contract is in effect on or before September 8, 2010, so long as the contract was not in effect prior to January 1, 2008. A similar rule applies to self-constructed property. Check out the Joint Committee Report to the new law for confirmation and also the instructions to Form 4562. The actual wording of the law is quite ambiguous on the point, however.

This is a follow-up question to "Does 100% bonus depreciation get recaptured if a piece of property is converted to personal use after the first year?"

If the vehicle was used 100% for business use the first year, but only 80% for business use the second year, are there any recapture implications?

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