Revenue Procedure 2011-26

of certain personal property manufactured
or produced in Puerto Rico and certain
services performed in Puerto Rico.
Technical corrections to the legislation
were enacted on October 28, 2010, and
January 31, 2011.
Final regulations
relating to the Expanded ECI Rules
and the Excise Tax were published on
December 29, 2010.
The Expanded
ECI Rules and the Excise Tax are
generally effective for income accruing
and acquisitions occurring, respectively,
after December 31, 2010.
Section 901 allows a credit against
U.S. income tax for the amount of any
income, war profits and excess profits
tax (collectively, an “income tax”) paid
or accrued during the taxable year to any
foreign country or to any possession of
the United States. A foreign levy is an
income tax only if (a) it is a tax and (b)
the predominant character of that tax is
that of an income tax in the U.S. sense.
§1.901–2(a)(1) of the Income Tax Regulations.
Under section 903, an income tax includes a tax paid or accrued in lieu of an
income tax that is otherwise generally imposed by any foreign country or by any
possession of the United States. Section
1.903–1(a) provides that a foreign levy is
a tax in lieu of an income tax only if it is
a tax within the meaning of §1.901–2(a)(2)
and it meets the “substitution requirement”
of §1.903–1(b). A foreign levy satisfies
the substitution requirement only if it operates in substitution for and not in addition to a generally imposed income tax or
series of income taxes and only to the extent that liability for the foreign tax is not
dependent (by its terms or otherwise) on
the availability of a credit for the foreign
tax against income tax liability to another
country. §1.903–1(b)(1) and (2).
The IRS and the Treasury Department
are evaluating the Excise Tax. The provisions of the Excise Tax are novel. The determination of the creditability of the Excise Tax requires the resolution of a number of legal and factual issues. Pending the
resolution of these issues, the IRS will not
challenge a taxpayer’s position that the Excise Tax is a tax in lieu of an income tax under section 903. This notice is effective for
Excise Tax paid or accrued on or after January 1, 2011. Any change in the foreign
tax credit treatment of the Excise Tax after resolution of the pending issues will be

2011–16 I.R.B.

prospective, and will apply to Excise Tax
paid or accrued after the date that further
guidance is issued.
Various personnel from the IRS and the
Treasury Department participated in the
development of this notice. For further
information regarding this notice, contact
Richard L. Chewning at (202) 622–3850
(not a toll-free call).

26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also Part I, §§ 168, 280F; 1.168(k)–1.)

Rev. Proc. 2011–26
SECTION 1. PURPOSE
This revenue procedure provides guidance under § 2022(a) of the Small Business
Jobs Act of 2010, Pub. L. No. 111–240,
124 Stat. 2504 (September 27, 2010)
(SBJA), and § 401(a) and (b) of the Tax
Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,
Pub. L. No. 111–312, 124 Stat. 3296
(December 17, 2010) (TRUIRJCA). Sections 2022(a) of the SBJA and 401(a) of
the TRUIRJCA amend § 168(k)(2) of the
Internal Revenue Code by extending the
placed-in-service date for property to qualify for the 50-percent additional first year
depreciation deduction. Section 401(b)
of the TRUIRJCA amends § 168(k) by
adding § 168(k)(5), which temporarily
allows a 100-percent additional first year
depreciation deduction for certain new
property.
SECTION 2. BACKGROUND
.01 Prior to the enactment of the SBJA,
§ 168(k)(1) allowed a 50-percent additional first year depreciation deduction for
qualified property acquired by a taxpayer
after 2007 and placed in service by the taxpayer before 2010 (before 2011 in the case
of property described in § 168(k)(2)(B)
and (C)). Section 2022(a) of the SBJA
amends § 168(k)(2) by extending the
placed-in-service date to before 2011
(before 2012 in the case of property described in § 168(k)(2)(B) and (C)), and
extending other dates in § 168(k)(2) from
“January 1, 2010” to “January 1, 2011”
(for example, the self-constructed property

664

rules in § 168(k)(2)(E)(i)).
Section
2022(c) of the SBJA provides that these
amendments apply to property placed
in service after December 31, 2009, in
taxable years ending after that date.
.02 Section 401(a) of the TRUIRJCA
further amends § 168(k)(2) by extending
the placed-in-service date to before 2013
(before 2014 in the case of property described in § 168(k)(2)(B) and (C)), and
extending other dates in § 168(k)(2) from
“January 1, 2011” to “January 1, 2013”
(for example, the self-constructed property rules in § 168(k)(2)(E)(i)). Section
401(e)(1) of the TRUIRJCA provides
that these amendments apply to property
placed in service after December 31, 2010,
in taxable years ending after that date.
.03 Section 401(b) of the TRUIRJCA
also amends § 168(k) by adding
§ 168(k)(5) to the Code.
It allows
a 100-percent additional first year
depreciation deduction for qualified
property acquired by a taxpayer
(under rules similar to the rules of
§ 168(k)(2)(A)(ii) and (iii)) after
September 8, 2010, and before January
1, 2012, and placed in service by the
taxpayer before January 1, 2012 (before
January 1, 2013, in the case of property
described in § 168(k)(2)(B) and (C)).
Section 401(e)(2) of the TRUIRJCA
provides that § 168(k)(5) applies to
property placed in service after September
8, 2010, in taxable years ending after such
date. Section 3 of this revenue procedure
defines which property is eligible for
the 100-percent additional first year
depreciation deduction.
.04 Sections 1.168(k)–1(b)(4)(iii)(C)(1)
and (2) of the Income Tax Regulations
provide that if the manufacture, construction, or production of the larger
self-constructed property begins before
December 31, 2007 (as modified by the
dates in § 168(k)(2)(E)(i)), for qualified
property, the larger self-constructed property and any acquired or self-constructed
components related to the larger self-constructed property do not qualify for the
50-percent additional first year depreciation deduction. Because of the policies
underlying the enactment of an unprecedented 100-percent additional first year
depreciation provision, rules similar to,
but not necessarily the same as, the acquisition rules under § 168(k)(2)(A)(iii)
for qualified property are warranted

