The IRS issued final regulations (T.D. 9916) providing guidance on additional first-year (bonus) depreciation under Sec. 168(k), which was amended by the law known as the Tax Cuts and Jobs Act, P.L. 115-97. T.D. 9916 provides taxpayers with guidance on issues involving the application of Sec. 168(k) that were not addressed in 2019 final regulations (T.D. 9874). This includes clarifying guidance on the requirements that must be met for property to qualify for the deduction, including used property. The regulations also address recent legislative changes to the depreciation rules for qualified improvement property.
The final regulations provide:
- Rules relevant to the definition of qualified property;
- Rules for consolidated groups;
- Rules for components acquired or self-constructed after Sept. 27, 2017, for larger self-constructed property for which manufacture, construction, or production began before Sept. 28, 2017;
- Rules for applying the midquarter convention, under Sec. 168(d); and
- Changes to the definitions in the 2019 final regulations for the terms “qualified improvement property,” “predecessor,” and “class of property.”
In response to comments, the IRS clarified the application of the five-year safe harbor and the de minimis rule. It also agreed to simplify the series of related-transaction rules.
Additionally, the final regulations provide rules for consolidated groups and rules for components acquired or self-constructed after Sept. 27, 2017, for larger self-constructed property on which production began before Sept. 28, 2017.
In a change from the proposed regulations, in lieu of the proposed consolidated acquisition rules in the proposed regulations, the final regulations adopt the alternative delayed bonus approach, under which the transferee member (or target) is treated as selling and then purchasing eligible property for cash, in the case of actual and deemed acquisitions of eligible property in certain circumstances.
The final regulations also address the definition of qualified improvement property (QIP) in Sec. 168(e)(6), which was amended by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. Under the CARES Act change, QIP must be “made by the taxpayer”; therefore, T.D. 9916 amends Regs. Sec. 1.168(b)-1(a)(5)(i)(A) to provide that the improvement must be made by the taxpayer. The preamble explains that “an improvement is made by the taxpayer if the taxpayer makes, manufactures, constructs, or produces the improvement for itself or if the improvement is made, manufactured, constructed, or produced for the taxpayer by another person under a written contract.” The CARES Act also retroactively changed the recovery period for QIP to 15 years, making QIP eligible for bonus depreciation through 2026.
The IRS plans to issue procedures for taxpayers to choose to apply the final regulations in prior tax years or to rely on the proposed regulations issued in September 2019.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.