Quickfinder. Depreciation Quickfinder Handbook (2017 Tax Year) Updates for the Tax Cuts and Jobs Act of 2017

Transcription

1 Quickfinder Depreciation Quickfinder Handbook (07 Tax Year) Updates for the Tax Cuts and Jobs Act of 07 Instructions: This packet contains marked up changes to the pages in the Depreciation Quickfinder Handbook that were affected by the Tax Cuts and Jobs Act of 07, which was enacted after the Handbook was published. To update your Handbook, you can make the same changes in your Handbook or print the revised page and paste over the original page.

2 Example: On April, 07, Geo Corp. buys and places in service a $40,000 passenger auto, which is used 80% for corporate business and 0% personally by Geo s president. Tax year 07 for Geo is a short tax year of six months that begins in calendar-year 07 and includes April, 07. The maximum amount of MACRS deductions (under any MACRS depreciation method and any applicable convention) that Geo may claim for the car for its 07 short tax year is $,64 (80% business use 6/ $3,60 first year depreciation limit for a passenger auto placed in service in 07 see Tab 6). This is true even if Geo elects to expense $3,60 of the car s basis under IRC Sec. 79, since the first year depreciation (IRC Sec. 80F) limit applies to the sum of any special (bonus) depreciation allowance, MACRS depreciation and Section 79 expense claimed (see Tab 6). Section 79 Deduction for a Short Tax Year If a Section 79 deduction is elected for property placed in service in a short tax year, no pro-ration of the Section 79 expense is required [Reg..79-(c)]. However, the first-year depreciation limits on business vehicles are reduced in a short tax year, which may limit the Section 79 deduction for these assets if placed in service in a short tax year, as discussed at Vehicle depreciation limits on Page -. Computing Depreciation After a Short Year For the tax years after the first short year, depreciation may be computed using either the simplified method or the allocation method (Rev. Proc. 89-5). The method chosen must be consistently used until the tax year that a switch to the MACRS straight-line (SL) method is required because it produces a larger depreciation deduction. Usually, both methods produce the same depreciation allowance. Simplified method. Calculate depreciation for a later -month year in the recovery period by multiplying the adjusted basis of the property at the beginning of the year by the applicable depreciation rate. See Optional Tables Not Used on Page -6 for the applicable rates. Allocation method. Calculate depreciation for each later tax year by allocating to that year the depreciation attributable to the parts of the recovery years that fall within that year. For each recovery year included, multiply the depreciation attributable to that recovery year by a fraction. The fraction s numerator is the number of months (including parts of a month) that are included in both the tax year and the recovery year. The denominator is. The allowable depreciation for the tax year is the sum of the depreciation figured for each recovery year. Example #: Mary Jones forms a proprietorship that has a short tax year beginning March 5 and ending December 3. She is treated as having a 0-month tax year and, under the half-year convention, calculates a $67 ($,000 40% 5 ) depreciation allowance for year on a $,000 asset with a five-year recovery period. If Mary uses the simplified method for computing depreciation in the following years, her depreciation in years and 3 will be as follows: Year Depreciation Allowance... ($,000 $67) 40% = $ ($,000 $67 $333) 40% = $00 Example #: Assume the same facts as in Example #, except that the allocation method is used to compute the depreciation in years after the short year. For the second year, a two-part calculation is required. Seven months of depreciation is calculated using the method applicable to the first short-year calculation, and five months of depreciation is computed using the adjusted basis of $600 ($,000 original cost less $400 depreciation allowance claimed in the first months). The calculations for the first three years under this method are as follows: Year Depreciation Allowance... 