April 18, 2011

solely for purposes of § 168(k)(5). Accordingly, the Treasury Department and
the Internal Revenue Service (“the Service”) will allow, solely for purposes of
§ 168(k)(5), a limited exception to this
rule in §§ 1.168(k)–1(b)(4)(iii)(C)(1) and
(2) for certain components. See section
3.02(2)(b) of this revenue procedure for
this limited exception.
.05 Section 168(k)(2)(D)(iii) provides
that a taxpayer may elect not to deduct
additional first year depreciation for any
class of property placed in service by the
taxpayer during the taxable year. The
term “class of property” is defined in
§ 1.168(k)–1(e)(2)(i) to mean, in general, each class of property described in
§ 168(e) (for example, 5-year property).
If the taxpayer makes this election, it applies to all qualified property that is in
the same class and placed in service in
the same taxable year. This revenue procedure provides a limited exception for a
taxpayer to elect the 50-percent, instead
of the 100-percent, additional first year
depreciation deduction for certain qualified property placed in service by the
taxpayer in its taxable year that includes
September 9, 2010 (see section 4.02 of
this revenue procedure). Section 4.03 of
this revenue procedure specifies the time
and manner for making this election.
.06 Section 1.168(k)–1(e)(3)(i) provides that the election not to deduct additional first year depreciation must be made
by the due date (including extensions) of
the federal tax return for the taxable year
in which the taxpayer places the property
in service. Section 1.168(k)–1(e)(3)(ii)
provides that this election generally must
be made in the manner prescribed on Form
4562, “Depreciation and Amortization,”
and its instructions. The instructions to
Form 4562 for the 2009 and 2010 taxable years provide that the election is
made by attaching a statement to the taxpayer’s timely filed tax return indicating
that the taxpayer is electing not to deduct
the additional first year depreciation and
the class of property for which the taxpayer is making the election. Section
1.168(k)–1(e)(7)(i) provides that once the
election is made, it generally may be revoked only with the written consent of
the Commissioner of Internal Revenue.
Some taxpayers with a taxable year beginning in 2009 and ending in 2010 that
filed their 2009 federal tax returns before

April 18, 2011

the enactment of the SBJA are uncertain
how to claim or not claim the 50-percent additional first year depreciation for
qualified property placed in service after December 31, 2009, in taxable years
ending in 2010. Section 5 of this revenue
procedure provides the procedures for
claiming or not claiming the 50-percent
additional first year depreciation for this
property.
SECTION 3. 100-PERCENT
ADDITIONAL FIRST YEAR
DEPRECIATION DEDUCTION
.01 In General. Depreciable property is
eligible for the 100-percent additional first
year depreciation deduction if the property is qualified property (as defined in
§ 168(k)(2), as amended by the SBJA and
the TRUIRJCA) and also meets the additional requirements in section 3.02 of this
revenue procedure. For purposes of determining whether depreciable property is
qualified property, rules similar to the rules
in § 1.168(k)–1 for “qualified property” or
for “30-percent additional first year depreciation deduction” apply.
.02 Application of Additional
Requirements and Revised Dates.
(1) In general.
For purposes of
§ 168(k)(5), qualified property is eligible
for the 100-percent additional first year depreciation deduction if the property meets
all of the following additional requirements in the first taxable year in which
the property is subject to depreciation by
the taxpayer, whether or not depreciation
deductions for that property are allowable:
(a) The taxpayer acquires the qualified property after September 8,
2010, and before January 1, 2012
(before January 1, 2013, in the case
of qualified property described in
§ 168(k)(2)(B) or (C)). Solely for purposes
of § 168(k)(5) and this section 3.02(1)(a),
a taxpayer acquires the qualified property
when the taxpayer pays or incurs
the cost of the property.
Qualified
property that a taxpayer manufactures,
constructs, or produces (as defined under
§ 1.168(k)–1(b)(4)(iii)(A) and modified
by this section 3.02(1)(a) solely for
purposes of § 168(k)(5)) for use in its
trade or business or for its production of
income is acquired by the taxpayer for
purposes of § 168(k)(5) and this section
3.02(1)(a) when the taxpayer begins

665

constructing, manufacturing, or producing
that property (as determined under
§ 1.168(k)–1(b)(4)(iii)(B)). If a taxpayer
enters into a written binding contract
(as defined in § 1.168(k)–1(b)(4)(ii))
after September 8, 2010, and before
January 1, 2012, to acquire (including
to manufacture, construct, or produce)
qualified
property
described
in
§ 168(k)(2)(B) or (C), the property will
be treated as having met the acquisition
requirement of this section 3.02(1)(a).
See section 3.02(2) of this revenue
procedure for additional rules applicable
to self-constructed property.
(b) The taxpayer places the qualified
property in service after September 8,
2010, and before January 1, 2012 (before
January 1, 2013, in the case of qualified
property described in § 168(k)(2)(B) or
(C)). For this purpose, rules similar to the
rules in § 1.168(k)–1(b)(5) apply. However, in applying § 1.168(k)–1(b)(5)(ii),
“December 31, 2007” is substituted for
“September 10, 2001.”
(c) The original use of the qualified property commences with the taxpayer after September 8, 2010.
For
this purpose, rules similar to the rules
in § 1.168(k)–1(b)(3) apply.
However, in applying § 1.168(k)–1(b)(3)(i),
“September 8, 2010” is substituted for
“September 10, 2001” and, in applying
§ 1.168(k)–1(b)(3)(iii), “December 31,
2007” is substituted for “September 10,
2001.”
(2) Self-constructed property.
(a) Application of § 1.168(k)–1(b)(4)(iii).
If a taxpayer manufactures, constructs,
or produces qualified property for use by
the taxpayer in its trade or business or
for its production of income, rules similar to the self-constructed property rules
in § 1.168(k)–1(b)(4)(iii) apply for determining whether this property meets
the acquisition requirement of section
3.02(1)(a) of this revenue procedure.
However, see section 3.02(2)(b) of this
revenue procedure for a limited exception for certain components of a larger
self-constructed property. Further, in applying § 1.168(k)–1(b)(4)(iii)(C)(1) solely
for purposes of § 168(k)(5), an acquired
component that is qualified property is
not required to be acquired pursuant to
a written binding contract (as defined in
§ 1.168(k)–1(b)(4)(ii)) to satisfy the acquisition requirement of section 3.02(1)(a)

