On Sept. 13, the IRS issued final regulations (T.D. 9874) and proposed regulations (REG-106808-19) governing the 100% bonus depreciation deduction under Sec. 168(k). The final regulations finalize proposed regulations issued in August 2018 (REG-104397-18) with some changes in response to comments.
REG-106808-19 contains new provisions not addressed previously. Both the final and proposed regulations were published in the Federal Register on Sept. 24.
Sec. 168(k) was amended by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, to increase the bonus depreciation percentage from 50% to 100% for qualified property and to modify the definition of property that is considered to be qualified to expand the property eligible for bonus depreciation. The TCJA allows businesses to immediately deduct 100% of the cost of eligible property in the year it is placed in service, through 2022. The amount of allowable bonus depreciation is then phased down over four years: 80% will be allowed for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. (For certain property with long production periods, the above dates will be pushed out a year.) Bonus depreciation is also allowable for specified plants planted or grafted after Sept. 27, 2017, and before Jan. 1, 2027.
The final regulations adopt the August 2018 proposed regulations with some modifications. They provide operational rules, address how to compute additional bonus depreciation, and contain special rules for certain situations.
The operational rules include rules about eligibility for the deduction, including the types of property that are eligible for the deduction; the original-use requirement for new property and the acquisition requirements for used property; and the placed-in-service date and acquisition date requirements.
The special rules include rules for the following situations: (1) qualified property placed in service or planted or grafted, as applicable, and disposed of in the same tax year; (2) redetermination of the basis of qualified property; (3) recapture of additional first-year depreciation for purposes of Secs. 1245 and 1250; (4) a certified pollution control facility that is qualified property; (5) like-kind exchanges and involuntary conversions of qualified property; (6) a change in use of qualified property; (7) the computation of earnings and profits; (8) the increase in the limitation of the amount of depreciation for passenger automobiles; (9) the rehabilitation credit under Sec. 47; and (10) computation of depreciation for purposes of Sec. 514(a)(3).
The final regulations are effective for qualified property placed in service (or planted or grafted, as applicable) during tax years that include Sept. 24, 2019, and after. However, a taxpayer may elect to apply the final regulations to qualified property placed in service (or planted or grafted, as applicable) after Sept. 27, 2017, during tax years ending on or after Sept. 28, 2017, provided the taxpayer consistently applies all the rules in the final regulations. Taxpayers may also rely on the August 2018 proposed regulations for qualified property acquired or placed in service (or planted or grafted) after Sept. 27, 2017, during tax years ending on or after Sept. 28, 2017, and ending before Sept. 24, 2019.
The new proposed regulations contain guidance on (1) certain property not eligible for the additional first-year depreciation deduction; (2) a de minimis—use rule for determining whether a taxpayer previously used property; (3) components acquired after Sept. 27, 2017, of larger property for which construction began before Sept. 28, 2017; and (4) other aspects not dealt with in the August 2018 proposed regulations. The proposed regulations also withdraw and repropose rules regarding how the used property acquisition requirements apply to consolidated groups and to a series of related transactions.
The proposed regulations will be effective when published as final in the Federal Register; however, taxpayers may choose to rely on them, in their entirety, for qualified property placed in service (or planted or grafted, as applicable) after Sept. 27, 2017, during tax years ending on or after Sept. 28, 2017.