Bonus Depreciation: Making Informed Decisions About Upcoming Capital - - PowerPoint PPT Presentation

Presenting a live 110‐minute teleconference with interactive Q&A

Bonus Depreciation: Making Informed Decisions About Upcoming Capital Investments About Upcoming Capital Investments

Mastering the Latest Guidance and Navigating the Complexities of the Qualifying Rules

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, AUGUST 9, 2011

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Mary Burke Baker Government Affairs Advisor K&L Gates Washington D C Mary Burke Baker, Government Affairs Advisor, K&L Gates, Washington, D.C. Tom Windram, Managing Director, RSM McGladrey Inc., Washington, D.C. David McGuire, Director, McGuire Sponsel, Indianapolis Edward Meyette, Partner, Crowe Horwath, Grand Rapids, Mich.

For this program, attendees must listen to the audio over the telephone.

Edward Meyette, Partner, Crowe Horwath, Grand Rapids, Mich. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10.

Conference Materials

If you have not printed the conference materials for this program, please complete the following steps:

• Click on the + sign next to “Conference Materials” in the middle of the left-

hand column on your screen hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

Continuing Education Credits

FOR LIVE EVENT ONLY

Attendees must listen to the audio over the telephone. Attendees can still view

the presentation slides online but there is no online audio for this program.

Attendees must stay on the line for at least 100 minutes in order to qualify for

a full 2 credits of CPE. Attendance is monitored as required by NASBA. Please refer to the instructions emailed to the registrant for additional

• information. If you have any questions, please contact Customer Service

at 1-800-926-7926 ext. 10. at 1 800 926 7926 ext. 10.

Tips for Optimal Quality

S d Q lit S

• und Qualit y

For this program, you must listen via the telephone by dialing 1-866-873-1442 and entering your PIN when prompted. There will be no sound over the web connection. co ect o . If you dialed in and have any difficulties during the call, press *0 for assistance. You may also send us a chat or e-mail sound@

straffordpub.com immediately so

we can address the problem.

Viewing Qualit y

To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again press the F11 key again.

Bonus Depreciation: Making Informed D i i Ab t U i C it l Decisions About Upcoming Capital Investments Seminar

• Aug. 9, 2011

Tom Windram, RSM McGladrey Inc.

tom.windram@ mcgladrey.com

Mary Burke Baker, K&L Gates

maryburke.baker@ klgates.com

Edward Meyette, Crowe Horwath

edward.meyette@ crowehorwath.com

David McGuire, McGuire Sponsel

dmcguire@ mcguiresponsel.com

Today’s Program

Background On 2010 Enabling Legislation

[Edward Meyet t e, Mary Burke Baker]

Slide 7 – Slide 12

• Rev. Proc. 2011-26 Review

[Tom Windram, David McGuire]

Slide 13 – Slide 21 Related Compliance, Planning Issues To Consider

[Mary Burke Baker, David McGuire]

Slide 22 – Slide 36 State Matches Or Decouplings

[Tom Windram]

Slide 37 – Slide 41

Ed d M C H h

BACKGROUND ON 2010

Edward Meyette, Crowe Horwath Mary Burke Baker, K&L Gates

BACKGROUND ON 2010 ENABLING LEGISLATION

B D i i Bonus Depreciation

• T ax Relief, Unemployment Insurance Reaut horizat ion, and

Job Creat ion Act of 2010 (2010 Tax Relief Act) extended and

expanded bonus depreciation for federal income tax purposes. ― A 100% bonus first-year depreciation allowance for property acquired and placed in service after Sept. 8, 2010 and before Jan 1 2012 2010, and before Jan. 1, 2012 ― A 50% bonus first-year depreciation allowance under for A 50% bonus first year depreciation allowance under for property placed in service after Dec. 31, 2011, and before

• Jan. 1, 2013

8

B D i i (C ) Bonus Depreciation (Cont.)

• Property qualifying for bonus depreciation

― Must be originally placed in service by the taxpayer ― Used property does not qualify. P h f h h b bj ― Purchase of the property cannot have been subject to a binding written contract commencing on or before Dec. 31, 2007. ― Real property does not qualify for bonus depreciation. ― Exception for qualified leasehold improvement property ― Property purchased from a related party does not qualify for Property purchased from a related party does not qualify for bonus depreciation. ― Exception for certain sale-leaseback transactions ― The property may not be held by a controlled foreign corporation.

9

B D i i (C ) Bonus Depreciation (Cont.)

• Rules for claiming the deduction

― If 50% bonus depreciation is claimed, the remaining basis

• f property is depreciated under normal tax rules
• f property is depreciated under normal tax rules.

―

• Sect. 179 expense is applied before bonus depreciation.

― A taxpayer may elect out of bonus depreciation for all p y y p assets or for specific classes of assets. ― Certain long-production period properties (e.g., airplanes ships large production equipment) have airplanes, ships, large production equipment) have extended placed-in-service dates of one year.

