Generally speaking, "bonus" depreciation applies to tangible personal property and qualified leasehold improvement property.  For qualifying property placed in service before January 1, 2012, 100% bonus depreciation applies.  For qualifying property placed in service between January 1, 2012 and January 31, 2010, 50% bonus depreciation applies.  What this means is you can deduct either 100% or 50% of qualifying property. For the 100% bonus depreciation to apply, the project must be contracted after September 8, 2010.  Real property other than qualified leasehold property does not qualify for bonus depreciation.

Qualified leasehold improvements are those made to the interior portion of a commercial building, made pursuant to a lease, and must be made to a building that is at least three years old.  There are rules that deny the qualified leasehold improvement status when the lease is between related parties.  This exception will disqualify the deduction for most dealers.    

Also, note that in the course of property renovation projects, it may be possible to write-off the value of assets that will be discarded.  For example, flooring, lighting, walls, roof, etc. that have been assigned a value through a cost segregation study can usually have their remaining values "dismissed."

For 2011, section 179, election to expense, has been increased to $500,000.  The amount goes back to $125,000 for 2012.   The section 179 deduction is available for purchases of tangible personal property.  One important consideration is that the section 179 deduction is not available to dealer real estate entities.  It is available, though, to dealer operating companies.  Therefore, it is important to properly allocate assets between the operating company and the real estate entity.  For example, place all of the furniture, computers, and equipment on the dealer operating company's books.  Another important item to consider is that certain "land improvements" qualify as tangible personal property and section 179 and bonus depreciation apply.  Some common items that fall under the category of land improvements are landscaping, paving, and sidewalks.

We suggest that dealers spending in excess of one million dollars consider hiring a cost segregation company to perform an engineering study to properly allocate these costs.  Such a study, in combination with the analysis of an auto dealer CPA, can provide substantial tax savings.  For those spending less than a million dollars, a competent automotive CPA should be able to provide guidance.

This article scratches the surface of an extremely complicated area.  If you have questions related to this matter, or any other automotive tax or accounting issue, please contact Paul McGovern at pmcgovern@downeycocpa.com or 800-849-6022.