40% $,000 5/ = $67... (40% $,000 7/) + (40% $600 5/) = $ (40% $600 7/) + (40% $360 5/) = $00 Special (Bonus) Depreciation Law Change Alert: The 05 PATH Act retroactively extended the special Law Change depreciation Alert: The allowance Tax Cuts for and assets Jobs placed Act increased service the through special 09. depreciation However, allowance the percentage from 50% allowed to 00% decreases for qualified 50% property to 40% acquired in 08 and and 30% placed in 09. in service after September 7, from 07. It also did away with the requirement that the property must The special depreciation allowance for 07 generally equals 50% be new to qualify. of the property s basis [IRC Sec. 68(k)()(A)]. See the Special Depreciation be eligible Percentages for the special table below (bonus) for depreciation percentages allowance, for other years. an To asset must pass three tests: [IRC Sec. 68(k)()(A)] To be eligible for the 50% special (bonus) depreciation allowance, an ) asset It must must be qualified pass three property. tests: [IRC See Qualified Sec. 68(k)()(A)] Property on Page -3. ) It must be qualified property. See Qualified Property on Page ) It -3. must be new, if acquired or placed in service before September 8, 07 (see Original Use on Page -3). ) It must be new (see Original Use on Page -3). 3) It must be placed in service before 07. Exception: See Long 3) It must be placed in service before 00. Exception: See Long Production Period Property and Aircraft on Page -3 for the Production Period Property and Aircraft on Page -3 for the extended placed in service date for certain assets. extended placed in service date for certain assets. Special Depreciation Percentages Special Depreciation Percentages Date Qualifying Property Special Depreciation Date Placed Qualifying in Service Property Placed Before in 008 Service Allowance Special Depreciation Percentage Allowance 0% Percentage //08 9/8/0 Before % 9/9/0 /3/ //08 9/8/0 00% 50% // 9/7/7 9/9/0 /3/, 50% 00% 9/8/7 /3/ 00% % 80% % 40% % 30% 06 0% After % After 06 0% Also Must applies be acquired to property and placed placed in in service service after during September this period 7, 07, to qualify the property for 00% was special acquired depreciation. before September For this test, 8, property 07. is acquired when the taxpayer pays or incurs the cost of the property. (Rev. Proc. 0-6) A taxpayer may elect to apply the 50% special depreciation allowance instead of Certain 00% for long the production taxpayer s period first tax property year ending and aircraft after September qualify for 7, 00% 07. special depreciation allowance if placed in service 9/9/0 /3/. Note: The placed in service date generally is extended one year for certain long 3 production Certain period long production property and period aircraft. property See Long and aircraft Production qualify Period for Property 50%, 40% and or Aircraft 30% on special Page depreciation -3. allowance if placed in service in 08, 09 or 00, respectively. See Long Production Period Property and Aircraft on Page -3. Computing the Deduction Determine the special (bonus) depreciation allowance without any pro-ration based on when the property was placed in service or for short tax years. service on the last day of the tax year is eligible for the full special (bonus) depreciation amount. The special (bonus) depreciation allowance is an additional deduction - 07 Tax Year Depreciation Quickfinder Handbook Replacement Page /08

3 placed in service in 06 or 07 computed after any Section 79 deduction (if applicable) and before regular MACRS depreciation is calculated. N Observation: Fiscal year and short tax year filers, with tax years ending in 04, that filed their tax returns before special (bonus) depreciation was extended, may retroactively claim special (bonus) depreciation or revoke elections not to claim it for qualified property placed in service in 04 (Rev. Proc ). Similar guidance for 05 fiscal year and short tax year filers is provided in Rev. Proc see IRS Guidance on PATH Act Provisions on Page -7. Qualified Property Beginning in 06, qualified property includes qualified improvement property, whether or not subject to a lease, and there is no requirement that the improvement be placed in service more than three years after the building. Also, certain trees, vines and plants bearing fruit or nuts are electively eligible for special depreciation when planted or grafted, rather than when placed in service. Rev. Proc provides procedures for making this election. To qualify for the special (bonus) depreciation allowance, an asset must be one of the following: [IRC Sec. 68(k)()] ) MACRS asset with a recovery period of 0 years or less, ) Depreciable computer software other than software amortizable under IRC Sec. 97 (for example, off-the-shelf software), 3) Water utility property defined in IRC Sec. 68(e)(5) or 4) Qualified improvement property (see Qualified improvement property below). Qualified property does not include: ) service and disposed of in the same tax year. ) Property converted from business use to personal use in the same tax year it is acquired. [Reg..68(k)-(f)(6)] 3) Property that must be depreciated using the Alternative Depreciation System (ADS). This includes listed property used 50% or less for business. 4) Property for which taxpayer elected not to claim any special depreciation allowance. Qualified improvement property must meet the following tests: ) The improvement is to an interior portion of a building. ) The building is nonresidential real property. 