2011–16 I.R.B.

of this revenue procedure. For purposes of
the additional first year depreciation deduction, the term “component” is intended
to refer to any part used in the manufacture, construction, or production of the
larger self-constructed property, which
may or may not be the same as the asset
for depreciation purposes or the same as
the unit of property for purposes of other
Code sections.
(b) Limited exception for components
acquired or self-constructed after September 8, 2010, and before January 1, 2012,
when the manufacture, construction, or
production of larger self-constructed property begins before September 9, 2010.
Solely for purposes of § 168(k)(5) and
section 3.02(1)(a) of this revenue procedure, the Treasury Department and the
Service will allow a limited exception to
the rule described in section 2.04 of this
revenue procedure for the components
described in this section 3.02(2)(b). If
before September 9, 2010, a taxpayer
begins the manufacture, construction, or
production of the larger self-constructed
property that is qualified property for use
in its trade or business or for its production of income, but this larger self-constructed property meets the requirements
of sections 3.02(1)(b) and (c) of this revenue procedure, the taxpayer may elect
to treat any acquired or self-constructed
component of that larger self-constructed
property as being eligible for the 100-percent additional first year depreciation
deduction if the component is qualified
property and is acquired or self-constructed by the taxpayer after September 8,
2010, and before January 1, 2012 (before
January 1, 2013, in the case of qualified
property described in § 168(k)(2)(B)
or (C)). The taxpayer may make this
election for one or more components that
are described in this section 3.02(2)(b).
The taxpayer must make the election in
this section 3.02(2)(b) by the due date
(including extensions) of the federal tax
return for the taxpayer’s taxable year in
which the larger self-constructed property
is placed in service by the taxpayer, and
by attaching a statement to that return
indicating that the taxpayer is making the
election provided in section 3.02(2)(b)
of Rev. Proc. 2011–26 and whether the
taxpayer is making the election for all
or some of the components described in
section 3.02(2)(b) of Rev. Proc. 2011–26.

2011–16 I.R.B.

If a taxpayer has timely filed its federal tax
return for the taxpayer’s taxable year in
which the larger self-constructed property
is placed in service by the taxpayer on or
before April 18, 2011, see § 301.9100–2(b)
of the Procedure and Administration
Regulations for an automatic extension
of 6 months from the due date of that
federal return (excluding extensions) to
make the election specified in this section
3.02(2)(b).
(3) Disqualified transactions. A rule
similar to the rule in § 168(k)(2)(E)(iv)
applies for determining whether qualified
property fails the acquisition requirement
of section 3.02(1)(a) of this revenue procedure. Solely for purposes of § 168(k)(5):
(a) Section 168(k)(2)(E)(iv)(I) and (II)
is applied by substituting “September 8,
2010” for “December 31, 2007;”
(b) Section 1.168(k)–1(b)(4)(iv)(A)
is applied by substituting “September 9,
2010” for “September 11, 2001;” and
(c) In determining when the qualified
property was originally placed in service
for purposes of § 1.168(k)–1(b)(4)(iv),
this determination includes the operation of § 1.168(k)–1(b)(5)(ii) as modified
by section 3.02(1)(b) of this revenue
procedure, § 1.168(k)–1(b)(5)(iii), and
§ 1.168(k)–1(b)(5)(iv).
.03 Special Rules.
(1) Application of § 1.168(k)–1(f).
(a) In general. Solely for purposes of
§ 168(k)(5), the rules of § 168(k)–1(f) apply to depreciable property that is qualified
property and that also meets the requirements of section 3.02 of this revenue
procedure. For example, for purposes
of the redetermination of basis rules of
§ 1.168(k)–1(f)(2), the 100-percent additional first year depreciation deduction
applies to the increase or decrease in basis of qualified property if the underlying
property is eligible for the 100-percent additional first year depreciation deduction.
In addition, in applying § 1.168(k)–1(f)
for purposes of § 168(k)(5), the taxpayer
should make the following substitutions:
(i) “September 8, 2010” is substituted
for “September 10, 2001;”
(ii) “January 1, 2012” is substituted for
“May 6, 2003;”
(iii) “December 31, 2011” is substituted
for “December 31, 2004;”
(iv) “January 1, 2012” is substituted for
“January 1, 2005;”

