Is this the year “temporary” actually means it?
It’s an old joke that nothing is as permanent as a temporary tax break. The research tax credit has been on borrowed time, one or two years at a time, since the 1980s, to allow congresscritters to pretend that it doesn’t really cost much. This congressional lie has now been extended to dozens of tax breaks, most of which Congress has no intention of letting expire. Yet expire they will if Congress fails to take action. With both Congress and the President in full electile dysfunction mode, failure is always an option.
The recent incentives for fixed asset purchases are perhaps the most likely candidates for expiration. While 100% bonus depreciation and the $500,000 limit on the Section 179 deduction are popular with businesses, they are also big revenue losers. With Congress spending about $1.67 for each dollar of revenue, it may find it easy to let this one go. It failed to pass this before year-end with the payroll tax cut extension, which shows that extending these breaks are not the top item on their to-do list.
The least-likely candidate for actual expiration is the “AMT Patch.” This is the recurring increase in the individual alternative minimum tax exemption to prevent inflation and the Bush-era regular rate reductions (which themselves have become another regularly-expiring provision, but not for 2012) from throwing over 20 million additional taxpayers into AMT. Affected taxpayers would see an average annual tax increase of $3,900 on average according to the Congressional Budget Office, and some would see an increase of over $8,000.
The Research Credit is also technically dead as of January 1. It has been extended, with one temporary exception, since the 1980s, and is likely to be again extended retroactively.
The fate of some 50 other “temporary” breaks that expired January 1, including 15-year depreciation for “qualified restaurant buildings” and “qualified leasehold improvements” and seven-year depreciation for “motorsports entertainment complexes” is less certain. The more often they are extended, the less likely it is that they will be permitted to die, but with the continuing budget disaster, only the AMT Patch and the research credit seem like sure bets for continuation this year.
If Congress wanted to honestly budget these items, they would treat any provision extended more than once as permanent for budgeting purposes. That would require them to face up to the real effects of these items, and limit the regular enactment of permanent tax increases to pay for “temporary” breaks. It would also simplify the tax law and remove uncertainty from taxpayer lives. Yet it is clearly in the interest of congresscritters to force beneficiaries of these provisions to have to beg for them to be extended every year or two, so expect the lie to continue.
Link: Joint Committee on Taxation list of expiring provisions.
Posts Tagged ‘bonus depreciation’
Is this the year “temporary” actually means it?
The Wall Street Journal reports this morning that the Congresscritters are on the verge of a deal to extend the 2% cut in the employee portion of the Social Security tax (from 6.2% to 4.2%). The deal would also extend the reduction in the Self-employment Tax from 15.3% to 13.3% — so don’t be hasty about accelerating self-employment income into this year.
I see nothing yet on whether the deal will also extend 100% bonus depreciation or the $500,000 Section 179 deduction maximum one more year.
UPDATE, 12/18: Senate passes two-month extension of payroll tax cut.
Two big tax benefits for buying business fixed assets will be trimmed way back starting next year. The “100% bonus depreciation” for 2011 asset additions will become “50% bonus depreciation” starting January 1. The $500,000 annual limit for assets expensed under Section 179 will also be cut way back next year, to about $138,000. So taxpayers are scrambling to get their fixed asset purchase to qualify for the more generous 2011 rules.
An asset normally has to be “placed in service” by year-end to qualify. The tax regulations say:
Property is first placed in service when first placed in a condition or state of readiness and availability for a specifically assigned function…
What does that mean? If your machine is still in shipping crates on your loading dock, it’s not placed in service. But it doesn’t actually have to be generating revenue for you yet, either. If everything is in place and ready to go, your asset may be in service. For example, last year the Tax Court said components of a recording studio purchased in 2002 and 2003 were placed in service in those years because they were set up and tested, even though it wasn’t actually used in the business until 2004, because the pieces were operable on their own.
In contrast, components that need to be interconnected to function may not be placed in service until they are hooked together. For example, a production line might not be considered placed in service if a component machine isn’t in place, even if separate machines purchsed for the line are otherwise ready to go.
December 31 isn’t far away, so if you are counting on bonus depreciation or Section 179 for new equipment for 2011, make sure you get it “in service” before the ball drops.
More 2011 year-end tax tips here through December 31!
Paul Neiffer has a great chart at Farm CPA Today.
Paul Neiffer summarizes:
If a farmer is constructing a new building and the construction commenced after September 8, 2010 and is finished before January 1, 2012, then the total cost is allowed to be 100% depreciated during 2011. If the building construction commenced before September 9, 2010 and was finished in 2011, then only 50% bonus depreciation is allowed (unless you can segregate out some components that can be 100% bonus depreciated this year).