3) The improvement is placed in service after the date the building was first placed in service. The following improvements are not qualified improvement property: ) The enlargement of a building. 08 ) An elevator or escalator. 3) The internal structural framework of a building. IRS Opinion: Heating, ventilation and air conditioning units installed on the exterior of a building or on its roof were not qualified leasehold improvement property since they were not installed to the interior of the building (CCA 03008). The same rationale will presumably apply to determinations regarding qualified improvement property. U Caution: While property eligible for 5-year depreciation as qualified leasehold improvement property or qualified retail improvement property also satisfies the requirements for qualified improvement property, property eligible for depreciation as qualified restaurant property may or may not meet these requirements [IRC Sec. 68(e)(7)(B)]. For example, qualified restaurant property, unlike qualified improvement property, can consist of an entire building. Thus, the tax professional must determine that a taxpayer s qualified restaurant property also meets the Section 68(k)(3) requirements for qualified improvement property to claim a bonus depreciation deduction for such property placed in service after December 3, 05. in 06 or 07 Replacement Page /08 On June, 07 00%, 80%, 60%, 40% or 0% apply to such property placed in service in 08 03, 04, 05, 06 or 07, respectively. property acquired or placed in service before September 8, 07 Original Use To qualify for the special (bonus) depreciation allowance, the asset must generally be new, rather than pre-owned (that is, original use must commence with the taxpayer) [IRC Sec. 68(k)(); Reg..68(k)-(b)(3)]. However: New property acquired after December 3, 007 for personal use and subsequently converted to business use meets the original use requirement. Capital expenditures to recondition or rebuild acquired or owned property satisfy the original use requirement. Assets that are reconditioned or rebuilt before the taxpayer buys them generally don t meet the original use test, but property containing used parts is not treated as reconditioned or rebuilt if the cost of the used parts is 0% or less of the property s total cost. Assets placed in service after December 3, 007 by a person and then sold to the taxpayer for leaseback to that person within three months after being placed in service will be treated as a new asset placed in service by the taxpayer on a date not earlier than the date it is used first by the lessee under the leaseback arrangement. Example: During the current tax year, Bobcat Company bought a used machine for $0,000 and spent $5,000 to recondition it. The $0,000 purchase price is ineligible for the special (bonus) depreciation allowance. The $5,000 additional cost to recondition the machine is eligible for the special (bonus) depreciation allowance, assuming all other requirements are also met. Favorable AMT Treatment Special depreciation applies for both regular tax and alternative minimum tax (AMT). In addition, there s no AMT adjustment for MACRS depreciation deductions on the property s remaining basis. [IRC Sec. 68(k)()(G)] N Observation: Claiming special depreciation for qualified assets effectively exempts them from AMT depreciation adjustments. Note: The IRS updated Forms 466 (Alternative Minimum Tax Corporations) and 65 (Alternative Minimum Tax Individuals) to reflect changes made in the PATH Act which provide that taxpayers who elect not to take special depreciation on qualified property will not be subject to an AMT adjustment if placed in service after 05. Long Production Period Property and Aircraft Qualified property for bonus depreciation includes long production period property and certain noncommercial aircraft placed in service before 0. Bonus depreciation rates of 50%, 40% or 30% apply to such property placed in service in 08, 09 or 00, respectively. U Caution: For long production period property, only the portion of an asset s basis that is allocable to costs incurred before 00 is eligible for the special depreciation allowance. [IRC Sec. 68(k)()(B)(ii)] 07 Long production period property. The property must meet the following requirements: [IRC Sec. 68(k)()(B)] ) It has a recovery period of at least 0 years or is tangible personal property used in the trade or business of transporting people or property. ) It is subject to the Section 63A uniform capitalization rules. 3) It has an estimated production period exceeding one year and an estimated production cost exceeding $,000,000. Noncommercial aircraft. The aircraft must () not be used in the trade or business of transporting people or property other than for agricultural or firefighting purposes, () be purchased and at the 07 Tax Year Depreciation Quickfinder Handbook -3