666

(v) “December 31, 2012” is substituted
for “December 31, 2005;” and
(vi) “January 1, 2013” is substituted for
“January 1, 2006.”
(b) Limitation of amount of depreciation for certain passenger automobiles.
For purposes of applying
§ 1.168(k)–1(f)(8) to passenger automobiles (as defined in § 280F(d)(5)), the
limitation under § 280F(a)(1)(A)(i) is
increased by $8,000 for a passenger automobile that is eligible for the 100-percent
additional first year depreciation deduction.
(2)
Property
described
in
§ 168(k)(2)(B). For property that is
qualified property solely by reason of
§ 168(k)(2)(B)(i) and that is eligible
for the 100-percent additional first year
depreciation deduction, only the property’s adjusted basis attributable to the
manufacture, construction, or production
before January 1, 2013, is eligible for the
100-percent additional first year depreciation deduction. Section 168(k)(2)(B)(ii).
(3) Qualified restaurant property and
qualified retail improvement property.
Qualified property that meets the definition of both qualified leasehold improvement property (as defined in §§ 168(e)(6),
168(k)(3), and 1.168(k)–1(c)) and qualified restaurant property (as defined in
§ 168(e)(7)) or qualified retail improvement property (as defined in § 168(e)(8)) is
eligible for the 50-percent or 100-percent
additional first year depreciation deduction (assuming all other requirements in
§ 168(k) are met). For example, if in 2011
a taxpayer constructs and places in service
qualified property that is an improvement
to a restaurant building and that improvement meets the definition of both qualified
restaurant property and qualified leasehold
improvement property, the improvement
is eligible for the 100-percent additional
first year depreciation deduction (assuming all other requirements in § 168(k) are
met). However, if in 2011 a taxpayer
constructs and places in service a new
restaurant building, that building is not
qualified leasehold improvement property
and is not eligible for any additional first
year depreciation deduction.
(4) Mid-quarter convention.
The
depreciable basis (as defined in
§ 1.168(d)–1(b)(4)) of qualified property that is eligible for any additional
first year depreciation deduction is taken

April 18, 2011

into account in determining whether the
mid-quarter convention applies to the
property placed in service during the taxable year.
(5) Coordination with other Code sections.
(a) Tax credits and section 1603 payments. Except for the rehabilitation credit
under § 47, the 100-percent additional
first year depreciation deduction is determined for qualified property eligible
for the 100-percent additional first year
depreciation deduction after the reduction
to the property’s basis by the amount
of any credits claimed for the property
that require an adjustment to basis (for
example, the disabled access credit under
§ 44 or the energy credit under § 48) or any
payments received for specified energy
property under § 1603 of the American
Recovery and Reinvestment Tax Act of
2009, Division B, Pub. L. 111–5, 123
Stat. 115 (section 1603 payments). For
the treatment of the rehabilitation credit
and the 100-percent additional first year
depreciation deduction, a rule similar to
the rule in § 1.168(k)–1(f)(10) applies.
(b) Application of § 50(d)(5). For purposes of applying § 50(d)(5), the shortest
recovery period under § 168 that is applicable to qualified property eligible for the
100-percent additional first year depreciation deduction is the recovery period assigned to that property under § 168(c).
(c) Section 280F(a) limitations on passenger automobiles.
(i) In general.
If the unadjusted
depreciable basis (as defined in
§ 1.168(b)–1(a)(3)) of a passenger automobile (as defined in § 280F(d)(5)) that is
qualified property eligible for the 100-percent additional first year depreciation
deduction exceeds the first year limitation amount under § 280F(a)(1)(A)(i), the
excess amount is the unrecovered basis
of the passenger automobile for purposes
of § 280F(a)(1)(B)(i) and, therefore, is
treated as a deductible expense in the first
taxable year succeeding the end of the
recovery period subject to the limitation
under § 280F(a)(1)(B)(ii). For example, if
a calendar-year taxpayer places in service
in December 2010 a passenger automobile
that cost $20,000, is not a truck or van,
and is eligible for the 100-percent additional first year depreciation deduction, the
100-percent additional first year depreciation deduction for this property is limited

April 18, 2011

to $11,060 under § 280F(a)(1)(A)(i) (see
Table 7 of Rev. Proc. 2011–21, 2011–12
I.R.B. 560) and the excess amount of
$8,940 is recovered by the taxpayer beginning in taxable year 2016, subject to the
limitation under § 280F(a)(1)(B)(ii).
(ii) Safe harbor method of accounting.
To mitigate the anomalous result that occurs in the taxable years subsequent to the
placed-in-service year and before the first
taxable year succeeding the end of the recovery period for a passenger automobile
that is qualified property eligible for the
100-percent additional first year depreciation deduction, the Treasury Department
and the Service are providing a safe harbor
method of accounting under this section
3.03(5)(c)(ii). A taxpayer adopts this safe
harbor method of accounting by applying
it to deduct depreciation of its passenger
automobile (as defined in § 280F(d)(5)) on
its federal tax return for the first taxable
year succeeding the placed-in-service year
of the passenger automobile. For a taxpayer with a passenger automobile that has
an unadjusted depreciable basis exceeding the first year limitation amount under § 280F(a)(1)(A)(i) and that is qualified
property eligible for the 100-percent additional first year depreciation, the safe harbor method of accounting operates as follows:
(A) In the placed-in-service year of the
passenger automobile, the taxpayer will
deduct the lesser of the 100-percent additional first year depreciation for the passenger automobile or the first year limitation amount under § 280F(a)(1)(A)(i). See
Rev. Proc. 2011–21, 2011–12 I.R.B. 560,
for the first year limitation amount under
§ 280F(a)(1)(A)(i) for a passenger automobile placed in service in 2010 or 2011 if
either the 50-percent or 100-percent additional first year depreciation deduction applies.
(B) Next, the taxpayer will determine
the unrecovered basis of the passenger automobile for its placed-in-service year as
though the taxpayer claimed the 50-percent, instead of the 100-percent, additional
first year depreciation for the passenger
automobile. For this purpose, the unrecovered basis is equal to the depreciation
that would be allowable for the passenger
automobile had the taxpayer claimed the
50-percent additional first year depreciation deduction less the amount determined

