Regulations clarify bonus depreciation treatment

By Sally P. Schreiber, J.D.

The IRS on Friday issued final regulations (T.D. 9874) and new 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 sets of regulations have been posted to IRS.gov prior to their official publication in the Federal Register.

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. 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.

Final regulations

The final regulations adopt the August 2018 proposed regulations with some modifications. They provide operational rules and address how to compute additional bonus depreciation and how to make elections under Sec. 168(k). They provide clarifying guidance on the requirements that must be met for property to qualify for the deduction under Sec. 168(k), including used property.

The final regulations provide rules for qualified film, television, and live theatrical productions. They also clarify how the basis of property that is subject to the alternative depreciation system is determined when it otherwise qualifies for bonus depreciation.

Although the IRS declined to remove the term “predecessor” from the final regulations’ definition of used property, it did decide to define the term in the final regulations. Therefore a predecessor is defined as (1) the transferor of an asset to a transferee in a transaction to which Sec. 381(a) applies; (2) a transferor of an asset to a transferee in a transaction in which the transferee’s basis in the asset is determined, in whole or in part, by reference to the basis of the asset in the hands of the transferor; (3) a partnership that is considered as continuing under Sec. 708(b)(2); (4) the decedent, in the case of an asset acquired by an estate; or (5) a transferor of an asset to a trust.

The final regulations are effective for qualified property placed in service (or planted or grafted, as applicable) during tax years that include the date they are published in the Federal Register. However, taxpayers 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.

Proposed regulations

The 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 upon their publication as final regulations 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.

Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.

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