4 time of contract for purchase, the purchaser makes a nonrefundable deposit of 0% of the cost (or $00,000, if less) and (3) have an estimated production period exceeding four months and cost more than $00,000. [IRC Sec. 68(k)()(C)] U Caution: Long production period property that otherwise qualifies for special depreciation and that is placed in service before 0 qualifies for 30% special depreciation only to the extent of adjusted basis attributable to manufacture, construction or production before 00. [IRC Sec. 68(k)()(B)(ii)] 0% 07 Electing Out of the Special (Bonus) Depreciation Allowance A taxpayer can elect not to claim special depreciation for any class of property for any tax year [IRC Sec. 68(k)(7); Reg..68(k)-(e)]. The election not to claim special depreciation must be made for all additions within an entire class placed in service for the tax year. The election out of special depreciation is made by attaching a statement similar to that below to the tax return for the year it is to be effective. Generally, it must be made by the due date, including extensions, of the tax return for the tax year in which the qualified property is placed in service. Election Out of Special Depreciation Taxpayer elects under IRC Sec. 68(k)(7) to not claim the additional firstyear bonus depreciation deduction (the special depreciation allowance) for the following classes of property placed in service during the tax year ended [year-end]: [list property classes for which election is made]. Foregoing Special (Bonus) Depreciation Allowance to Claim Additional Credits Corporations may forego the special (bonus) depreciation allowance and instead elect to claim additional research or minimum tax credits. [IRC Sec. 68(k)(4)] 08 A corporation making the election foregoes the special (bonus) depreciation deductions and instead increases the limit on the use of research credits or minimum tax credits. The increases in the allowable credits are treated as refundable. The depreciation for qualified property is calculated for both regular tax and AMT purposes using the straight-line method in place of the method that would otherwise be used. This provision applies to years ending, and property placed in service, after March 3, 008 and before 00 (0 for certain long-lived assets). The election to forego the special depreciation allowance and instead increase the limit on certain credits is also available for assets placed in service in 0, 0, 03, 04 and 05 (0 06 for long production period property and certain aircraft) [IRC Sec. 68(k)(4)(D)]. The election can be made for Round Two property, Round Three property, Round Four property or Round Five property, which is property eligible for the special depreciation allowance solely because it meets the requirements under the extension of the special depreciation allowance for certain property placed in service after 00 (Round Two), 0 (Round Three), 03 (Round Four) or 04 (Round Five). However, corporations that have already made this election for an earlier year can elect to not apply the election to Round Two, Round Three, Round Four or Round Five property. Also, for Round Two, Round Three, Round Four or Round Five property, the limit on unused research credits cannot be increased by making this election. For any tax year ending after December 3, 05 (the computation year), the credit amount may not offset research credits and is limited to the lesser of () 50% of the Section 53(b) minimum tax credit for the first tax year ending after December 3, 05 or () the Section 53(b) minimum tax credit for the computation year determined by taking into account only the adjusted net minimum tax for tax years ending before January, 06 [IRC Sec. 68(k)(4)(B)(ii)]. The 05 PATH Act provides special phase-in rules for fiscal year corporations with tax years that begin in 05 and end in 06. See Rev. Proc , Rev. Proc , Rev. Proc , Rev. Proc and Rev. Proc for guidance on making the election. See also IRS Guidance on PATH Act Provisions on Page -7. Qualified Recycling and Biofuel Plant Property A 50% special (bonus) depreciation allowance applies to certain reuse and recycling property placed in service after August 3, 008 [IRC Sec. 68(m)], cellulosic biofuel plant property placed in service after October 3, 008 and before January 3, 03 and second generation biofuel plant property placed in service after January, 03 and before 07. [IRC Sec. 68(l)] Note: These provisions are separate from the special (bonus) depreciation allowance under IRC Sec. 68(k). Property qualifying under IRC Sec. 68(k) is not eligible for the special depreciation allowed under IRC Secs. 68(l) and 68(m). Qualified