667

under section 3.03(5)(c)(ii)(A) of this revenue procedure.
(C) If there is any unrecovered basis for the passenger automobile in its
placed-in-service year (as determined
under section 3.03(5)(c)(ii)(B) of this
revenue procedure), the taxpayer will determine the depreciation deductions for the
passenger automobile for the taxable years
subsequent to the placed-in-service year
as though the taxpayer claimed the 50-percent, instead of the 100-percent, additional
first year depreciation for the passenger automobile, subject to the limitation
amounts under § 280F(a)(1)(A). Accordingly, for purposes of § 1.168(k)–1(d)(2),
the remaining adjusted depreciable basis
of the passenger automobile is equal to its
unadjusted depreciable basis reduced by
the amount of the 50-percent additional
first year depreciation deemed allowed or
allowable, whichever is greater, for the
passenger automobile.
(D) If there is no unrecovered basis for the passenger automobile in its
placed-in-service year (as determined
under section 3.03(5)(c)(ii)(B) of this
revenue procedure), the taxpayer will
determine the depreciation deduction
for the passenger automobile for any
12-month taxable year subsequent to the
placed-in-service year by multiplying the
adjusted depreciable basis (as defined in
§ 1.168(b)–1(a)(4)) of the passenger automobile by the applicable depreciation rate
for each taxable year (as determined under
sections 6.03, 6.04, 6.05, and 6.06 of Rev.
Proc. 87–57, 1987–2 C.B. 687, 692). If
any taxable year is less than 12 months,
the depreciation deduction determined
under this section 3.03(5)(c)(ii)(D) must
be adjusted for a short taxable year (for
further guidance, see Rev. Proc. 89–15,
1989–1 C.B. 816). The taxpayer must not
use the optional depreciation tables for
computing the depreciation deductions for
the passenger automobile. For purposes
of determining the applicable depreciation
rate, the applicable depreciation method
is the method under § 168(b), and the
applicable convention is the convention
under § 168(d), that would apply in the
placed-in-service year for the passenger
automobile had the taxpayer claimed the
50-percent additional first year depreciation deduction.

2011–16 I.R.B.

.04 Examples.
(1) Example 1 — Acquired property and self-constructed property not eligible for the 100-percent additional first year depreciation deduction. In June
2008, X began constructing an electric generation
power plant for its own use. In February 2009, prior
to the completion of the power plant, X and Y (an unrelated party) entered into a written binding contract
under which X transferred the rights to own and use
this power plant to Y for $2 million. On March 1,
2009, Y began construction to complete the power
plant. Between March 2009 and August 2010, Y
incurred another $10 million to complete the construction of the power plant. This $10 million includes amounts for acquired components that were
acquired by Y pursuant to written binding contracts
entered into after March 1, 2009, and for self-constructed components, the construction, manufacturing, or production of which began after March 1,
2009. Y completed construction of the power plant
in August 2010. On October 1, 2010, Y placed the
power plant in service. The power plant is included
in asset class 49.13 of Rev. Proc. 87–56, 1987–2
C.B. 674, and has a recovery period of 20 years under
§ 168(c).
First, Y must determine if the power plant is
qualified property and if its components are qualified
property. Y acquired the $2 million portion of the
total $12 million unadjusted depreciable basis pursuant to a written binding contract entered into after
December 31, 2007. Further, Y began construction
to complete the power plant after December 31,
2007, and all of its components were self-constructed
beginning, or acquired pursuant to written binding
contracts entered into, after December 31, 2007.
Also, the original use of the power plant began with
Y after December 31, 2007, and Y placed the power
plant in service before January 1, 2014 (the power
plant is property described in § 168(k)(2)(B)). Thus,
the power plant is qualified property and all of its
components are qualified property.
Y must next determine if the power plant and
any of its components are eligible for the 100-percent additional first year depreciation deduction. Because X and Y are not related parties, the transaction
between X and Y will not be a disqualified transaction pursuant to § 1.168(k)–1(b)(4)(iv), as modified by section 3.02(3) of this revenue procedure.
Although the original use of the power plant began
with Y after September 8, 2010, and Y placed the
power plant in service after September 8, 2010, and
before January 1, 2013 (the power plant is property
described in § 168(k)(2)(B)), the power plant does
not meet the acquisition rule in § 168(k)(5) and section 3.02(1)(a) of this revenue procedure. Y acquired
the $2 million portion of the total $12 million unadjusted depreciable basis before September 9, 2010.
Further, Y began construction to complete the power
plant before September 9, 2010, and Y acquired or
self-constructed all of the components to complete
the construction of the power plant before September 9, 2010. Accordingly, Y’s total expenditures of
$12 million for the power plant do not qualify for the
100-percent additional first year depreciation deduction. Instead, Y’s total expenditures of $12 million
for the power plant qualify for the 50-percent additional first year depreciation deduction.
(2) Example 2 — Acquired property and self-constructed property partially eligible for the 100-per-

2011–16 I.R.B.

cent additional first year depreciation deduction.
In August 2009, X began constructing an electric generation power plant for its own use. On
September 1, 2010, prior to the completion of the
power plant, X and Y (an unrelated party) entered
into a written binding contract and X transferred
the rights to own and use this power plant to Y
for $5 million. On September 15, 2010, Y began
construction to complete the power plant. Between
September 15, 2010, and November 2011, Y incurred
another $10 million to complete the construction of
the power plant. This $10 million includes amounts
for acquired components that were acquired by Y
after September 15, 2010, and for self-constructed
components, the construction, manufacturing, or
production of which began after September 15,
2010. All acquired components to complete the
construction of the power plant were acquired by Y
pursuant to written binding contracts entered into
after September 1, 2010. Y completed construction
of the power plant in November 2011. On December
15, 2011, Y placed the power plant in service. The
power plant is included in asset class 49.13 of Rev.
Proc. 87–56, and has a recovery period of 20 years
under § 168(c).
First, Y must determine if the power plant is
qualified property and if its components are qualified
property. Y acquired the $5 million portion of the
total $15 million unadjusted depreciable basis pursuant to a written binding contract entered into after
December 31, 2007. Further, Y began construction
to complete the power plant after December 31,
2007, and all of its components were self-constructed
beginning, or acquired pursuant to written binding
contracts entered into, after December 31, 2007.
Also, the original use of the power plant began with
Y after December 31, 2007, and Y placed the power
plant in service before January 1, 2014 (the power
plant is property described in § 168(k)(2)(B)). Thus,
the power plant and its components are qualified
property.
Y must next determine if the power plant and
any of its components are eligible for the 100-percent additional first year depreciation deduction. X
and Y are not related parties; therefore, the transaction between X and Y will not be a disqualified
transaction pursuant to § 1.168(k)–1(b)(4)(iv), as
modified by section 3.02(3) of this revenue procedure. Although the original use of the power
plant began with Y after September 8, 2010, and Y
placed the power plant in service after September 8,
2010, and before January 1, 2013 (the power plant
is property described in § 168(k)(2)(B)), not all of
Y’s total expenditures of $15 million qualify for
the 100-percent additional first year depreciation
deduction. Given that Y acquired the $5 million
portion of the total $15 million unadjusted depreciable basis before September 9, 2010, that portion
qualifies only for the 50-percent additional first
year depreciation deduction. However, because
Y began construction to complete the power plant
after September 8, 2010, and Y acquired or began
self-constructing all of the components to complete
the construction of the power plant after September
8, 2010, the $10 million portion of the total $15
million unadjusted depreciable basis qualifies for
the 100-percent additional first year depreciation
deduction.

