October 2004
Volume 1, Number 1
Table of Contents

Financial Planning:
Bonus Depreciation

by Michael P. Hurley

Can you and your clients benefit from bonus depreciation? The Jobs and Growth Tax Relief and Reconciliation Act of 2003 increased the bonus depreciation rate from 30 percent to 50 percent of the adjusted basis of qualified property. Bonus depreciation is determined without any proration based on the point during the tax year that the property was placed in service. Property that is placed in service any time during the year-even on the last day of the year-is eligible for the full 50 percent bonus depreciation amount. Qualifying vehicles, through an increase in the first year luxury auto depreciation limit, are also eligible for bonus depreciation.

How does bonus depreciation work? The 50 percent bonus depreciation is taken after any Section 179 deduction (allowing one to expense, subject to limitations, certain otherwise depreciable assets), but before figuring the regular depreciation pertaining to the property. Bonus depreciation is available for both regular tax and alternative minimum tax (AMT) purposes. Capital expenditures to recondition or rebuild acquired or owned property satisfy the original-use requirement, but purchases of reconditioned or rebuilt assets do not qualify.

To meet the requirements for 50 percent bonus depreciation, the property must be qualified property, its original use must commence after May 5, 2003, and it must be acquired and placed in service after May 5, 2003, and before Jan. 1, 2005. However, the placed-in-service period is extended to Dec. 31, 2005, for certain extended-life property and transportation property.

Qualified property, or property that is eligible for bonus depreciation, is defined as one of the following:

  • Tangible personal property with a recovery period of 20 years or less;
  • Depreciable computer software;
  • Water utility property; or
  • Qualified leasehold improvement made to the interior of a nonresidential building, by or for the benefit of a lessee or sublessee and placed in service more than three years after the building was placed in service.

If the qualified property was subject to a binding written contract for acquisition in effect before May 6, 2003, it does not qualify for the 50 percent bonus depreciation deduction; however, it may qualify for the 30 percent bonus depreciation provision of the 2002 Tax Act.

Michael P. Hurley is counsel with the Painesville, Ohio law firm of Nelson, Sweet & Hurley.


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