The 2003 Tax Act increases the special depreciation allowance from 30% to 50%
If you decide to use the special depreciation allowance (30% or 50%) on your
3-year rental inventory property then you must use it for "all" the 3-year
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Last year, I wrote two articles
on how the depreciation rules affect Rent to Own inventory
property and non-rental inventory property under the titles, "Understanding Rental
Depreciation" and "Maximizing Rental
Inventory Depreciation". It might be good to review them because there
are some new rules for 2003 in which you might be interested.
The 2003 Tax Act increases the special depreciation allowance
from 30% to 50% for certain qualifying property. To qualify for
the 50% special depreciation allowance, property must be
acquired after May 5, 2003 and placed in service before January
The 30% special depreciation allowance continues to be
available for qualifying property acquired and placed in service
prior to May 6, 2003. In addition, the 2003 Tax Act extends the
acquisition dates for property qualifying for the 30% special
depreciation allowance from September 11, 2004, to January 1,
To be treated as "qualified property," an asset must fall
within one of the four asset classes listed below and meet the
original use, timely acquisition, and timely placed-in-service
- Class #1 – Modified Accelerated Cost Recovery System (MACRS)
recovery property with a recovery period of 20 years of
- Class #2 – Computer software
- Class #3 – Water utility property
- Class #4 - Leasehold improvements – only nonresidential
property under certain conditions.
You can elect to use the 30% special depreciation allowance
instead of the 50% special depreciation allowance for all
property in a class placed in service during the year or you can
elect not to claim the special depreciation allowance for all
property in a class placed in service during the year. This
means they don’t allow you to claim the 30% rate on one item and
the 50% rate on another item in the same class. Nor can you
claim both the 50% rate and the 30% rate for the same property.
Here is a cautionary note because it gets even trickier. The
four classes mentioned above define "qualified property". The
"classes" of property referred to in the context of "how" to use
the special depreciation allowance in the above paragraph relate
to "class-lives" such as 3-year; 5-year; 7-year, etc. For
instance, if you decide to use the special depreciation
allowance (30% or 50%) on your 3-year rental inventory property
then you must use it for "all" the 3-year property. You are not
allowed to elect and not elect within a class. You can, at the
same time, decide to elect not to use the bonus depreciation for
your 7-year property, but that means "all" 7-year property.
To figure depreciable basis for purposes of the 30% or 50%
special depreciation allowance, multiply the property’s cost or
other basis by the percentage of business use and reduce that
amount by any 179 expense deduction.
Keep in mind that rental property does not qualify for the
179 election to expense deduction. So, if you decided to use the
50% rate on your new, qualified rental property which has a
class life of 3 years, the following would be an example of how
|Qualified rental inventory
|Bonus depreciation (50% x $50,000)
Apply the regular 3-yr 200% Double-Declining Balance Method
or 33.33 depreciation rate to the remaining basis of $25,000.
33.33% x $25,000 = $8,333
The total depreciation deduction for rental inventory
|Bonus depreciation (50%)
|Total depreciation deduction
This extra deduction could save some big tax bucks at the end
of the year.
New Code Section 179 rules
The news here is that the new law contains several changes
relating to the
Section 179 deduction for tax years beginning after 2002 and
before 2006. The most relevant changes are that the maximum
deduction is increased from $25,000 to $100,000, and the
investment limit is increased from $200,000 to $400,000.
Publication 946 "How to Depreciate Property"
I’ve hit the highlights, but it would be wise to read
Pub 946 or check with your tax advisor to make sure you
follow all the rules. In the Table of Contents, find Section 3,
"Claiming the Special Depreciation Allowance". It will provide
all the details.
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