10

Background: Economy, Politics And Policy

• Economy

y

• Economy stalled
• Unemployment rate still creeping up - 9.6% in September to

9 8% in December 9.8% in December

• GDP grew 1.3% for the entire year.

P liti

• Politics
• White House and members under tremendous pressure
• Spark the economy
• Job creation
• Help small business

11

Background: Economy, Politics And Policy (Cont.)

• Policy
• Jump-start the economy NOW
• Improve cash flow through reduced taxes
• Improve cash flow through reduced taxes
• Increase demand for qualifying property
• Create jobs through increased manufacturing hires
• Improve competitiveness
• Support small business
• Make it easy for taxpayers to qualify

y p y q y

• Cost affects scope

12

T Wi d RSM M Gl d I

REV PROC 2011 26 REVIEW

Tom Windram, RSM McGladrey Inc. David McGuire, McGuire Sponsel

• REV. PROC. 2011‐26 REVIEW

Bonus Depreciation: 50% Vs. 100%

Requirements 50 percent 100 percent Qualified property

• MACRS property with

recovery period ≤ 20 years

• Certain computer

Same software

• Water utility property
• Qualified leasehold

improvements Original use After 12/31/2007 After 9/8/2010 Acquisition date 1/1/2008 – 12/31/2012* 9/9/2010 – 12/31/2011* Placed in service date Before 1/1/2013* Before 1/1/2012* Placed in service date Before 1/1/2013 Before 1/1/2012 * Extended one year for longer production period property and certain aircraft.

14

Bonus Depreciation: Rev. Proc. 2011-26

• Rev. Proc. 2011-26
• Interpretive guidance on the 100% bonus depreciation

provisions provisions

• Manufacture, construction or production of self-

constructed property must begin after 9/8/2010 for property to meet 100% bonus depreciation acquisition requirement to meet 100% bonus depreciation acquisition requirement.

• Physical work of a significant nature must commence,
• r 10% safe harbor be met, after 9/8/2010.

15

• Rev. Proc. 2011-26: Components

Of Self-Constructed Assets

• New election to qualify components of self-constructed

property for 100% bonus depreciation

• Components must meet ALL requirements of Sect 168(k)

Components must meet ALL requirements of Sect. 168(k), including original use and placed-in-service date.

• An election must be attached to timely-filed return

(including extensions) for tax year larger self-constructed (including extensions) for tax year larger self constructed property is placed in service.

• Must state taxpayer is making the component election

and which eligible components it is being made for and which eligible components it is being made for

16

• Rev. Proc. 2011-26: Clarifications
• Dual character leasehold improvements eligible for bonus

p g depreciation

• Qualified restaurant property AND qualified leasehold

improvement property p p p y

• Qualified retail improvement property AND qualified

leasehold improvement property

• Basis first reduced for Sect 1603 grants then reduced for

Basis first reduced for Sect. 1603 grants, then reduced for bonus depreciation

• Basis eligible for bonus depreciation included in mid-quarter

convention determination convention determination

17

• Rev. Proc. 2011-26: Administrative Relief

Taxpayers with fiscal and short years ending in 2010 that did not claim bonus depreciation and either: claim bonus depreciation and either: Did not make valid election out of bonus depreciation Made valid election out of bonus depreciation

• Amend tax return before filing
• Amend tax return to revoke

Amend tax return before filing return for next succeeding year,

• File Form 3115 with tax return for

next or 2nd succeeding year, OR f Amend tax return to revoke election and claim bonus depreciation by later of:

• June 17, 2011, or

f f

• Make deemed election out of

bonus depreciation

• Filing of return for next

succeeding year

18

• Rev. Proc. 2011-26: Administrative Relief (Cont.)
• Solely for tax year that:

y y

• Include 9/9/2010, AND
• Election out of bonus depreciation not made
• May elect, on class-by-class basis, to:
• Claim 50% instead of 100% bonus depreciation
• Election made on Form 4562 in same manner as election
• ut of bonus depreciation

19

Bonus Depreciation: Opportunities And Considerations And Considerations

• 100% bonus depreciation creating NOLs for many taxpayers

p g y p y in 2010 and/or 2011

• Cash refund opportunities if historically profitable
• Look at accounting methods to determine opportunities to

Look at accounting methods to determine opportunities to file Form 3115 and increase NOL

• Maximize carryback refund
• Bonus depreciation accelerates income recognition under
• Sect. 460 post-2010

20

Bonus Depreciation: Opportunities And Considerations (Cont.) And Considerations (Cont.)

