Posts Tagged ‘bonus depreciation’

Tax Roundup, 12/10/14: Extender bill lives, permanent charitable extender bill doesn’t. And: don’t just buy it; install it!

Wednesday, December 10th, 2014 by Joe Kristan

lizard20140826Whither the extender bill? HR 5771, the bill to extend retroactively through the end of this month the 55 or so tax breaks that expired at the end of 2013, has been “placed on the Senate Legislative Calendar.” That means it appears to be proceeding to a vote, though I find nothing on when that will happen. Tax Analysts reports ($link) that outgoing Senate Majority Leader Reid says he will take up the extender bill ” after finishing work on a defense authorization bill and a government funding measure.”

Meanwhile, the President has threatened to veto a separate attempt to permanently extend three charitable breaks in the extender bill, including the break for IRA contributions. While that’s bad for those breaks, it implies that the White House will not oppose HR 5771’s one-year extension.

 

20130422-2Because it looks as though the “extender” bill will clear the Senate, taxpayers looking to add fixed assets have extra incentive to get it done this year. The bill extends through 2014 — and only through 2014 — the $500,000 limit on Section 179 deductions and 50% bonus depreciation. These breaks allow taxpayers to deduct over half (bonus depreciation) or all (Section 179) of the cost of fixed assets that are otherwise capitalized, with their deductions spread over 3 to 20 years.

Taxpayers should remember that it’s not enough to order or pay for a new asset by the end of 2014 to qualify for these breaks. The asset has to be “placed in service” by year end.

A Tax Court case from last December drives home the point, where a taxpayer lost an $11 million bonus depreciation deduction in 2003 because an asset bought at year-end wasn’t “placed in service” on time.  Judge Holmes takes up the story:

On December 30, 2003, an insurance salesman named Michael Brown1 took ownership of a $22 million plane in Portland, Oregon. He flew from there to Seattle to Chicago — he says for business meetings — and then back to Portland. Brown says these flights put the plane in service in 2003, and entitle him to a giant bonus-depreciation allowance. But a few days later he had the plane flown to a plant in Illinois where it underwent additional modifications that were completed about a month later.

The IRS argued that the need for modifications meant the airplane wasn’t “placed in service” before year end. The taxpayer argued that the airplane was “fully functional” as purchased, and therefore was “placed in service” when acquired and used for its first flight on December 30, 2003. The court agreed with the IRS:

While acknowledging in his briefs that those modifications made the Challenger “more valuable to him” and allowed him to “more comfortably conduct business” as a passenger, he says they have “nothing to do with the Challenger’s assigned function of transporting him for his business.” The problem is that this posttrial framing just doesn’t square with the trial testimony, in which Brown testified that those two modifications were “needed” and “required”. We therefore find that the Challenger simply was not available for its intended use on a regular basis until those modifications were installed in 2004. Brown thus didn’t place the Challenger in service in 2003 and can’t take bonus depreciation on it that year.

A new asset doesn’t actually have to be used during the year to be “placed in service,” but it has to be ready to go. A new machine should be on the floor and hooked up, not just in a crate on the dock, or in a trailer on the way in, if you want to depreciate it. If the new asset is a vehicle, you need to take delivery to get the deduction. If the asset is a farm building, it needs to be assembled and in place, not in boxes on the ground.

Cite: Brown, T.C. Memo 2013-275

 

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The TaxProf reports on a new Treasury Inspector General report, TIGTA: IRS Has 25-30% Error Rate In Refundable Child Tax Credits, Mistakenly Pays $6-7 Billion:

The IRS has continually rated the risk of improper ACTC payments as low. However, TIGTA’s assessment of the potential for ACTC improper payments indicates the ACTC improper payment rate is similar to that of the EITC. Using IRS data, TIGTA estimates the potential ACTC improper payment rate for Fiscal Year 2013 is between 25.2 percent and 30.5 percent, with potential ACTC improper payments totaling between $5.9 billion and $7.1 billion. In addition, IRS enforcement data show the root causes of improper ACTC payments are similar to those of the EITC.

