What is Bonus Depreciation and Impact on Like-Kind Exchanges (LKE)
Bonus depreciation represents a government incentive to acquire new capital assets and certain real property improvements with a depreciation recovery period of 20 years or less. Bonus depreciation taken on Federal tax returns is in addition to Section 179 depreciation and is always taken in the first year the depreciable asset is placed in service.
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 provides 100 percent bonus depreciation for qualifying investments placed into service after September 8, 2010 through December 31, 2011. In addition, Section 179 of the IRS tax code increased the depreciation levels of qualifying capital assets acquired during the tax year. The 2011 deduction limit was increased from $250,000 to $500,000 with a limit of $2,000,000 up from $800,000. The 100% bonus depreciation applies once the $500,000 limit is reached.
Depreciation reduces a companies income tax and represents an incentive to acquire qualifying capital assets. Both Section 179 and bonus depreciation help small businesses acquire equipment including business vehicles with a gross weight in excess of 6,000 lbs, computers, software, office furniture, office equipment, manufacturing equipment and tangible personal property. Eligible real property includes new qualified leasehold and retail improvements (other than structural improvements) and qualified restaurant property. Bonus depreciation does not apply to commercial and residential real property with a recovery period in excess of 20 years.
Like-Kind Exchanges (LKE)
The Joint Committee on Taxation estimates the tax expenditure for like-kind exchanges or 1031 exchanges is $15.6 billion for the revenue period 2010 - 2014. This is up from the estimate period 2009 - 2013 of $13.0 billion yet lower than the expenditure estimated for 2008 - 2012 of $21.2 billion. The decrease could be a result of the 100% bonus depreciation and Section 179 limit increases.
Bonus depreciation reduces the use of 1031 exchanges because the cost of the new capital asset can be deducted from income rather than be depreciated over the years. Consequently, the capital gain triggered by the sale of the relinquished or old property could be offset by 100% depreciation cost of the replacement property. In states that do not follow Federal depreciation rules, 1031 exchanges may be justified to defer state capital gain taxes.
There is indication that depreciable livestock (horses, cattle, hogs, sheep, goats, mink and other fur bearing animals) is eligible for bonus depreciation. Depreciable livestock purchased for breeding should qualify given livestock was not previously bred. If previously bred, the original use requirement for bonus depreciation would be violated.
Livestock is depreciated under one of four farm property recovery periods for hogs, cattle either dairy or breeding, goats, sheep, mink, and horses either breeding or walking less than or greater than 12 years old and racing horses more than two years old: