By Mike Antich
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853) was signed into law by President Obama on Dec. 17, 2010. The legislation includes an extension of the Small Business Jobs and Credit Act of 2010's "bonus depreciation" allowance through the end of 2011, and increases that amount from 50 percent to100 percent. H.R. 4853 temporarily provides 100-percent bonus depreciation for investments, such as company vehicles, placed in service after Sept. 8, 2010 through Dec. 31, 2011. (Bonus depreciation returns to 50 percent for investments placed in service after Dec. 31, 2011 through Dec. 31, 2012.)
Under the new H.R. 4853 bonus depreciation schedule, businesses may immediately write-off 100-percent of the cost of depreciable property acquired in the same calendar year, providing the equipment is used in the U.S. The equipment must be new, and original use of the equipment must commence with the taxpayer claiming the depreciation bonus between Sep. 8, 2010 and Jan. 1, 2012.
Also, to be eligible for the 100-percent bonus depreciation, the equipment must be depreciable under the Modified Accelerated Cost Recovery System (MACRS) and have a depreciation recovery period of 20 years or less. Typically, businesses recover the cost of equipment and other capital investments through specified MACRS depreciation deductions. Under this system, cars have a five-year life and the recovery deductions by year are 20 percent, 32 percent, 19.2 percent, 11.5 percent, and 5.8 percent. Allowing companies to depreciate 100-percent of the purchase price in the first year lowers a company's tax liability for the year in which new equipment (such as a fleet vehicle) is put in service.
In addition to the 100-percent bonus depreciation, there are several other fleet-related provisions in H.R. 4853:
Biodiesel and renewable diesel tax credits. The law extends through 2011 the $1 per gallon production tax credit for biodiesel. In addition, it retroactively reinstates the biodiesel tax incentive for 2010. The bill also extends through 2011 the $1 per gallon production tax credit for diesel created from biomass.
Ethanol tax credit. The law extends through 2011 the per-gallon tax credits and outlay payments for ethanol.
Alternative vehicle refueling property tax credit. The bill extends through 2011 the 30-percent investment tax credit for alternative-vehicle refueling property.
Sixth Time this Decade
H.R. 4853 is the sixth time this decade that first-year bonus depreciation has been used as an economic stimulus. It was first introduced in March 2002, after the terrorist attacks of Sept. 11, 2001. At that time, Congress passed H.R. 3090, known as the Economic Security and Recovery Act of 2001, which provided a 30-percent bonus depreciation for a three-year period. In May 2003, the Jobs and Growth Tax Relief Reconciliation Act increased first-year bonus depreciation to 50 percent. This temporary change in the tax code expired Jan. 1, 2005. In 2008 and 2009, Congress temporarily allowed businesses to recover the costs of capital expenditures faster than the current depreciation schedule. In September 2010, the Small Business Jobs Act (H.R. 5297) added an additional year of 50-percent bonus depreciation for qualifying property purchased and placed in service in 2010.
Economists rate bonus depreciation as one of the most productive economic stimulus initiatives. The Institute for Policy Innovation estimated every tax dollar dedicated to accelerated depreciation results in approximately $9 of GDP growth.
Critics argue bonus depreciation will not substantially benefit commercial fleets in the long run because it is quickly recaptured when a vehicle is remarketed. If you resell an asset fairly rapidly, as do commercial fleets, you give back the bonus depreciation in the form of recapture. However, bonus depreciation provision benefits fleets with long-life assets, such as trucks, off-road inventory, and other specialty equipment.
"One-hundred percent depreciation does provide a bigger benefit for those fleets that hold assets for a longer period of time. However, a company that owns its vehicles would have to give back only a portion, not all of the 100-percent depreciation by recapture. A fleet that holds a vehicle for three years, for example, could depreciate $16,000 in the first year. This compares to $10,910 over three years (IRS Rev. Proc. 2010-18). Recapture depends on the value of the vehicle when remarketed," said Pat O'Connor, president of Kent & O'Connor, the legislative counsel for the NAFA Fleet Management Association. "Whether bonus depreciation for an owned fleet provides a tax advantage with respect to the company's overall capital investment strategy needs to be addressed on a case-by-case basis."
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