So at least 1/4 of the credit is claimed fraudulently or illegally. This is one of the provisions the President insists be made permanent as a price for permanently extending business provisions. He killed the permanent extender compromise when it didn’t also make the child credit permanent.

 

Wind turbineIowa Public Radio reports Grassley Wants Wind Tax Credit to Go Further. He should read Bryan Caplan’s review, The Moral Case for Fossil Fuels: We Owe Civilization to Fossil Fuels. “And despite decades of government favoritism, alternative fuels have yet to deliver.”

 

Peter Reilly, Seventh Circuit Will Not Let Tax Protester Blame His Lawyer For Conviction:

James Stuart thought that Peter Hendrickson had “cracked the code” – the Internal Revenue Code, that is. Joe Kristan would characterize it as finding the tax fairy – that magical sprite who make your taxes go away painlessly while your sucker friends send checks to the tax man.   

It’s always fun to be named-checked by a Forbes blogger.

Jana Luttenegger Weiler, Tax Tips for Gifts to Charity (Davis Brown Tax Law Blog).

Robert D. Flach, DONOR ADVISED FUNDS. For at least 99.99% of taxpayers, these are far better than setting up a private foundation.

Kay Bell, Sen. Tom Coburn’s parting gift: a tax code decoder

Paul Neiffer, Watch Your Crop Insurance Form 1099s This Year

Jason Dinesen, 5 Things You Didn’t Know About EAs, #2: We Don’t Work for the IRS

Brad Ridlehoover, The Grinch That Stole Their Reasonable Cause… (Procedurally Taxing)

Tim Todd, IRS Erred in Making Notice of Tax Lien a Condition to Installment Agreement

 

TaxProf, The IRS Scandal, Day 580. Lois Lerner appears to have been scheming to sic the Justice Department on the Tea Partiers as early as 2010, according to newly-unearthed e-mails.

 

Howard Gleckman asks Why Does Congress Pay For Some Tax Cuts and Not Others? (TaxVox). “It can’t be the merits of the recipients. By now, TaxVox readers know that the expired tax breaks included such worthies as preferences for race horse owners, Puerto Rican rum manufacturers, and TV and film producers.”

Eric Cederwall asks What is the Simplest Tax System? (Tax Policy Blog). “Normative economics aside, a per-person tax is one of the most economically efficient taxes for raising revenue.”  Not happening, though.

 

Adrienne Gonzalez, Kids These Days Trust the IRS More Than Olds Do (Going Concern). Like Santa Claus and the Tooth Fairy, they’ll figure it out eventually.

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Tax Roundup, 7/8/14: Not in Kansas Anymore edition. And: the latest on bonus depreciation for 2014.

Tuesday, July 8th, 2014 by Joe Kristan

20140409-1What’s the matter with Kansas?  Economist Scott Sumner looks at the controversy over the recent Kansas tax reforms:

The past two years Kansas reduced its state income tax rates. As a result, the top rate of income tax faced by Kansas residents (combined state and federal) rose from 41.45% in 2012 to 48.3% in 2013 and then fell a tad to 48.2% in 2014 (if they don’t itemize.) That’s a pretty tiny drop in the top marginal tax rate in 2014, and a much bigger rise in 2013.


I can’t imagine any serious economist predicting that the Kansas rate cut would boost Kansas GDP by 25% or more. Why did I pick that figure? Because the Kansas state income tax top rate fell from 6.45% in 2012 to 4.8% in 2014, which is roughly a 25% rate cut. In order for that rate cut to boost Kansas tax revenues, you’d have to see Kansas GDP rise by more than 25%. That’s obviously absurd.