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(3) Example 3 — Component election made. X, a
calendar-year taxpayer, began constructing a ship for
its own use in March 2010. Between March 2010 and
June 2012, X incurred $25 million to complete the
construction of the ship. This $25 million includes
$15 million for acquired components that were acquired by X after September 8, 2010, and before
January 1, 2013, and for self-constructed components, the construction, manufacturing, or production
of which began after September 8, 2010, and before
January 1, 2013 (the ship is property described in
§ 168(k)(2)(B)). All acquired components of the
ship were acquired by X pursuant to written binding
contracts entered into after March 2010. The original
use of all components of the ship commences with X.
X completed construction of the ship in June 2012,
and placed it in service in August 2012. On its 2012
federal tax return, X makes the election provided
under section 3.02(2)(b) of this revenue procedure.
The ship is included in asset class 00.28 of Rev. Proc.
87–56, and has a recovery period of 10 years under
§ 168(c).
First, X must determine if the ship is qualified property and if its components are qualified
property. X began construction of the ship after
December 31, 2007, and all of its components were
self-constructed beginning, or acquired pursuant
to written binding contracts entered into, after
December 31, 2007. Also, the original use of the
ship began with X after December 31, 2007, and X
placed the ship in service before January 1, 2014 (the
ship is property described in § 168(k)(2)(B)). Thus,
the ship and its components are qualified property.
X must next determine if the ship and any of
its components are eligible for the 100-percent additional first year depreciation deduction. Although the
original use of the ship began with X after September 8, 2010, and X placed the ship in service after
September 8, 2010, and before January 1, 2013 (the
ship is property described in § 168(k)(2)(B)), not all
of X’s total expenditures of $25 million qualify for the
100-percent additional first year depreciation deduction. X began construction of the ship before September 9, 2010, but made the election provided under
section 3.02(2)(b) of this revenue procedure. As a result, the $15 million portion (of the total $25 million
unadjusted depreciable basis for the ship) incurred
for the components that were acquired or self-constructed by X after September 8, 2010, and before
January 1, 2013, qualifies for the 100-percent additional first year depreciation deduction. The remaining $10 million portion of the total $25 million unadjusted depreciable basis qualifies only for the 50-percent additional first year depreciation deduction.
(4) Example 4 — Component election not made.
The facts are the same as in Example 3, except X
did not make the election provided under section
3.02(2)(b) of this revenue procedure on its 2012
federal tax return. As a result, X’s total expenditures
of $25 million for the ship do not qualify for the
100-percent additional first year depreciation deduction. Although the original use of the ship began
with X after September 8, 2010, and X placed the
ship in service after September 8, 2010, and before
January 1, 2013 (the ship is property described in
§ 168(k)(2)(B)), the ship does not meet the acquisition rule in § 168(k)(5) and section 3.02(1)(a) of this
revenue procedure because X began construction of
the ship before September 9, 2010. Accordingly,

April 18, 2011

X’s total expenditures of $25 million for the ship
qualify only for the 50-percent additional first year
depreciation deduction.
(5) Example 5 — Application of § 280F(a) safe
harbor method of accounting when there is unrecovered basis. In December 2010, X, a calendar-year
taxpayer, purchased and placed in service for use in
its business a new passenger automobile that cost
$20,000. The passenger automobile is not a truck
or van, is 5-year property under § 168(e), and is eligible for the 100-percent additional first year depreciation deduction. X does not claim any § 179 deduction for the passenger automobile. For 2010, X
deducts $11,060 for the 100-percent additional first
year depreciation for this property, which is the depreciation limitation for 2010 under § 280F(a)(1)(A)(i)
(see Table 7 in Rev. Proc. 2011–21). X adopts the
safe harbor method of accounting provided in section
3.03(5)(c)(ii) of this revenue procedure.
Under the safe harbor method of accounting, X
is deemed to have claimed the 50-percent additional
first year depreciation deduction for purposes of determining the unrecovered basis and the remaining
adjusted depreciable basis of the passenger automobile. Accordingly, for 2010, the total depreciation
allowable for the passenger automobile is deemed
to be $12,000 [(50 percent multiplied by unadjusted
depreciable basis of $20,000) + (20 percent multiplied by the remaining adjusted depreciable basis of
$10,000)]. Thus, the unrecovered basis for the passenger automobile for 2010 is $940 ($12,000 deemed
depreciation allowable less the $11,060 depreciation
deduction for 2010) and that amount is recovered by
X beginning in the 2016 taxable year, subject to the
limitation under § 280F(a)(1)(B)(ii).
For 2011, the total depreciation allowable for the
passenger automobile is deemed to be $3,200 (32 percent multiplied by the remaining adjusted depreciable
basis of $10,000). Because this amount is less than
the depreciation limitation of $4,900 for 2011 (see Table 7 in Rev. Proc. 2011–21), X deducts $3,200 as
depreciation on its federal income tax return for the
2011 taxable year.
(6) Example 6 — Application of § 280F(a) safe
harbor method of accounting when there is no unrecovered basis. The facts are the same as in Example 5, except the cost of the passenger automobile is $18,400. For 2010, X deducts $11,060 for the
100-percent additional first year depreciation for this
property, which is the depreciation limitation for 2010
under § 280F(a)(1)(A)(i) (see Table 7 in Rev. Proc.
2011–21).
Under the safe harbor method of accounting, X
is deemed to have claimed the 50-percent additional
first year depreciation deduction for purposes of determining the unrecovered basis and the remaining
adjusted depreciable basis of the passenger automobile. As a result, for 2010, the total depreciation allowable for the passenger automobile is deemed to be
$11,040 [(50 percent multiplied by unadjusted depreciable basis of $18,400) + (20 percent multiplied by
the remaining adjusted depreciable basis of $9,200)].
Thus, there is no unrecovered basis for the passenger
automobile for 2010 because the 2010 deemed depreciation allowable of $11,040 is less than the 2010 depreciation deduction of $11,060.
Pursuant to section 3.03(5)(c)(ii)(D) of this
revenue procedure, X must not use the optional
depreciation tables for computing the depreciation