• Sect. 168(k)(4) extended for 2011 and 2012
• Allows corporations with AMT credit carryforwards to forgo

bonus depreciation converting a portion into refunds of bonus depreciation, converting a portion into refunds of AMT credit carryforwards

• Extension applies to AMT credits only, NOT research

tax credits tax credits

• Election for “Round 2 extension property” applies to

property placed in service after 12/31/2010 and before 1/1/2013 1/1/2013

21

Mary Burke Baker, K&L Gates

RELATED COMPLIANCE,

y David McGuire, McGuire Sponsel

, PLANNING ISSUES TO CONSIDER CONSIDER

Compliance Issues: Dealing With The IRS

• IRS approach
• Rev. Proc. 2011-26 acknowledges the policy behind 100%

b d i ti bonus depreciation.

• Policy considerations may not filter out to the examiners.
• Tight IRS training budgets may affect how examiners look

at the issue.

• Taxpayers and practitioners may be put in the position of

educating examiners.

• Policy notwithstanding, old habits may be hard to break.

23

Compliance Issues: Dealing With The IRS (Cont.)

• IRS approach (Cont.)
• Longstanding dispute between IRS and taxpayers on cost

ti i segregation issues

• Cost segregation audit technique guidelines
• Cost segregation industry specific guidance
• Demonstrate some movement by IRS on cost-

segregation approach

• Examiners will review returns for proper elections.
• Examiners will look closely at dates and amounts.

24

Compliance Issues: Dealing With The IRS (Cont.)

• IRS approach (Cont.)
• Expect detailed information document requests
• Invoices
• Payments

Payments

• Contracts
• Work orders

Ch d

• Change orders
• Blueprints
• Construction timelines
• When placed in service
• Amounts deducted under Sect. 179 expensing
• Identification of components

25

Identification of components

• Sampling techniques

Compliance Issues: Dealing With The IRS (Cont.)

• Strategies to protect your deduction
• Documentation, documentation, documentation
• IDR list
• Keep estimates, reconstructed data and non-

contemporaneous substantiation to a minimum.

• Credibility is enhanced if most dates/costs are verified

by source documents .

• If examiner proposes adjustments inconsistent with policy

j y and documentation, ascertain whether appropriate training was received.

26

Q lifi d L h ld I t Qualified Leasehold Improvements

D fi iti Definition

• Improvements made subject to lease
• Lease cannot be between related parties
• 1245 and 1250 property eligible
• 1245 and 1250 property eligible
• Occupied by lessee (not common area)
• In a building more than 3 years old
• Structural components not eligible

Structural components not eligible Eligible for 100% bonus

27

McGuire Sponsel, LLC

specialty tax services

Q lifi d L h ld I (C ) Qualified Leasehold Improvements (Cont.)

I t t i Important issues

• State compliance
• If a state does not comply, depreciable lives are still

important important.

• Qualified restaurant/retail
• Excluded from 100% bonus

Excluded from 100% bonus

• If property is also QLI, QLI rules apply.

28

McGuire Sponsel, LLC

specialty tax services

Safe Harbor For Safe Harbor For Certain Components

“Self-constructed” assets are eligible for bonus if less than 10% of asset completed prior to 9/8/10

• Eligible costs only
• Eligible costs only
• Most new construction would be considered “self

constructed,” even if an outside contractor is used.

29

McGuire Sponsel, LLC

specialty tax services

Safe Harbor For Safe Harbor For Certain Components (Cont.)

S f h b f t f lf t t d t Safe harbor for components of self-constructed assets

• Rev. Proc. 2011-26, Sect. 3.02(2)(b)
• Components constructed after 9/8/10 of a larger self-

constructed asset may be eligible constructed asset may be eligible.

• Example: A boat started on 6/1/10 is not eligible for

bonus; however carpet purchased 10/1/10 for boat will be eligible eligible.

• Requires statement to return that taxpayer is making

election under 3.02(2)(b) of 2011-26.

30

McGuire Sponsel, LLC

specialty tax services

Safe Harbor For Safe Harbor For Certain Components (Cont.)

Safe harbor for components of self-constructed assets (Cont.)

• Taxpayers may need to hire a construction/engineering

expert to analyze project to ensure costs are captured (make expert to analyze project to ensure costs are captured (make sure this is part of a cost segregation study).

• Automatic six-month extension to returns filed prior to

4/18/11 to make this election 4/18/11 to make this election

31

McGuire Sponsel, LLC

specialty tax services

P C Li it ti Passenger Car Limitations

The amount of depreciation that exceeds the first-year limitation under §280F(a)(1)(A)(i) is considered the unrecovered basis for purposes of §280F(a)(1)(B)(i) and is recovered in the first taxable purposes of §280F(a)(1)(B)(i), and is recovered in the first taxable year following the recovery period.

32

McGuire Sponsel, LLC

specialty tax services

P C Li it ti (C t ) Passenger Car Limitations (Cont.)

