On August 3, IRS issued proposed regulations, REG-104397-18, to detail how bonus depreciation (the additional first- year depreciation deduction) under IRC § 168(k) should work in light of changes made by the Tax Cuts and Jobs Act. PL 115-97. Guidance provided in the proposed regulations closely tracks the statutory language, updates existing guidance (Prop. Treas. Reg. § 1.168(k)-1) and creates a new subsection of rules (Prop. Treas. Reg. § 1.168(k)-2).
Generally, the TCJA modified bonus depreciation in the following key ways:
The TCJA also repealed (1) the election to accelerate alternative minimum tax credits in lieu of the additional first year depreciation deduction for taxable years beginning after December 31, 2017 and (2) IRC § 168(k)(3) (relating to qualified improvement property) for property placed in service after December 31, 2017 (more on this below).
Generally, the TCJA and proposed regulations require that to qualify for bonus depreciation:
Specifically, the regulations track the TCJA and provide that, to be qualified property, it must be:
The proposed regulations do not specifically address the fact that for property placed in service after December 31, 2017, the TCJA eliminated the 15-year MACRS classification for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property and amended IRC § 168(k) to eliminate qualified improvement property as a specific category of qualified property. Instead, the proposed regulations allow additional first-year depreciation only on qualified improvement property acquired and placed in service after September 27, 2017, and before January 1, 2018. The proposed regulations leave it to Congress to make a technical correction for qualified improvement property placed in service after December 31, 2018. For now, this property remains 39-year property, not eligible for bonus. For more information on this problem, click here.
Note: On August 16, 2018, Senate Finance Republicans sent a letter to Treasury and IRS, stating that a drafting error was made and that Congress intended that qualified improvement property would have a 15-year MACRs life and would, thus, be eligible for bonus depreciation.
The following types of property are generally not eligible for the additional first-year depreciation deduction:
The proposed regulations largely point to provisions already in place for IRC § 179 to prevent potential abuse related to taxpayers claiming bonus depreciation for used property. Three requirements must be met for used property to qualify:
IRC § 704(c) allows depreciation of remedial allocations in situations where partners contribute depreciable property to a partnership and the partnership’s book value in the property is higher than its adjusted tax basis. The proposed regulations state that these remedial allocations do not qualify for bonus depreciation. This is because in such transactions, the partnership’s basis is determined by reference to the contributing partner’s basis, thus violation IRC § 179(d)(2)(C). The proposed regulations also provide that IRC § 734(b) basis step-ups are not eligible for the additional first-year depreciation deduction. In contrast, the proposed regulation do allow bonus depreciation for some partnership IRC § 743 adjustments made when a new partner enters a partnership and a section 754 election is made. It is possible that these rules will be revised before the final regulations are issued.
The proposed regulations retain the general rule that elections out of bonus depreciation can be made on a class-by-class basis. The special election to apply 50 percent bonus to property acquired by a taxpayer and placed in service during its taxable year that includes September 28, 2017, however, must be made for all qualifying property or not at all.
Until final regulations are issued, taxpayers may apply the proposed regulations to property placed in service after September 27, 2017.
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