reuse and recycling property is any machinery and equipment (including software to operate the equipment but not buildings or real estate) which is used exclusively to collect, distribute or recycle qualified reuse and recyclable materials such as: Scrap plastic, glass, textiles, rubber or packaging. Recovered fiber. Scrap ferrous and nonferrous metals or electronic scrap (such as cathode ray tubes, flat panel screens, similar video display devices and central processing units). Qualified cellulosic biofuel plant property is property used to make cellulosic biofuel (any liquid fuel), including ethanol from cellulose, in the manner prescribed in IRC Sec. 68(l). Second generation biofuel is any liquid fuel derived by or from qualified feed stocks. [IRC Sec. 40(b)(6)(E)] Qualified Disaster Assistance Property An additional 50% special (bonus) depreciation allowance was available for qualified disaster assistance property placed in service after 007 in federally declared disaster areas for disasters declared after 007 and occurring before 00. [IRC Sec. 68(n)] Qualified disaster assistance property is property used in an active trade or business that is: ) MACRS property with a recovery period of 0 years or less, ) Computer software, 3) Water utility property, 4) Qualified improvement property, 5) Nonresidential real property or 6) Residential rental property. Qualified disaster assistance property must also meet the following requirements: ) Substantially all of the property s use must be in a federally declared disaster area. ) The property must rehabilitate property damaged, or replace property destroyed or condemned. 3) Its first use in the disaster area must begin with the taxpayer. 4) It must be acquired by the taxpayer by purchase on or after the disaster date, but only if no written binding contract for the acquisition was in effect before that date Tax Year Depreciation Quickfinder Handbook Replacement Page /08

5 30% rate instead of the 50% rate, or to revoke such an election [Reg..446-(e)()]. Requests to make or revoke an election on an untimely basis must be made under Reg , which requires the taxpayer to request a private letter ruling. See Special (Bonus) Depreciation on Page -. For these rules, special depreciation includes several provisions, as listed in the Special (Bonus) Depreciation Summary table below. Special (Bonus) Depreciation Summary Description IRC Sec. Applies to qualified property placed in service: All taxpayers 50% (or 00%) 68(k) During (40% for 08, 30% for 09) All taxpayers 30% 68(k) After 9/0/0 and before 5/6/03 All taxpayers 50% 68(k) After 5/5/03 and before //05 3,4 NY Liberty Zone 30% 400L After 9/0/0 and before //07 5 Gulf Opportunity Zone 50% 400N After 8/7/05 and before //08 6,7 During (80% for 03, 60% for 04, 40% for 05 and 0% for 06) Kansas Disaster Area 50% 400N After 5/4/07 and before //09 5 After /3/07 for disasters occurring Other Disaster Areas 50% 68(n) before 00 (see Qualified Disaster Assistance Property on Page -4) During During for for certain certain long-production property property (40% (80% for for 09, 04, 30% 60% for for 00). 05, [IRC 40% Sec. for 06 68(k)()(B)] and 0% for 07). [IRC Sec. 68(k)()(B)] As in effect before amendment in Before //06 for certain long-production property (before //07 if long-production property affected by Hurricanes Katrina, Rita or Wilma). [IRC Sec. 68(k)(); Announcement 006-9] 4 Taxpayers could elect to use 30% rate instead of 50%. 5 Before //0 for nonresidential real and residential rental property. 6 Before //09 for nonresidential real and residential rental property. 7 Before // for nonresidential real and residential rental property in certain counties and parishes that sustained significant damage. [IRC Sec. 400N(d)(6)] Example: Asta, Inc. (a calendar-year taxpayer) purchased a $50,000 computer on July 3, 06. The computer qualified for 50% special depreciation, which was claimed on Asta s 06 tax return filed in March 07. During November 08, Asta realizes that it would have been better off had it not claimed special depreciation on the computer in 06. Changing from claiming special depreciation to not claiming it is not an accounting method change because Asta is effectively trying to make a late election out of the special depreciation. Therefore, Asta cannot make this change on a Form 35. Instead, Asta must request a private letter ruling to make the change. Tangible Property Regulations and Reduced Filing Requirements for Certain Taxpayers For 04, taxpayers may need to file an accounting method change to comply with the tangible property regulations published on September 3, 03 (TD 9636). (See Tangible Property Regulations beginning on Page -4 for discussion of the regulations.) Automatic consent procedures are provided for amounts paid to acquire, produce or improve