The Sumner post is there to refute a straw-man argument made by tax fans:

“Why am I even discussing such crazy ideas? Because Paul Krugman seems to want to convince his readers that lots of supply-siders believe such nonsense…”

Actually, supply-siders do not claim that tax cuts pay for themselves, except in very unusual cases. Kansas is not one of those cases. The Laffer curve effect is typically applied to cases of extremely high marginal tax rates.

kansas flagI have long pushed for a combination of rate cuts for Iowa, combined with comprehensive elimination of deductions and cronyist tax credits.  That would keep the state budget from getting clobbered, while making the tax system much easier and cheaper to run and to comply with.  Kansas couldn’t let go of the loopholes, and in fact added new ones.  Joseph Henchman of the Tax Foundation discusses the Kansas tax changes in Governing.com (my emphasis):

Good tax reform broadens the tax base and lowers rates. That’s what Gov. Brownback wanted to do. But the legislature took out the “broaden-the-base” part. They just passed a tax cut, which can be justifiable if you want to reduce the size of government or expect other revenue sources to go up. But they didn’t cut spending and they don’t expect revenue to grow, so it’s just a hole. With the exemption for pass-through entities, if you’re a wage earner, you’re taxed at the top rate, which is currently 4.9 percent in Kansas. If you’re a partnership, an LLC or any form of recognized business entity with limited liability that’s not a corporation, your income is taxed at zero percent. That’s an incentive to game the tax system without doing anything productive for the economy. They think things like the pass-through exemption will encourage small business, and to be fair, it might. But they are doing it in a way that violates the tax principle of neutrality.

So what would happen if my Quick and Dirty Iowa Tax Reform Plan were enacted in Iowa?  My plan would eliminate corporation taxation and allow S corporation owners to elect to be taxed on distributions, rather than on pass-through income.  Properly structured, it wouldn’t hurt Iowa’s tax revenue, as the rate cuts would be offset by fewer deductions and elimination of tax credit giveaways.  I like to think that without a corporation tax and without a culture of begging for tax credits, Iowa would over time do well, considering that its regulatory and labor environment is already business-friendly.  But I don’t expect miracles, and I would not want the rate cuts to be so deep as to depend on a short-term economic boom to keep the state solvent.

 

20130113-3Richard Borean, House to Consider Bonus Depreciation (Tax Policy Blog). “It turns out that  adding permanent bonus expensing to the Camp Plan would boost GDP, wages, job creation, and federal revenue.”

Bonus depreciation is one of the many perpetually-expiring provisions that get renewed every year or two, after enough lobbyists make their offerings to the congressional fundraising idols.  The congresscritters love enacting proposals temporarily because that way they don’t appear to cost as much as officially-permanent provisions, and because it makes the lobbyists come and visit them regularly to get yet another extender bill passed.

Ways and Means Committee Chairman Camp is calling out this game by trying to get some of these provisions extended permanently, officially.  He notes that they really are permanent, and that pretending that they are temporary isn’t fooling anybody.  His opposition in the Senate wants to keep pretending the provisions are temporary, and that the honest step of treating them as permanent is “budget busting.”

None of this helps businesses pricing investment decisions for 2014.  Anyone buying equipment has to guess at the deduction schedule in order to forecast cash flows from the purchase.  Unfortunately, nothing is likely to happen until after the November elections, when a temporary retroactive extension is likely to pass — but might not.

 

Trish McIntire discusses The New Voluntary Tax Preparer Program.  “I’m interested in seeing the numbers of the Filing Season Program come January 2015. Honestly, I don’t think they are going to be as high as the IRS hopes.”

Roberton Williams, IRS Help Line Is Out Of Service (TaxVox) “I needed to double-check an issue concerning withdrawals from my nonagenarian father’s IRA. IRS Publication 590 wasn’t clear so I decided to call the IRS. The experience was illuminating. Not helpful mind you, but illuminating.”

William Perez, What’s Form W-9?  “Independent contractors and other people who work for themselves will often need to give a Form W-9 to their clients. Clients will then use the information on Form W-9 to prepare Form 1099-MISC to report income paid to the independent contractor.”

Jim Maule continues his Tax Myths series with “I’m Getting a Refund and Not Paying Tax.”  He notes “Whether a person has a tax liability cannot be determined simply from the existence of a refund.”

Kay Bell assigns 5 easy tax tasks to take care of in July.

 

20140708-1Brian Mahany, Are FBAR Penalties Unconstitutional? In Many Cases Yes.  “It’s one thing to assess a 50% or 75% penalty but when penalties exceed the total tax owed by a multiple of 50 times like in the Warner case, we believe the penalties are clearly unconstitutional.”

