3.   Claiming the Special Depreciation Allowance

Introduction

You can take a special depreciation allowance to recover part of the cost of qualified property (defined next), placed in service during the tax year. The allowance applies only for the first year you place the property in service. For qualified property placed in service in 2014, you can take an additional 50% special allowance. The allowance is an additional deduction you can take after any section 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service.

This chapter explains what is qualified property. It also includes rules regarding how to figure an allowance, how to elect not to claim an allowance, and when you must recapture an allowance.

Corporations can elect to accelerate certain minimum tax credits in lieu of claiming the special depreciation allowance for eligible qualified property. See Election to Accelerate Certain Credits in Lieu of the Special Depreciation Allowance , later.

See chapter 6 for information about getting publications and forms.

What Is Qualified Property?

Your property is qualified property if it is one of the following.

  • Qualified reuse and recycling property.

  • Qualified second generation biofuel plant property.

  • Certain qualified property acquired after December 31, 2007.

The following discussions provide information about the types of qualified property listed above for which you can take the special depreciation allowance.

Qualified Reuse and Recycling Property

You can take a 50% special depreciation allowance for qualified reuse and recycling property. Qualified reuse and recycling property is any machinery or equipment (not including buildings or real estate), along with any appurtenance, that is used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials (as defined in section 168(m)(3)(B) of the Internal Revenue Code). Qualified reuse and recycling property also includes software necessary to operate such equipment. The property must meet the following requirements.

  • The property must be depreciated under MACRS.

  • The property must have a useful life of at least 5 years.

  • The original use of the property must begin with you after August 31, 2008.

  • You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) after August 31, 2008, with no binding written contract for the acquisition in effect before September 1, 2008.

  • The property must be placed in service for use in your trade or business after August 31, 2008.

Excepted Property

Qualified reuse and recycling property does not include any of the following.

  • Any rolling stock or other equipment used to transport reuse or recyclable materials.

  • Property required to be depreciated using the Alternative Depreciation System (ADS). For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies , in chapter 4.

  • Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies.

  • Property for which you elected not to claim any special depreciation allowance (discussed later).

  • Property placed in service and disposed of in the same tax year.

  • Property converted from business use to personal use in the same tax year acquired. Property converted from personal use to business use in the same or later tax year may be qualified reuse and recycling property.

Qualified Second Generation Biofuel Plant Property

You can take a 50% special depreciation allowance for qualified second generation biofuel plant property (as defined in section 40(b)(6)(E) of the Internal Revenue Code). The property must meet the following requirements.

  1. The property is used in the United States solely to produce second generation biofuel.

  2. The original use of the property must begin with you after December 20, 2006.

  3. You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) after December 20, 2006, with no binding written contract for acquisition in effect before December 21, 2006.

  4. The property must be placed in service for use in your trade or business or for the production of income after January 2, 2013, and before January 1, 2015.

Special Rules

Sale-leaseback.   If you sold qualified second generation biofuel plant property you placed in service after October 3, 2008, and leased it back within 3 months after you originally placed it in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback.

  The property will not qualify for the special allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before December 21, 2006.

Syndicated leasing transactions.   If qualified second generation biofuel plant property is originally placed in service by a lessor after October 3, 2008, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale.

  Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of sale if the property is sold within 3 months after the final unit is placed in service and the period between the times the first and last units are placed in service does not exceed 12 months.

Excepted Property

Qualified second generation biofuel plant property does not include any of the following.

  • Property placed in 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. Property converted from personal use to business use in the same or later tax year may be qualified cellulosic biomass ethanol plant property.

  • Property required to be depreciated using the Alternative Depreciation System (ADS). For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies , in chapter 1.

  • Property any portion of which is financed with the proceeds of any obligation the interest on which is exempt from tax under section 103 of the Internal Revenue Code.

  • Property for which you elected not to claim any special depreciation allowance (discussed later).

  • Property for which a deduction was taken under section 179C for certain qualified refinery property.

  • Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies.

Certain Qualified Property Acquired After December 31, 2007

You can take a 50% special depreciation deduction allowance for certain qualified property acquired after December 31, 2007. Your property is qualified property if it meets the following requirements.

  1. It is one of the following types of property.

    1. Tangible property depreciated under MACRS with a recovery period of 20 years or less.

    2. Water utility property.

    3. Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS.)

    4. Qualified leasehold improvement property (defined under Qualified leasehold improvement property, later).

  2. You must have acquired the property after December 31, 2007, with no binding written contract for the acquisition in effect before January 1, 2008.

  3. The property must be placed in service for use in your trade or business or for the production of income before January 1, 2015 (before January 1, 2016, for certain property with a long production period and certain aircraft (defined under Long Production Period Property see Long Production Period Property and Noncommercial Aircraft see Noncommercial Aircraft, later)).

  4. The original use of the property must begin with you after December 31, 2007.

  5. It is not excepted property (explained later in Excepted property).

Qualified leasehold improvement property.    Generally, this is any improvement to an interior part of a building that is nonresidential real property, if all the following requirements are met.
  • The improvement is made under or according to a lease by the lessee (or any sublessee) or the lessor of that part of the building.

  • That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part.

  • The improvement is placed in service more than 3 years after the date the building was first placed in service by any person.

  • The improvement is section 1250 property. See chapter 3 in Publication 544, Sales and Other Dispositions of Assets, for the definition of section 1250 property.

  However, a qualified leasehold improvement does not include any improvement for which the expenditure is attributable to any of the following.
  • The enlargement of the building.

  • Any elevator or escalator.

  • Any structural component benefiting a common area.

  • The internal structural framework of the building.

  Generally, a binding commitment to enter into a lease is treated as a lease and the parties to the commitment are treated as the lessor and lessee. However, a lease between related persons is not treated as a lease.

Related persons.   For this purpose, the following are related persons.
  1. Members of an affiliated group.

  2. An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant.

  3. A corporation and an individual who directly or indirectly owns 80% or more of the value of the outstanding stock of that corporation.

  4. Two corporations that are members of the same controlled group.

  5. A trust fiduciary and a corporation if 80% or more of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust.

  6. The grantor and fiduciary, and the fiduciary and beneficiary, of any trust.

  7. The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts.

  8. A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization.

  9. Two S corporations, and an S corporation and a regular corporation, if the same persons own 80% or more of the value of the outstanding stock of each corporation.

  10. A corporation and a partnership if the same persons own both of the following.

    1. 80% or more of the value of the outstanding stock of the corporation.

    2. 80% or more of the capital or profits interest in the partnership.

  11. The executor and beneficiary of any estate.

Long Production Period Property

To be qualified property, long production period property must meet the following requirements.

  • It must meet the requirements in (1)-(5).

  • The property has a recovery period of at least 10 years or is transportation property. Transportation property is tangible personal property used in the trade or business of transporting persons or property.

  • The property is subject to section 263A of the Internal Revenue Code.

  • The property has an estimated production period exceeding 1 year and an estimated production cost exceeding $1,000,000.

Noncommercial Aircraft

To be qualified property, noncommercial aircraft must meet the following requirements.

  • It must meet the requirements in (2)-(5).

  • The aircraft must not be tangible personal property used in the trade or business of transporting persons or property (except for agricultural or firefighting purposes).

  • The aircraft must be purchased (as discussed under Property Acquired by Purchase in chapter 2) by a purchaser who at the time of the contract for purchase, makes a nonrefundable deposit of the lesser of 10% of the cost or $100,000.

  • The aircraft must have an estimated production period exceeding four months and a cost exceeding $200,000.

Special Rules

Sale-leaseback.   If you sold qualified property you placed in service after December 31, 2007, and leased it back within 3 months after you originally placed in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback.

  The property will not qualify for the special depreciation allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before January 1, 2008.