This only applies to farm buildings. Non-farm residential or commercial real estate is not eligible for bonus depreciation, with a very limited exception for some restaurant buildings. If the bonus depreciation generates a loss, the usual rules limiting losses may apply — basis limitations, at-risk rules, and the passive activity loss rules.
Governor Branstad has used his item veto authority on SF 512, the bill containing the “code conformity” provisions for the Iowa income tax. The item veto removes budget transfer authority included in the bill; the item veto therefore enacts the federal code coupling language.
As a result, we finally have a 2010 Iowa tax law. Key points:
- Iowa conforms to the $500,000 Section 179 deduction limit for 2010 and 2011.
- Iowa adopts federal tax computation rules in effect as of 1/1/2011, including things like the educator expense deduction that have been a problem in other years.
- Iowa DOES NOT adopt federal bonus depreciation for 2010 or 2011.
I don’t think the legislature can now undo the parts approved by the Governor in his item veto, but I’ll let you know if I hear otherwise. I will update this post as events may warrant.
UPDATE, 5:46 pm: A reader asks in the comments:
So we can deduct front page tuition deduction and educator costs now on 2010 Iowa tax returns? Was it retroactive back to tax year 2008 by any chance?
The SF 512 provisions adopting the Internal Revenue Code changes through 1/1/11 “apply retroactively to January 1, 2010, for tax years beginning on or after that date” (Sec. 6 of the bill). So it goes back to 2010, but not further, if I understand it correctly, and the tuition deduction, the IRA donation exclusion, and the like are good now for Iowa 2010 1040s.
UPDATE, 4/13/2011: Iowa Department of Revenue issues release on new Iowa rules enacted yesterday
Des Moines Register
Janet Novack explains:
Thanks to the temporary tax cut deal President Barack Obama and Republicans struck last December, you can write off the full cost of purchasing a new luxury SUV
Roger McEowen posts his insights on the Rev. Proc. 2011-26 guidance on bonus depreciation issued this week.
Of course, Iowa has yet to resolve its depreciation and Section 179 rules for 2010.
IRS release solves ‘second year zero’ problem for auto depreciation
Bush-rate extension passes; what it means
2010 100% bonus depreciation, Extenders, $5 million portable gift-estate tax exemption in ‘Framework’ text
The IRS yesterday issued eagerly-awaited guidance on bonus depreciation (Rev. Proc. 2011-26). Key bits:
- You will be able to elect 50% bonus depreciation, rather than 100%, for assets qualifying for the 100% bonus — but only for the tax year that includes September 9, 2010.
- It confirms that projects started as late as January 1, 2008 can qualify for 100% bonus depreciation, if placed in service between September 9, 2010 and December 31, 2011. This will be good news for farmers with new building going into service after last September 8.
- The IRS provided a “safe harbor” that solves the “zero second year depreciation” problem for cars subject to 100% bonus depreciation.
“Bonus” depreciation allows you to deduct an extra part of a fixed asset in the year it is placed in service. The part of property not qualifying for bonus depreciation is recovered over a period of years, usually five or seven years. With “50% bonus” depreciation, you deduct half of the cost in the year you place an asset into service, and you deduct the remaining cost under the usual depreciation rules. With “100% bonus,” the entire cost is deducted in the first year.
A new 2011 Ford Fiesta listed for $16,977 at Stivers Ford Lincoln Mercury. This car can qualify for 100% bonus depreciation, subject to the “luxury auto” limits.
With cars, it’s more complicated. The so-called “luxury auto” rules limit annual depreciation of cars. The limit is adjusted annually for inflation. It kicks in for cars costing around $15,300 and up (you can find the current limits here). As a nod to bonus depreciation, the first-year “Sec. 280F” limit was increased to $11,060 for 2010 and 2011.
A technical reading of the luxury auto rules says that if you take “100% bonus” depreciation for a car, you get the $11,060 in year 1, but then you get no more depreciation until year 7. The new IRS safe harbor allows taxpayers to make a special computation that allows them to take depreciation in years 2-6 also, up to the usual annual Sec. 280F limits. The safe harbor computations are confusing, but the bottom line of thenew guidance is that you get full 280F-limited depreciation starting in year 2 for cars with costs starting around $18,450. The computation for cars costing less than that is more puzzling, but you do get year 2-6 depreciation. (Cars are “five year” property, but because the car is normally considered to be placed in service at the mid-point of the year, the depreciable life goes into a sixth year).
While welcome, the “luxury auto” safe harbor seems like a long way to get home. The IRS apparently agreed with the “second year zero” reading of the tax law. Rather than ignoring the implied Congressional malpractice, IRS made up a whole new funky depreciation rule to get around the problem. While it’s hard to see where the Code says they can do that, nobody is likely to complain.