Martin Sullivan, Will States Get a Multibillion-Dollar Windfall From Corporate Tax Reform? (Tax Analysts Blog).  Only if there is actually corporate tax reform.

TaxGrrrl, The Real Cost Of Summer Vacation: Don’t Get Buried In Taxes

Stephen Olsen, Summary Opinions for 6/27/14. (Procedurally Taxing)  Don’t let the date fool you, this roundup of tax procedure news was posted yesterday.

Peter Reilly, City Taxes Trip Up Investment Advisor Restructuring.  Beware New York City.

Jack Townsend, Convicted Politician Did Not Lay a Proper Foundation For Proferred Indirect Testimony of Lack of Intent.  “How does a defendant unwilling to testify as to his intent — thus invoking his Fifth Amendment privilege — introduce indirect evidence of his lack of intent to blunt the Government’s indirect proof of his intent?”

 

TaxProf, The IRS Scandal, Day 425

 

Robert D. Flach brings the Tuesday Buzz.  I like this:

Item #10 on the new IRS-issued Taxpayer Bill of Rights is “The Right to a Fair and Just Tax system”.

In order to assure this right to taxpayers the Tax Code would need to be totally rewritten and all current members of Congress would have to be replaced by competent and intelligent legislators who actually give a damn about the American public.

It’s right as far as it goes, but some members of the executive branch would also need to go, starting with the Commissioner.

 

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Happy 2012! Your taxes may have just gone up!

Tuesday, January 3rd, 2012 by Joe Kristan

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.

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Payroll tax cut extension imminent?

Friday, December 16th, 2011 by Joe Kristan

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.
More Coverage:
Tax.com
TaxGrrrl
Kay Bell

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Year-end planning: what does “placed in service” mean?

Thursday, December 8th, 2011 by Joe Kristan

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!

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How does your state tax bonus depreciation?

Friday, October 28th, 2011 by Joe Kristan

Paul Neiffer has a great chart at Farm CPA Today.

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Farm Buildings and 100% bonus depreciation

Friday, August 12th, 2011 by Joe Kristan

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.

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Governor uses item veto on SF 512; ties Iowa law to federal tax law for 2010

Tuesday, April 12th, 2011 by Joe Kristan

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
Links:
SF 512
Veto message
More coverage:
Radio Iowa
Des Moines Register

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Using bonus depreciation to write off the big SUV

Monday, April 11th, 2011 by Joe Kristan

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

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More on the Bonus Depreciation Guidance

Thursday, March 31st, 2011 by Joe Kristan

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.
Related:
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

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IRS release solves ‘second year zero’ problem for auto depreciation

Wednesday, March 30th, 2011 by Joe Kristan

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.
20110330-1.jpg
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.

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Weekend Update: No resolution yet for 2010 Iowa tax depreciation, Section 179 rules

Saturday, March 19th, 2011 by Joe Kristan

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.

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Conference on 2010 depreciation rules for Iowa drags on

Friday, March 18th, 2011 by Joe Kristan

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

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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

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2010 Bonus Depreciation bill passes Iowa House

Wednesday, March 2nd, 2011 by Joe Kristan

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.

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Iowa House Ways and Means passes coupling with $500K 2010 Section 179 limit AND bonus depreciation

Tuesday, February 22nd, 2011 by Joe Kristan

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

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Iowa to link to federal depreciation rules for 2011, Sec. 179 for 2010?

Tuesday, February 15th, 2011 by Joe Kristan

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.

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Bonus Depreciation and farm buildings

Monday, February 14th, 2011 by Joe Kristan

A 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.
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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.

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Does 100% bonus depreciation set up car buyers for a second-year surprise?

Friday, February 4th, 2011 by Joe Kristan

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.

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Flickr image by David McKelvey under Creative Commons license. At $15,353, the Yaris is subject to the Sec. 280F depreciation limits.

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.

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Picking and choosing bonus depreciation deductions

Friday, January 21st, 2011 by Joe Kristan

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.

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