Syndicated leasing transactions.   If qualified property is originally placed in service by a lessor after December 31, 2007, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale.

  Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of the last sale if the property is sold within 3 months after the final unit is placed in service and the period between the time the first and last units are placed in service does not exceed 12 months.

Excepted Property

Qualified property does not include any of the following.

  • Property placed in service and disposed of in the same tax year.

  • Property converted from business use to personal use in the same tax year acquired. Property converted from personal use to business use in the same or later tax year may be qualified property.

  • Property required to be depreciated under the Alternative Depreciation System (ADS). This includes listed property used 50% or less in a qualified business use. For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies , in chapter 4.

  • Qualified restaurant property (as defined in section 168(e)(7) of the Internal Revenue Code).

  • Qualified retail improvement property (as defined in section 168(e)(8) of the Internal Revenue Code).

  • Property for which you elected not to claim any special depreciation allowance (discussed later).

  • Property for which you elected to accelerate certain credits in lieu of the special depreciation allowance (discussed next).

Election to Accelerate Certain Credits in Lieu of the Special Depreciation Allowance

An election made by a corporation to claim pre-2006 unused minimum tax credits in lieu of claiming the special depreciation allowance for either its first tax year ending after March 31, 2008, its first tax year ending after December 31, 2008, or its first tax year ending after December 31, 2010, continues to apply to round 3 extension property (as defined in section 168(k)(4)(J)), unless the corporation made an election not to apply the section 168(k)(4) election to round 3 extension property for its first tax year ending after December 31, 2010. For 2014, round 3 extension property generally is long production period and noncommercial aircraft if acquired after March 31, 2008, and placed in service after December 31, 2013, but before January 1, 2015.

An election to claim pre-2006 unused minimum tax credits in lieu of claiming the special depreciation allowance made by a corporation for either its first tax year ending after March 31, 2008, its first tax year ending after December 31, 2008, its first tax year ending after December 31, 2010, or for its first tax year ending after December 31, 2012, continues to apply to round 4 extension property (as defined in section 168(k)(4)(K)), unless the corporation makes an election not to apply the section 168(k)(4) election to round 4 extension property for its first year ending after December 31, 2013. If a corporation did not make a section 168(k)(4) election for either its first tax year ending after March 31, 2008, its first tax year ending after December 31, 2008, its first tax year ending after December 31, 2010, or its first tax year ending after December 31, 2012, the corporation may elect for its first tax year ending after December 31, 2013, to claim pre-2006 unused minimum tax credits in lieu of claiming the special depreciation allowance for only round 4 extension property.

If you make an election to accelerate these credits in lieu of claiming the special depreciation allowance for eligible property, you must not take the 50% special depreciation allowance for the property and must depreciate the basis in the property under MACRS using the straight line method. See Which Depreciation Method Applies in chapter 4.

Once made, the election cannot be revoked without IRS consent.

Additional guidance.   For additional guidance on the election to accelerate the minimum tax credit in lieu of claiming the special depreciation allowance, see Form 8827, Credit for Prior Year Minimum Tax — Corporations, and related instructions.

  Additional guidance regarding the election to accelerate the minimum tax credit in lieu of claiming the special depreciation allowance for round 4 extension property may also be available in later Internal Revenue Bulletins available at www.irs.gov/irb.

How Much Can You Deduct?

Figure the special depreciation allowance by multiplying the depreciable basis of qualified reuse and recycling property, qualified second generation biofuel plant property, and certain qualified property acquired after December 31, 2007, by 50%.

For qualified property other than listed property, enter the special allowance on Form 4562, Part II, line 14. For qualified property that is listed property, enter the special allowance on Form 4562, Part V, line 25.

If you place qualified property in service in a short tax year, you can take the full amount of a special depreciation allowance.

Depreciable basis.   This is the property's cost or other basis multiplied by the percentage of business/investment use, reduced by the total amount of any credits and deductions allocable to the property.