tangible property. Procedures are also provided for obtaining automatic consent to change to a reasonable method for self-constructed assets and to change to a permissible method for certain costs related to real property acquired through a foreclosure or similar transaction. Automatic consent procedures for changes in accounting for dispositions of tangible property, a late partial disposition election and a revocation of a general asset account election are also available. (See Rev. Proc. 04-7, Rev. Proc , Rev. Proc and Rev. Proc ) æ Practice Tip: A small business taxpayer (a business with total assets of less than $0 million or average annual gross receipts of $0 million or less for the prior three tax years) may make certain tangible property changes in methods of accounting by taking into account only amounts paid or incurred, and dispositions, in tax years beginning after December 3, 03. In addition, these small business taxpayers need not file Form 35 for their first tax year that begins after December 3, 03. (Rev. Proc. 05-0) N Observation: A small business taxpayer, as discussed in the preceding Practice Tip, should not be confused with a qualified small taxpayer, which qualifies for a reduced Form 35 filing requirement for certain automatic accounting method changes under Rev. Proc A qualified small taxpayer is a taxpayer with average annual gross receipts of less than or equal to $0 million for the three tax years preceding the year of change [Rev. Proc , Section 6.0(4)(b)]. The year of change is the first tax year the applicant (an entity, a person, or a separate and distinct trade or business of an entity or a person whose method of accounting is being changed) uses the proposed method of accounting, even if no affected items are taken into account for that year. Example: A calendar year taxpayer that has consistently capitalized certain building repair costs from 0 to 06 files a Form 35 in 07 to deduct these repair costs. The year of change is calendar year 07. For qualifying changes and filing requirements for a qualified small taxpayer, see the List of Automatic Changes in Rev. Proc (Sections through 3 of Rev. Proc ). Errors Corrected on an Amended Return Depreciation changes that are not accounting method changes are made on an amended return for the year being changed. Thus, these changes can be made only within the statute of limitations for the year being changed. Depreciation Changes Made on an Amended Return Tax Year Depreciation Quickfinder Handbook Replacement Page /08 Change Mathematical, calculation or posting errors. [Reg.446-(e)] Changing a depreciation method that has only been used on one return. Adjustment in the useful life of an asset that is not a MACRS asset, as long as it is not a change to or from a useful life that is specifically assigned by the Code [for example, the 36-month life assigned to depreciable computer software by IRC Sec. 67(f)()]. A change in an asset s placed-inservice date. Example A number is transposed when the preparer enters it on the tax return. In 06, taxpayer claims depreciation on a piece of equipment based on a seven-year recovery period, but the actual recovery period is five years. If the 07 return has not been filed, an amended 06 return can be filed to correct the error. A change in the useful life of an amortizable copyright asset that is not a Section 97 intangible. An asset was ordered and paid for in 06, but was not delivered and placed in service until 07. Any depreciation claimed in 06 would be erroneous and can be corrected by filing an amended return. In this situation, the taxpayer can also choose to file a Form 35 to request an accounting method change. See Method Used for Only One Year on Page 0-. If the taxpayer initiates the change, the placed-in-service date can be corrected by adjustments in the current and following tax years, rather than by filing amended returns. [Reg..446-(e)()(ii)(d)(5)(v)]

6 at that time Tax Cuts and Jobs Act of 07 PL 5-97 //7 What s New and Glossary Tab 3 Topics Tax Reform... Page 3- Tax Legislation... Page 3- Selected Tax Law Changes Affecting Business Assets... Page 3- Glossary... Page 3-3 Tax Reform At the time of this publication, Congress and the Administration were considering tax reform proposals related to U.S. individual and business taxation, international taxation and more. If enacted, these proposals may address depreciation and business property. However, the most significant tax legislation enacted recently, to provide relief to victims of hurricane-related disasters, does not impact the material in this Handbook. Tax Note: Cuts If tax and reform Jobs Act legislation of 07. is enacted, Enacted on Quickfinder December will, post a 07, table the of the Act key makes provisions significant on the changes Updates to page individual of its