Archive for March 1st, 2011

As you’re probably aware, bonus depreciation is back and better than ever. Qualified assets placed in service after September 8, 2010 are eligible for 100% first-year expensing. Nice deal, right?

Logically, this may seem like the perfect time to pick up that sweet Canyonero you’ve been eyeing up to help lug inventory to the ol’ cracker factory.

Not so fast…

The IRS limits depreciation on certain “luxury automobiles” under Section 280F. The purpose is to restrict depreciation otherwise allowable under Section 168 for normal business assets.

On Tuesday, the IRS issued Revenue Procedure 2011-21, which sets the annual depreciation limits for these luxury autos. For 2011, if you elect to apply the bonus depreciation rules, instead of getting a 100% deduction for your shiny new $100,000 ride, you’re limited to $11,060 in depreciation in year 1.

In future years, at first glance you would be entitled to $4,900 in depreciation in year 2, $2,950 in year 3, and $1,775 for each succeeding year until the asset is either fully depreciated or disposed of.

Now, what do I mean by “at first glance?”

Well, if you were to read Revenue Procedure 2011-21 closely, you would see a sentence that reads as follows:

The Service intends to issue additional guidance addressing the interaction between the 100 percent additional first year depreciation deduction and Section 280F(a) for the taxable years subsequent to the first taxable year. (emphasis added)

So what’s that all about? As best I can guess, the IRS has realized that they’ve created a sticky situation in years 2 through 6 for taxpayers who purchase a qualifying auto in 2011 and elect to take the maximum 100% first-year depreciation limited to the $11,060 discussed above.

See, in each year a luxury auto is depreciated, the deduction is limited to the lesser of the Section 280F limitation or the depreciation that would have been computed under Section 168 (normal depreciation.)

So if you elected bonus depreciation on that $100K Canyonero, your deduction in year 1 would be limited to $11,060, the lesser of the Section 280F limit and the depreciation allowable under Section 168 of $100,000 (100% of the cost for a qualifying bonus asset).

For years 2-6, the depreciation would again be limited to the lesser of the Section 280F limitations for each year (listed above) and the amount allowed under Section 168, or $0.

That’s right, zero. Remember, in this hypothetical, we elected under Section 168 to apply the first year bonus depreciation rules. So under that provision, all the allowable depreciation is taken in year 1, with nothing remaining for subsequent years. The fact that Section 280F limits the year 1 depreciation has no bearing on what the depreciation would be for years 2-6 would be under the normal rules. As a result, in those years, you would receive no depreciation deduction, before finally depreciating the entire remaining basis of the car in year 7 under Section 280F’s catch-up rule.

Now this deal’s not looking so great, is it? For your $100,000 purchase, you get a $11,060 depreciation deduction in year 1, then nothing until year 7.

Of course, this result could be avoided by electing out of bonus depreciation, but that election would apply to all 5-year assets placed in service in 2011, thereby defeating the purpose of one of the nicest business tax incentives to be offered up by the IRS in some time.

Clearly, Congress did not intend for this result when they added the 100% bonus rules, but until the promised advice shows up, it would appear we’re stuck with it.

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Maybe it’s the quarter of a billion dollars he’s amassed while admittedly using steroids. Or perhaps it’s the fact that he’s rumored to have a portrait of himself as a centaur hanging above his bed.

Or maybe, just maybe, it’s the fact that TV cameras caught this timeless image of him being hand-fed popcorn by Cameron Diaz during the Super Bowl; A-Rod enjoying a mid-game snack in the most A-Rod way possible.

Whatever the reason, there’s no denying that Bostonians, many baseball fans, everyone living outside of the Five Boroughs view Alex Rodriquez as the embodiment of all that’s wrong with the modern athlete. And now, for reasons entirely removed from the baseball diamond, A-Rod’s NYC neighbors are turning against him as well.

 So what’s sparked this Big Apple backlash?

The Yankee third baseman will soon move into a $6 million, 5 bedroom luxury West Side penthouse. A-Rod’s property tax bill? A paltry $1,150 for each of the next 10 years. That’s less than the price of a decent ticket to a single Yankee home game, and 1/50th of the normal property tax assessed on a similarly priced NYC home.  

To be fair, A-Rod isn’t getting a break simply for manning the hot-corner for sport’s most storied franchise. Rather, every resident of this newly built high-rise is entitled to this same property tax reduction under the city’s 421A tax abatement program. Under the program, luxury developers get tax incentives in exchange for promising to build affordable units elsewhere.

Needless to say, others in NYC aren’t thrilled with the idea of a man making $33 million annually paying so little in property taxes.

“I think my constituents feel a sense of outrage,” NYC Councilman James Vacca said.

“To find that someone rich like this is paying so little, it just goes to our core our feeling that this is not right. This has got to be addressed.”

The councilman said the law needs to be changed because this year alone the program will cost the city $900 million in lost revenue. Of course, I have a feeling Mr. Vacca will be happy to let bygones be bygones the first time A-Rod doubles off the wall to beat the Sox in the bottom of the ninth.

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