April 18, 2011

deductions for the passenger automobile for the taxable years subsequent to the placed-in-service year.
Therefore, assuming the applicable depreciation
method and convention for the passenger automobile
is the 200-percent declining balance method and the
half-year convention, respectively, the total depreciation allowable for the passenger automobile for
2011 is $2,936 (40 percent multiplied by the adjusted
depreciable basis of $7,340 [unadjusted depreciable
basis of $18,400 less the total depreciation allowable
for prior taxable years of $11,060]). Because this
amount is less than the depreciation limitation of
$4,900 for 2011 (see Table 7 in Rev. Proc. 2011–21),
X deducts $2,936 as depreciation on its federal income tax return for the 2011 taxable year.

SECTION 4. ELECTION NOT TO
DEDUCT ADDITIONAL FIRST YEAR
DEPRECIATION
.01 In General. The election under
§ 168(k)(2)(D)(iii) not to deduct additional first year depreciation for a class
of property applies to all qualified property that is in that class of property and
placed in service in the same taxable year.
See § 1.168(k)–1(e)(1). For example, if
a calendar-year taxpayer for its taxable
year ending December 31, 2010, makes
the election not to deduct additional first
year depreciation for 5-year property, all
5-year property placed in service by the
taxpayer during its 2010 taxable year is not
qualified property under § 168(k)(2) and,
therefore, is not eligible for the 50-percent
or the 100-percent additional first year depreciation deduction for the 2010 taxable
year. However, see section 4.02 of this
revenue procedure for a limited exception.
.02 Limited Exception. The Treasury
Department and the Service recognize
that a taxpayer may have difficulty determining the exact date during a month on
which the taxpayer acquires and places
in service property. To minimize disputes
regarding whether a taxpayer acquired or
placed in service particular property after
September 8, 2010, the Treasury Department and the Service will allow a taxpayer
to elect to deduct the 50-percent, instead
of the 100-percent, additional first year
depreciation for all qualified property that
is in the same class of property and placed
in service by the taxpayer in its taxable
year that includes September 9, 2010,
provided the taxpayer does not make an
election not to deduct additional first year
depreciation for that class of property for
that taxable year under § 168(k)(2)(D)(iii)
or section 5.04 of this revenue proce-

669

dure. If the taxpayer makes the election
under this section 4.02, the allowable additional first year depreciation deduction
is determined for the class of property
based on the 50-percent additional first
year depreciation deduction. For example, if a calendar-year taxpayer for its
taxable year ending December 31, 2010,
placed in service 5-year property before
September 9, 2010, and other 5-year
property after September 8, 2010, the
taxpayer may elect to claim the 50-percent
additional first year depreciation for all
of its 5-year property that is qualified
property and placed in service during the
2010 taxable year.
.03 Time and Manner for Making Election. The election specified in section 4.02
of this revenue procedure must be made
by the due date (including extensions) of
the federal tax return for the taxpayer’s
taxable year that includes September 9,
2010, and must be made in the same manner as the § 168(k)(2)(D)(iii) election is
made. See § 1.168(k)–1(e)(3). If a taxpayer has timely filed its federal tax return for the taxpayer’s taxable year that
includes September 9, 2010, on or before
April 18, 2011, see § 301.9100–2(b) of the
Procedure and Administration Regulations
for an automatic extension of 6 months
from the due date of that federal return (excluding extensions) to make the election
specified in section 4.02 of this revenue
procedure.
SECTION 5. SBJA RETROACTIVE
APPLICATION OF 50-PERCENT
ADDITIONAL FIRST YEAR
DEPRECIATION DEDUCTION
.01 Scope. This section 5 applies to
a taxpayer that did not claim the 50-percent additional first year depreciation for
some or all qualified property placed in
service by the taxpayer after December 31,
2009, on its federal tax return for its taxable year beginning in 2009 and ending in
2010 (2009 taxable year) or its taxable year
of less than 12 months beginning and ending in 2010 (2010 short taxable year). For
purposes of this section 5:
(1) Except as provided in section
5.04(3) of this revenue procedure, the term
“qualified property” has the same meaning as provided in § 168(k)(2) before the
enactment of the TRUIRJCA;

2011–16 I.R.B.