  The following are examples of some credits and deductions that reduce depreciable basis.
  • Any section 179 deduction.

  • Any deduction for removal of barriers to the disabled and the elderly.

  • Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services.

  • Basis adjustment to investment credit property under section 50(c) of the Internal Revenue Code.

  For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code.

  For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1. For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1.

Depreciating the remaining cost.   After you figure your special depreciation allowance for your qualified property, you can use the remaining cost to figure your regular MACRS depreciation deduction (discussed in chapter 4 ). Therefore, you must reduce the depreciable basis of the property by the special depreciation allowance before figuring your regular MACRS depreciation deduction.

Example.

On November 1, 2014, Tom Brown bought and placed in service in his business qualified property that cost $450,000. He did not elect to claim a section 179 deduction. He deducts 50% of the cost ($225,000) as a special depreciation allowance for 2014. He uses the remaining $225,000 of cost to figure his regular MACRS depreciation deduction for 2014 and later years.

Like-kind exchanges and involuntary conversions.   If you acquire qualified property in a like-kind exchange or involuntary conversion, the carryover basis of the acquired property is eligible for a special depreciation allowance. After you figure your special allowance, you can use the remaining carryover basis to figure your regular MACRS depreciation deduction. In the year you claim the allowance (the year you place in service the property received in the exchange or dispose of involuntarily converted property), you must reduce the carryover basis of the property by the allowance before figuring your regular MACRS depreciation deduction. See Figuring the Deduction for Property Acquired in a Nontaxable Exchange , in chapter 4 under How Is the Depreciation Deduction Figured . The excess basis (the part of the acquired property's basis that exceeds its carryover basis) is also eligible for a special depreciation allowance.

How Can You Elect Not To Claim an Allowance?

You can elect, for any class of property, not to deduct any special depreciation allowances for all property in such class placed in service during the tax year.

To make an election, attach a statement to your return indicating what election you are making and the class of property for which you are making the election.

When to make election.   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service.

  However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Attach the election statement to the amended return. On the amended return, write “Filed pursuant to section 301.9100-2.

Revoking an election.   Once you elect not to deduct a special depreciation allowance for a class of property, you cannot revoke the election without IRS consent. A request to revoke the election is a request for a letter ruling.

If you elect not to have any special depreciation allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation.

When Must You Recapture an Allowance?

When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. See When Do You Recapture MACRS Depreciation in chapter 4 or more information.

Recapture of allowance deducted for qualified GO Zone property.   If, in any year after the year you claim the special depreciation allowance for qualified GO Zone property (including specified GO Zone extension property), the property ceases to be used in the GO Zone, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance. For additional guidance, see Notice 2008-25 on page 484 of Internal Revenue Bulletin 2008-9 available at www.irs.gov/irb/2008-09_IRB/index.html.

Qualified cellulosic biomass ethanol plant property, qualified cellulosic biofuel plant property, and qualified second generation biofuel plant property.   If, in any year after the year you claim the special depreciation allowance for any qualified cellulosic biomass ethanol plant property, qualified cellulosic biofuel plant property, or qualified second generation biofuel plant property, the property ceases to be qualified cellulosic biomass ethanol plant property, qualified cellulosic biofuel plant property, or qualified second generation biofuel plant property, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance.

Recapture of allowance for qualified Recovery Assistance property.   If, in any year after the year you claim the special depreciation allowance for qualified Recovery Assistance property, the property ceases to be used in the Kansas disaster area, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance. For additional guidance, see Notice 2008-67 on page 307 of Internal Revenue Bulletin 2008-32 available at www.irs.gov/irb/2008-32_IRB/index.html.

Recapture of allowance for qualified disaster assistance property.   If, in any year after the year you claim the special depreciation allowance for qualified disaster assistance property, the property ceases to be used in the applicable disaster area, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance.

  For additional guidance, see Notice 2008-67 on page 307 of Internal Revenue Bulletin 2008-32.


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