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Bonus Depreciation Ending
Investors should check with their tax advisors to make sure they have maximized there Bonus Deprecation before this valuable deduction ends. Read on for more details.
One of the more valuable tools used to increase cash flow on an investment is depreciation. The House and Senate passed the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTA) in May of 2003. The intent of the Act is to provide incentives to stimulate investment and consumption. The JGTA represents an acceleration and extension of tax reductions enacted in 2001.
There are several provisions made in the JGTA, but one of them directly relating to commercial real estate is “Title II: Growth Incentives For Business: Section 201: Increase and extension of Bonus Depreciation”
Section 201 provides for an increase and extension of the 30% accelerated depreciation of all equipment and Leasehold improvements as enacted in March of 2002. The 30% bonus depreciation was increased to an amount equal to 50% of the cost of the improvements that can be taken in the first year that the improvements were made, in addition to the regular straight-line depreciation (1/39th).
The “close out” provisions of current law remain in effect, so remaining balances may be deducted at the termination of the lease. The 50% bonus depreciation provision applies only to leasehold improvements that were made after May 5, 2003 and before January 2005. The 30% bonus depreciation applies to leasehold improvements made prior to May 6, 2003 and after September 11, 2001.
When using the Bonus Depreciation for Leasehold improvements, the building must have been “in service” (have been leased, but not necessarily to the Lessee that the property is currently leased to) for at least three (3) years prior to taking the bonus depreciation and only the person paying for the improvements may take that depreciation; Ex: An owner may not take the bonus depreciation for Leasehold improvements paid for by the Tenant and vice versa. There are limited circumstances where a property will remain eligible for bonus depreciation until January 2006.
The Bonus Depreciation does not apply to residential income or owner/user properties. Hopefully most of you remembered to use this accelerated depreciation in your 2004 tax reporting; please consider this a reminder if you did not. Additionally; it is possible that your property may qualify for one of the “limited circumstances” that allows it to remain eligible for the bonus depreciation through January of 2006.
As always, the above information should be discussed carefully with your tax professional to weigh the advantages or possible disadvantages of taking such accelerated depreciation.