Timely tax-saving tips and strategies 

Tax tip #5

Special depreciation allowance

You can deduct up to 100% of the cost of qualified property that you acquired after September 8, 2010, and place in service before January 1, 2012. For certain aircraft, and for certain property with a long production period, you have until December 31, 2012 to place the property in service.

If you acquire the qualified property after December 31, 2007, but placed it in service either before September 9, 2010, or after December 31, 2011 and before January 1, 2013, you’re eligible to deduct 50% of the cost of the property. The deadline for placing the property in service is December 31, 2013 for certain aircraft, and for certain property with a long production period.

To calculate the allowance, you first deduct subtract from the business or investment portion of the property’s cost any deductions or credits allocable to the property, like the section 179 expense deduction. That results in the depreciable basis. You multiply that amount by 100% or 50%, according to when you placed the property in service.

You then have to subtract the allowance from the depreciable basis to determine your regular depreciation or amortization.

You can elect not to deduct the special depreciation allowance for a class of property by attaching a statement to your tax return. However, it must be filed timely. You have until six months of the due date of a timely-filed return to make the election, by filing an amended return and writing “Filed pursuant to section 301.9100-2” on the amended return.

Note that the allowance is subject to recapture as ordinary income should the property be disposed of at a gain. That means you’d report ordinary income up to the amount of special depreciation allowance you deducted.

Also note that a corporation can elect to accelerate an unused minimum tax credit, from before 2006, instead of claiming the special depreciation allowance.

The definition of qualified property, and other information relating to the allowance, may be found in the IRS instructions for form 4562, and in IRS Publication 946.