St d d l l ti (3 03(5)(C)(i) Standard calculation (3.03(5)(C)(i)

• If, in 2010, a taxpayer purchases a automobile for $20,000 that

is eligible for 100% bonus

• First year deduction limited to $11 060 under
• First-year deduction limited to $11,060 under

§280F(a)(1)(A)(i)

• Excess amount of $8,940 recovered by taxpayer beginning

in 2016 in 2016

33

McGuire Sponsel, LLC

specialty tax services

P C Li it ti (C t ) Passenger Car Limitations (Cont.)

S f h b th d f ti (3 03(5)(C)(ii)) Safe harbor method of accounting (3.03(5)(C)(ii))

• First-year: Deduct lesser of 100% bonus or limitation under

§280 F(a)(1)(A)(i)

• Next determine unrecoverable basis as if 50% bonus
• Next, determine unrecoverable basis as if 50% bonus

claimed

• If unrecovered basis exists, taxpayer determines

deductions as though 50% had been claimed instead of deductions as though 50% had been claimed instead of 100%

• If no unrecovered basis, future deductions will be

calculated by multiplying the adjusted depreciable basis by

34

y p y g j p y the depreciation rate under Rev. Proc. 87-57

McGuire Sponsel, LLC

specialty tax services

Magnitude Of 100% Bonus Magnitude Of 100% Bonus Per $100,000

5 Y P t 5-Year Property

1 0 0 % Bonus 5 0 % Bonus 1st Year Cash Flow Increase $32,000 $16,000 $ , $ , 5-Year Cash Flow Increase $2,304 $1,152 NPV at end of tax life $4,263 $2,132

* Assumes 40% tax rate and 7% discount rate

35

McGuire Sponsel, LLC

specialty tax services

Magnitude Of 100% Bonus Magnitude Of 100% Bonus Per $100,000 (Cont.)

15 Y P t 15-Year Property

1 0 0 % Bonus 5 0 % Bonus 1st Year Cash Flow Increase $38,000 $19,000 $ , $ , 5-Year Cash Flow Increase $24,932 $12,466 NPV at end of tax life $13,204 $6,602

* Assumes 40% tax rate and 7% discount rate

36

McGuire Sponsel, LLC

specialty tax services

STATE MATCHES OR

Tom Windram, RSM McGladrey Inc.

DECOUPLINGS

State Conformity/Decoupling

• States have historically had varying levels of conformity to the

IRC.

• Some states’ statutes generally conform to current IRC as

enacted and have provisions which enable automatic updates.

• Other states’ statutes also generally conform to current

IRC but need enabling legislation to adopt federal tax law changes.

• Still other states’ statutes conform to the IRC as of an

earlier date for certain provisions.

38

State Conformity/Decoupling (Cont.)

• 29 states (and the District of Columbia) are fully decoupled

from Sect. 168(k) bonus depreciation.

• Four states are partially decoupled from bonus depreciation.
• 12 states fully conform to bonus depreciation.
• Five states have no income taxes
• Five states have no income taxes.
• There was some expectation that, due to extreme budget

t i t t t f i t 50% b d i ti constraints, states conforming to 50% bonus depreciation might decouple from 100% bonus depreciation, but that has not happened.

39

State Conformity/Decoupling (Cont.)

Allow 100% and 50% bonus AL, AK, CO, DE, KS, LA, MO, MT, NE, NM, ND, UT , , Allow 100% but not 50% bonus IL Allow 50% but not 100% bonus None Add b k b d t MACRS AZ AR CT DC FL GA HI ID IN IA KY Add back bonus and compute MACRS AZ, AR, CT, DC, FL, GA, HI, ID, IN, IA, KY, ME, MD, MA, MI, MS, NH, NJ, NY, NC, OR, PA, RI, SC, TN, VT, VA, WV, WI Add back a portion of bonus then MN (80%) OH (5/6) Add back a portion of bonus then depreciate five‐year straight‐line MN (80%), OH (5/6) Add back 80% of bonus then depreciate four‐year straight‐line OK p y g Decoupled from bonus and from MACRS; generally follows pre‐1981 ADR CA No income tax NV, SD, TX, WA, WY No income tax NV, SD, TX, WA, WY

40

State Decoupling Example 100% Federal Bonus 100% Federal Bonus

• Facts
• $1 million asset acquired 7/1/10
• Five-year tax life
• Half-year convention
• Federal depreciation in 2010 = $1 million

p

• State adjustments
• Add back $1 million federal depreciation
• Deduct state depreciation under five year MACRS

Deduct state depreciation under five-year MACRS

• 2010 $1,000,000 x .2 = $200,000
• 2011 $1,000,000 x .32 = $320,000

$ $

• 2012 $1,000,000 x .192 = $192,000
• 2013 $1,000,000 x .1152 = $115,200
• 2014 $1,000,000 x .1152 = $115,200
• 2015 $1,000,000 x .0576 = $57,600

41