(2) The term “2009 qualified property”
means qualified property placed in service
by the taxpayer before January 1, 2010, in
its 2009 taxable year; and
(3) The term “2010 qualified property”
means qualified property placed in service
by the taxpayer after December 31, 2009,
in its 2009 taxable year or 2010 short taxable year, as applicable.
.02 No Election Made To Not Deduct
50-Percent Additional First Year Depreciation. If a taxpayer timely filed its federal
tax return for the 2009 taxable year or the
2010 short taxable year, as applicable, did
not deduct on that return the 50-percent additional first year depreciation for a class
of property that is qualified property or for
some or all of its 2010 qualified property,
and did not make an election within the
time and in the manner described in either
section 2.06 or section 5.04(2) of this revenue procedure not to deduct the 50-percent additional first year depreciation for
the class of property in which the qualified
property or the 2010 qualified property, as
applicable, is included, the taxpayer may
claim the 50-percent additional first year
depreciation for that property by filing either:
(1) An amended federal tax return (or a
qualified amended return under Rev. Proc.
94–69, 1994–2 C.B. 804 (or its successor),
if applicable) for the 2009 taxable year or
the 2010 short taxable year, as applicable,
before the taxpayer files its federal tax return for the first taxable year succeeding
the 2009 taxable year or the 2010 short taxable year, as applicable; or
(2) A Form 3115, Application for
Change in Accounting Method, under section 6.01 of the Appendix of Rev. Proc.
2011–14, 2011–4 I.R.B. 330, 361, with
the taxpayer’s timely filed federal tax return for the first or second taxable year
succeeding the 2009 taxable year or the
2010 short taxable year, as applicable, if
the taxpayer owns the property as of the
first day of the year of change (as defined
in section 3.06 of Rev. Proc. 2011–14).
.03 Consent Granted to Revoke Election to Not Deduct 50-Percent Additional
First Year Depreciation. If, on its timely
filed federal tax return for the 2009 taxable year or the 2010 short taxable year,
as applicable, a taxpayer made an election within the time and in the manner described in section 2.06 of this revenue pro-

2011–16 I.R.B.

cedure to not deduct the 50-percent additional first year depreciation for a class
of property that is qualified property, the
Commissioner grants the taxpayer consent
to revoke that election, provided the taxpayer files an amended federal tax return
for the 2009 taxable year or the 2010 short
taxable year, as applicable, in a manner
that is consistent with the revocation of the
election and by the later of (1) June 17,
2011, or (2) before the taxpayer files its
federal tax return for the first taxable year
succeeding the 2009 taxable year or the
2010 short taxable year.
.04 Election To Not Deduct 50-Percent
Additional First Year Depreciation.
(1) In general. A taxpayer that timely
filed its federal tax return for the 2009 taxable year or the 2010 short taxable year,
as applicable, has made the election to not
deduct the 50-percent additional first year
depreciation for a class of property that is
qualified property if the taxpayer made the
election within the time and in the manner provided in section 2.06 of this revenue
procedure and did not revoke that election
within the time and in the manner provided
in section 5.03 of this revenue procedure.
(2) Deemed election. If section 5.04(1)
of this revenue procedure does not apply,
a taxpayer that timely filed its federal tax
return for the 2009 taxable year or the 2010
short taxable year, as applicable, also will
be treated as making the election to not
deduct the 50-percent additional first year
depreciation for a class of property that is
qualified property if the taxpayer:
(a) on that return, did not deduct the
50-percent additional first year depreciation for that class of property but did
deduct depreciation; and
(b) does not file an amended federal tax
return (or a qualified amended return) or a
Form 3115 within the time and in the manner provided in section 5.02 or section 5.03
of this revenue procedure, as applicable, to
claim the 50-percent additional first year
depreciation for the class of property.
(3) Application. If the taxpayer makes
the election under section 5.04(1) or (2)
of this revenue procedure for its 2009
taxable year, the election applies to both
2009 qualified property and 2010 qualified
property in the same class of property for
which the election is made. If the taxpayer
makes the election under section 5.04(1) or
(2) of this revenue procedure for its 2010
short taxable year, the election applies

670

to 2010 qualified property in the same
class of property for which the election is
made. The election under section 5.04(1)
or (2) of this revenue procedure also applies to qualified property (as defined in
§ 168(k), as amended by the SBJA and the
TRUIRJCA) in that class of property that
is eligible for the 100-percent additional
first year depreciation deduction and
placed in service during the taxpayer’s
2009 taxable year or 2010 short taxable
year, as applicable, and, therefore, this
property is not eligible for the 50-percent
or 100-percent additional first year
depreciation deduction.
SECTION 6. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2011–21 is amplified as provided in section 3.03(5)(c) of this revenue
procedure.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective
March 29, 2011.
SECTION 8. PAPERWORK
REDUCTION ACT
The collections of information contained in this revenue procedure have
been reviewed and approved by the Office
of Management and Budget in accordance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–2207.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collections of information in
this revenue procedure are in sections
3.02(2)(b) and 4.03. This information is
required to make the elections provided
under these sections. This information will
be used by the Service for examination
purposes. The collections of information
are required to obtain a benefit. The likely
respondents are individuals, business or
other for-profit institutions, and small
businesses.
The estimated total annual reporting
burden is 125,000 hours.
The estimated annual burden per respondent varies from .25 hours to 1 hour,
depending on individual circumstances,

April 18, 2011

with an estimated average of .5 hours.
The estimated number of respondents is
250,000.
The estimated frequency of responses
(used for reporting requirements only) is
annually.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in

April 18, 2011

the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Kathleen Reed of the Office

671

of Associate Chief Counsel (Income Tax
and Accounting). For further information
regarding the additional first year depreciation deduction, contact Douglas Kim
at (202) 622–4930 (not a toll-free call).
For further information regarding the depreciation deduction limitations under
§ 280F(a), contact Bernard P. Harvey at
(202) 622–4930 (not a toll-free call).

2011–16 I.R.B.