and website business taxes. Most provisions are effective beginning after 07. at quickfinder/quickfinder-updates/. See the Handbook Updates section of the Quickfinder website æ (tax.thomsonreuters.com/quickfinder) Practice Tip: Practitioners can stay for a table informed summarizing on the changing the Act s tax key landscape provisions. by following breaking tax news at Tax Legislation The following table identifies selected tax legislation enacted beginning in 009 that may impact 07 and later tax returns. Name of Act Public Law Number Date of Enactment Worker, Homeownership and Business Assistance PL -9 /6/09 Act of 009 Hiring Incentives to Restore Employment (HIRE) Act PL -47 3/8/0 Patient Protection and Affordable Care Act PL -48 3/3/0 Health Care and Education Reconciliation Act of PL -5 3/30/0 00 Small Business Jobs Act of 00 PL -40 9/7/0 Tax Relief Act of 00 PL -3 /7/0 Comprehensive 099 Taxpayer Protection and PL -9 4/4/ Repayment of Exchange Subsidy Overpayments Act of 0 (the 099 Act) American Taxpayer Relief Act of 0 PL -40 //3 Tax Increase Prevention Act of 04 PL 3-95 /9/4 Protecting Americans From Tax Hikes Act of PL 4-3 /8/5 05 (PATH Act) Disaster Tax Relief and Airport and Airway Extension Act of 07 PL /9/7 Selected Tax Law Changes Affecting Business Assets Applying to 07 and Previous Tax Years Item Effective Dates Page Provision in Effect for 06 Provision in Effect for 07 Business Property Energy Efficient Commercial Buildings Deduction Indian Reservation Property Shorter Recovery Periods Motorsports Entertainment Complexes Seven-Year Recovery Period Qualified Leasehold, Restaurant and Retail Improvement Property 5-Year Recovery Period Section 79 Election Can Be Revoked Section 79 Expansion and Inflation Adjustment Section 79 Expensing for Off-the-Shelf Software Section 79 Qualified Real Property Tax years beginning in such year. service before 07 service before 07 service before 07 Permanent for property placed in service after 04 Permanent for tax years beginning after A business can deduct, rather than capitalize and depreciate, all or part of the cost of energy efficient commercial building property placed in service before 07. [IRC Sec. 79D(h)] -4 Shortened recovery periods for both regular tax and AMT apply to qualified Indian reservation property placed in service before Motorsports entertainment complexes are depreciated over a sevenyear recovery period for property placed in service before 07. [IRC Sec. 68(e)(3)(C)(ii) and IRC Sec. 68(i)(5)] -, -, -3, -7, -, 7-, 7-9, 7-0 Qualified leasehold improvements, qualified restaurant property and qualified retail improvements are 5-year MACRS property. [IRC Sec. 68(e)(3)(E)] 5-8 For tax years beginning before 003, a Section 79 election could only be revoked with IRS consent. However, the ability to irrevocably revoke a Section 79 election without IRS consent for any property applies to tax years beginning after 00. [IRC Sec. 79(c)()] service after For tax years beginning in 05, the Section 79 deduction and qualifying property limits were $500,000 and $,000,000. [IRC Sec. 79(b)]. For tax years beginning after 05, these amounts are adjusted for inflation. The 06 limits are $500,000 and $,00,000 and air conditioning and heating units are eligible for expensing. Permanent for software placed in service in a tax year beginning after , -4 Off-the-shelf computer software is eligible for the Section 79 election if placed in service in a tax year beginning after 00. [IRC Sec. 79(d)()(A)(ii)] service after , 7- Taxpayers can claim the Section 79 deduction on up to $500,000 of qualified real property (qualified leasehold improvements, qualified restaurant property and qualified retail improvement property). [IRC Sec. 79(f)] in service before 07. in service before 07. in service before 07. Same as 06. Same as 06. The 07 limits are $50,000 and $,030,000 and air conditioning and heating units are eligible for expensing. Same as 06. Same as 06, but the deduction can be claimed on up to $50,000 of such property. Replacement Page /08 Continued on the next page 07 Tax Year Depreciation Quickfinder Handbook 3-

