*Example:  As the lessor of qualified 5-year property (such as a $1,000,000 helicopter) you can claim the following depreciation benefits: a first-year deduction of 30 percent ($300,000) plus 20 percent of the remaining $700,000 basis of the property in the first year. Thereafter, you take the regular depreciation for the remaining years needed to fully depreciate the property.  Here is the math:  $1,000,000 x 30 percent bonus depreciation of the original equipment cost  = $300,000 in bonus depreciation write-off.  The remaining basis to depreciate is $700,000 ($1,000,000 minus $300,000 bonus depreciation). Then, you take the regular depreciation of 20 percent on the $700,000 basis = $140,000 ($700,000 x 20 percent).  Finally, you add the $140,000 regular depreciation to the $300,000 bonus depreciation for a total of $440,000 of first year depreciation (which is 44 percent of $1,000,000).

For the balance of the 5-years, you depreciate the balance of the equipment cost by an amount equal to 70 percent of the existing depreciation percentages as follows:

             *32 percent x 70 percent = 22.4 percent (year 2);

             *19.2 percent x 70 percent = 13.44 percent (year 3);

             *11.52 percent x 70 percent = 8.064 percent (year 4);

             *11.52 percent x 70 percent = 8.064 percent (year 5); and

             *5.76 x 70 percent = 4.032 percent for the half-year or so that carries over into year 6 due to certain tax "conventions" described in "Leasing 101" (Item 9 below).

The new "bonus depreciation" provisions provide you with a meaningful cash benefit.  According to Curt Glenn of GATX Capital, in an ELA Tax Seminar on Friday, March 22, 2002, you gain:

 *an 8.4 percent after-tax (in hand) cash benefit of the original equipment cost for 5-year property; and

 *a 9 percent after-tax (in hand) cash benefit of the original equipment cost for 7-year property.

*Requirements To Take Depreciation.  Bonus depreciation is available only if the property that you buy meets eligibility, original use, acquisition date, and placed-in-service date requirements.  See Section 168(k) of the Internal Revenue Code of 1986, as amended (the "Code") and Section 1 of the Act for the new depreciation rules.

             *Property Eligible for Bonus:  The following property is eligible for the bonus write-offs: 

               *        Property that is eligible for MACRS depreciation under section 168 of the Code; 

               *        Property with a cost recovery period of 20 years or less; 

               *        Certain computer software that would not be depreciated under MACRS; 

               *        Water utility property; and 

               *       Qualified leasehold improvement property. Lessee improvements to the interior portion of a nonresidential building if the lessee occupies the building and the improvement is placed in service more than 3 years after the date the building is first placed in service.

Tip:  Software included as part of qualified technology equipment (QTE) qualifies for bonus depreciation.

*Other Placed in Service Requirements:  Property is qualified only if the original use of the property commenced with the taxpayer after September 10, 2001.  Used property is generally not qualified.  However, you can use the "three-month window" to complete sale leasebacks and apply the bonus depreciation to the leaseback property.  Example: Say that your lessee puts a printing press in service after September 10, 2001.  Within three months of that date (and before September 11, 2004), you buy the printing press from the lessee and lease it back.  The printing press meets the placed-in-service date requirement and will be treated as if originally used on the date you close the leaseback transaction.

      *Acquisition Requirements: The property is qualified only if:     

             *       The taxpayer acquires it after September 10, 2001 and before September 11, 2004; or 

             *       The property is acquired under a binding, written contract entered into after September 10, 2001 and before September 11, 2004; and  

             *       The property is placed in service before 2005 (with exceptions). 

Technical Points:  Note two important exceptions: 

·      it has a recovery period of at least 10 years or is "transportation property" and

·      it is subject to the interest capitalization rules of section 263A of the Code because it has an estimated production period exceeding two years or it costs more than $1 million and has an estimated production period exceeding one year

Example:  An aircraft with a construction period of more than one year qualifies for bonus depreciation if it is ordered before September 11, 2004, and placed in service before 2006.  If this rule applies, only the portion of the adjusted basis attributable to pre-September 11, 2004, manufacture, construction or production is eligible for bonus depreciation. 

Warning:  To qualify, transportation property must be used in a trade or business.  Other property does not qualify.  For example, an aircraft won't be considered "transportation property" unless it is used in a trade or business of transporting persons or property (e.g .,  commercial aircraft).  As a result, a business aircraft used for private use may not qualify, while one used in charter operation should qualify for the bonus depreciation.  The tax treatment in such cases remains unclear at this time.

      *Ineligible Property: If the alternative depreciation system of Section 168(g) of the Code applies to the property, stop right there.  That property is not eligible for bonus depreciation.  See Item 9, "Leasing 101" for a discussion of ADS.  Note that "qualified New York Liberty Zone leasehold improvement property" is not eligible for bonus depreciation, but is eligible for other tax benefits until 2004 consisting of five year depreciation on qualified property in the New York area.

Additional Cash Benefits From NOL Carrybacks:  Section 102 of the Act allows you to carry back losses from 2001 and 2002 for 5 years, instead of 2 years under prior law. The expected total cost to the taxpayer: $15 billion over the next two years according to the Congress' Joint Committee on Taxation.  Lucent Technologies, Inc. has taken advantage of these provisions with a cash benefit reportedly in excess of $204 million.  See "Ailing Companies May Get Windfall Through Tax Break Signed by Bush" in the Wall Street Journal, March 20, 2002 on page B5A.  United Airlines has reportedly also reaped a $450 million tax refund arising from its losses.  See: "UAL Gets Tax Refund Totaling $450 Million, Plans Charge For Avolar", Wall Street Journal, March 2002.

Alternative Minimum Tax (AMT) Won't Diminish Bonus.  When you compute alternative minimum taxable income, you take the same allowances for qualified property as you do for regular tax purposes.  In other words, you get 30 percent bonus depreciation plus regular MACRS depreciation on the remaining 70 percent of remaining cost to depreciation (100 percent of basis minus 30 percent bonus times applicable MACRS percentage).  In effect, you don't suffer any AMT depreciation preference on property that qualifies for bonus depreciation.  In addition, the Act allows alternative minimum tax NOL carryovers in 2001 and 2002 to reduce alternative minimum taxable income to zero and carrybacks of NOLs from 2001 and 2002 to reduce alternative minimum taxable income to zero.

 Subpart F Extended.  Finally, the Act extends the exceptions under Subpart F of the Code (created under the Tax Relief Act of 1997) for active financing income through December 31, 2006.  Subpart F provides a tax benefit by excluding of certain foreign income from US taxable income.

 Tip:  For more information on the Act and to download the new tax forms, including Forms 4562 and 2106, click on: IRS Description of Act.  You can amend your 2001 returns using Forms 1040-X and 1120-X.  Take an instructive and fun Tax Law Quiz  from Jeffrey Taylor of Executive Caliber.  Also, stay tuned for "technical corrections" to the new law.  These "corrections" do not change the policy of the law, but do clarify any ambiguities or drafting flaws.  If you want to get knee deep in this stuff, review the Technical Explanation of Act prepared by the Joint Committee on Taxation, dated March 6, 2002 (JCX-12-02).