The conference committee trying to reconcile the different “tax coupling” bills passed by the two houses of the Iowa General Assembly has now gone a full week without finishing its work.
Meanwhile, thousands of Iowa business tax returns are in limbo, awaiting the word on what rules apply for 2010. The House bill conforms Iowa’s tax law for bonus depreciation and the Section 179 deduction to the federal rules effective for 2010. The Senate bill adopts federal Section 179 rules for 2010, but bonus depreciation for 2011.
Many business returns already filed could be affected by the conference decision; these returns might have to be amended to comply with any retroactive tax law changes.
The bills in conference also include “supplemental appropriations” for several state programs, including indigent defense. Attorneys for paupers are scrambling to pay their bills; prosecutors, in contrast, won’t miss a paycheck.
The hangup is a proposed bookkeeping account to hold any surplus state funds after the end of the budget year. Republicans want the account to get all surplus funds after reserve funds are restored, to be used for general tax reduction. Democrats want a limited effective date, with only 25% of the surplus to be set aside, and only for property tax relief.
The Governor entered the debate yesterday. In a town hall meeting in Columbus Junction, he came out for splitting the non-contentious issues from the bill so they can be enacted without more delay, reports Kathie Obradovich:
Branstad today, at a town hall meeting to promote his jobs plan, came down on the side of Democrats who want to push through the $45.7 million needed for human services, corrections and indigent defense.
The conference committee attempting to determine whether to conform Iowa to federal rules for fixed asset cost recovery failed to reach agreement again yesterday. The committee is hung up on a plan to put any leftover money at the end of the fiscal year into a “tax relief fund.” Rod Boshart reports:
Talks stalled when House Republicans insisted on creating a tax relief fund with 100 percent of the state
IRS announces 2011 vehicle depreciation limits without settling “year 2″ problem in 100% bonus years.Wednesday, March 2nd, 2011 by Joe Kristan
The IRS yesterday issued (Rev. Proc. 2011-21) the maximum vehicle depreciation limits under the so-called “luxury auto” rules of Section 280F. The guidance pointedly leaves open the treatment of vehicles eligible for 100% bonus depreciation in years 2-6 of their depreciation life:
The Service intends to issue additional guidance addressing the interaction between the 100 percent additional first year depreciation deduction and
The Iowa House of Representatives last night voted to allow bonus depreciation and $500,000 of Section 179 depreciation on Iowa tax returns effective for 2010.
The Senate-passed version of S. 209 increases the Iowa Section 179 limit to $500,000 effective for 2010, but only allows bonus depreciation starting in 2011. It’s not clear which bonus depreciation effective date will emerge when the two houses reconcile their versions of the bill.
This is a quandary for businesses wanting to get their 2010 returns filed. As I wrote at IowaBiz.com yesterday, it may be wise to wait a little longer before filing Iowa returns when you have bonus depreciation or over $134,000 in Section 179 deductions on your federal filings.
Many taxpayers have already filed for 2010. The House-Senate conference should add a provision to S. 209 to allow any taxpayers who have already filed under the old rules to continue to depreciate their 2010 assets that way so they don’t have to amend their already-filed 2010 returns.
The Iowa House Ways and Means Committee has given Iowa businesses another reason to take their time finishing their 2010 returns. Rod Boshart reports at Eastern Iowa Government.com:
The House Ways and Means Committee voted 17-7 to
The Iowa Senate Ways and Means Committee yesterday approved this year’s “code conformity” bill to link Iowa’s income tax rules to the federal tax rules. The bill, SF 209,
The bill appears to adopt federal bonus depreciation and the $500,000 Sec. 179 limits. The bonus depreciation is effective for 2011, but not retroactively. The legislative language appears to make the Sec. 179 coupling retroactive to 2010. If the coupling is not retroactive, the Iowa Sec. 179 limit for 2010 is $134,000. The legislative explanation reads (my emphasis):
The division also decouples, for Iowa tax purposes, from the increased expensing allowance under section 179 of the Internal Revenue Code enacted by Congress as part of the American Recovery and Reinvestment Act of 2009 and makes a number of conforming changes. The changes take effect for tax years beginning on or after January 1, 2009, and before January 1, 2010.
I have emailed legislators for clarification and will post an update as soon as I hear back, as it means a lot for returns in process right now.
The bill couples retroactively for some minor breaks. For example, the bill would allow an Iowa deduction for sales taxes if that deduction is elected on the federal return. The bill also would conform Iowa the federal rules for excluding dependent health insurance.