7 Selected Tax Law Changes Affecting Business Assets Applying to 07 and Previous Tax Years (Continued) Item Effective Dates Page Provision in Effect for 06 Provision in Effect for 07 Section 79 Qualified Zone Property Special (Bonus) Depreciation Allowance Special (Bonus) Depreciation Corporate Election to Accelerate Alternative Minimum Tax (AMT) Credits Instead Tax Credits Energy Efficient Homes Incremental Research Nonbusiness Energy Property Plug-in Electric Vehicles Two- and Four-Wheeled Vehicles Taxes and Rates Long-Term Capital Gains and Qualified Dividends Rate Net Investment Income Tax (NIIT) Tax years beginning in such year. service before 07 Property acquired and placed in service before 00 (before 0 for certain property) Property placed in service in (00 for certain property) Qualified new energy efficient homes acquired from an eligible contractor before 07 Qualified research expenditures incurred after 04 Qualified property placed in service in 05/06 Qualified two-wheeled vehicles acquired in 05/06; qualified fourwheeled vehicles acquired after An enterprise zone business that places qualified zone property (defined in IRC Sec. 397D) in service in an empowerment zone before 07 can increase its Section 79 deduction and qualifying property limits. [IRC Sec. 39(d) and IRC Sec. 397A] -, 6-7 The 50% special depreciation allowance is available for new qualified property additions through 07. For long-productionperiod property and certain aircraft, the placed-in service deadline is extended one year through 08. No AMT adjustment applies to property for which the special depreciation allowance is claimed. Beginning in 06, qualified property includes qualified improvement property, whether or not subject to a lease, and there is no requirement that the improvement be placed in service more than three years after the building. Also, certain trees, vines and plants bearing fruit or nuts are electively eligible for special depreciation when planted or grafted, rather than when placed in service. Note: For 05 07, the Section 80F limit on depreciation for passenger autos is increased by $8,000 for qualified property. -4 The election to forego the special depreciation allowance and instead increase the limit on AMT credits is available for assets placed in service in 06. [IRC Sec. 68(k)(4)] 07 (and some months in 08 for fiscal year taxpayers) 7-8 A credit is available to eligible contractors who construct or manufacture homes that meet certain energy efficiency standards. [IRC Sec. 45L(g)] -9 A credit is available for the cost of increasing research activities. (IRC Sec. 4) Also, beginning in 06, eligible small businesses ($50 million or less in gross receipts) may claim the credit against AMT, and the credit can be utilized by certain small businesses against employer payroll tax (FICA) liability. 7-8 The $500 lifetime credit for qualified energy efficiency improvements and expenditures to a taxpayer s principal residence is available for property placed in service in (IRC Sec. 5C) 6- A credit is available for two-wheeled plug-in electric vehicles purchased in 05 or 06. Taxpayers who purchase a qualified four-wheeled plug-in electric vehicle after 009 are eligible for a credit of up to $7,500 (IRC Sec. 30D). See Credits for Plug-In Vehicles on Page 6- for applicable rules and a table of certified vehicles. 04 and later 8- The 5% maximum rate on long-term capital gains and qualified dividends applies to the extent taxable income does not exceed $45,050 (Single), $44,000 (HOH), $466,950 (MFJ or QW) and $33,475 (MFS). When taxable income exceeds those amounts, a 0% rate applies to long-term capital gains and qualified dividends (to the lesser of such gains and dividends or taxable income in excess of the threshold amount). These rates apply for regular tax and AMT. [IRC Sec. (h)] 04 and later 8-6 Individuals with modified AGI (MAGI) over $00,000 ($50,000 if MFJ or QW; $5,000 if MFS) are subject to a 3.8% additional tax on NII (or if less, on the excess of MAGI over the threshold amount). NII generally includes interest, dividends, royalties, rents, gross income from a passive trade or business and net gain from property dispositions (other than most property held for use in a nonpassive trade or business). NII is reduced by deductions allocable to such income. The tax also applies to estates and trusts. (IRC Sec. 4) in service before 07. Same as 06. for property acquired or placed in service on or before September 7, 07. For property acquired and placed in service after that date, the special depreciation allowance is increased to 00% and applies to both new and used property. The allowance phases down to 80%, 60%, 40% and 0% for property placed in service in 03, 04, 05 and 06, respectively. Same as 06. property was required to be acquired before 07. Same as 06. in service in 05 or 06. Expired provision (for twowheeled vehicles). Qualifying in service in 05 or 06. [IRC Sec. 30D(g)(3)(E)(ii)] Same as 06 for four-wheeled vehicles. The 5% maximum rate on longterm capital gains and qualified dividends applies to the extent taxable income does not exceed $48,400 (Single), $444,550 (HOH), $470,700 (MFJ or QW) and $35,350 (MFS). When taxable income exceeds those amounts, a 0% rate applies as explained in the previous column. Same as 06. Unlike the longterm capital gain and qualified dividend taxable income threshold amounts referenced above, the NII tax MAGI threshold amounts are not adjusted for inflation Tax Year Depreciation Quickfinder Handbook Replacement Page /08