The bill still has a way to go before it is enacted. If you have any Iowa items on your 2010 return that are on the 2009 list of federal-Iowa differences, you may want to sit on your Iowa return until conformity legislation is enacted; otherwise you may have to amend, or you may end up getting a payment notice from Iowa.
Other coverage: Sioux City Journal
Iowa Department of Revenue on 2010 conformity.
victim satisfied attendee of the new tax law webinar we did a few weeks ago asks:
Could you go through the 2011 depreciation scenario for a steel ag building being used for machinery, hay or livestock storing including bonus depreciation, if any?
Certainly! Bonus depreciation applies to new property “which has a recovery period of 20 years or less” (Sec. 168(k)(A)(I)(i)). The tax law depreciates farm buildings over a 20-year life. See Rev. Proc. 87-56. That means new farm buildings qualify for the current 100% bonus depreciation — fully deductible when placed in service if “acquired” after September 8, 2010, if in service by the end of this year.
Flickr image courtesy SteelMaster Buildings under Creative Commons license
So Mr. Farmer decides he needs a new tractor shed. He signs the deal today and the shed is up and in service on August 1, 2011. He pays $200,000 for it. His taxable income is otherwise $125,000 for this year. After the bonus depreciation, he has a $75,000 or so net operating loss that he can carry back to get a refund of prior-year taxes (farmers qualify for a special five-year carryback provision).
What if the shed was under construction on September 8, 2010 and finished on September 30, 2010?
As long as the property was not built under a contract binding as of January 1, 2008, it should qualify for 100% bonus depreciation if placed in service after September 8, 2010 and before the end of 2011.
What if I bought land from my neighbor that had a shed on it?
Sorry, then it is not “new” property and no bonus depreciation is permitted.
The 100% bonus depreciation enacted for new assets purchased after September 8 of last year is a sweet deal. You can fully deduct the cost of qualifying assets in they year they go into service, regardless of how many you buy or whether it generates a loss.
It never was a completely sweet deal for buyers of business autos. Section 280F, the “luxury car” rule, limits depreciation. For cars put in service in 2010, the first year deduction is limited to $11,060 – $3,060 plus an extra $8,000 for bonus depreciation. The limit for year two would normally be $4,900 for the second year, $2,950 in year 3, and $1,775 annually afterward until the car is fully depreciated.
But for “luxury autos” purchased after September 8, 2010, the depreciation allowed for years 2 through 6 might be… zero.
The Sec. 280F limits were written to restrict the depreciation otherwise allowable for automobiles under the normal Sec. 168 depreciation rules. One argument holds that when 100% bonus depreciation applies, the depreciation is only allowable in Year 1, unless you elect out of bonus depreciation for all assets in that class. That means the depreciation for the remaining five years of the auto period is the lesser of the Sec. 280F limits or the amounts that would otherwise apply under Sec. 168 — in the case of bonus depreciation, that means zero. Then in year seven depreciation would again be allowed under a Sec. 280F catch-up rule.
Is this what Congress had in mind? Certainly not. But the IRS is seriously considering embracing this interpretation; I spent a half hour yesterday listening to an IRS technician explain why yesterday. While the technician agreed that the result is unintended and perverse, s/he thinks the IRS may be stuck with it.
I think that an IRS that can invent a massive preparer regulation regime with the flimsiest justification and no specific legislative mandate should be able to come up with a way to depreciate cars that isn’t insane, but that’s just me. We may learn how the IRS will decide when they issue the annual inflation update for the Sec. 280F limits; that was about February 15 last year.
Is there any way to deal with this on 2010 returns?
Even if the no-second-year-depreciation rule applies, you would probably not want to elect out of bonus depreciation. You would have to make that election to all “five year property,” including passenger autos. You would lose $8,000 of your first-year depreciation, which you wouldn’t make up until the third subsequent year. If you would sell your car by then anyway, you would gain nothing.
It’s not clear to me whether you could take a Sec. 179 deduction for the $11,060 limit and elect out of bonus depreciation for the rest. If you could, you would get the full Sec. 280F depreciation for years 2 through 6, but that only works for “qualified” property under the bonus depreciation rules; I’m not sure you have “qualified” property under the bonus depreciation rules if you elect out of bonus depreciation.
The IRS could solve this by ruling that Sec. 280F operates in conjunction with Sec. 168 to allow depreciation in years 2-6, but they might not be so inclined. It might take a technical correction to fix this, and we all know how much we can count on Congress to clean up its messes.
If you think this potential IRS interpretation is silly, you should contact IRS people you know, and your local Congresscritters, to share your views.
Sometimes taxpayers want to take bonus depreciation on some assets, but not others. You have to do it by “asset class,” as Paul Neiffer explains.
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 depreciationThursday, January 6th, 2011 by Joe Kristan
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