IRS Issues Proposed Regulations on 100% Bonus Depreciation

By Kevin Johnson, CCSP, LEED AP – Midwest Practice Leader

The U.S. Treasury Department and the IRS has issued proposed regulations (REG-104397-18) providing guidance on Section 168(k), which was amended by P.L. 115-97, known as the Tax Cuts and Jobs Act (TCJA). The TCJA increased the allowable first-year depreciation deduction for qualified property from 50% to 100% for property acquired and placed in service after Sept. 27, 2017. This will get phased down by 20% per year beginning after Dec. 22, 2022. The biggest change that arose from tax reform was the ability to now take bonus depreciation on used property by waiving the original-use requirement. These simple changes cause cascading issues and transition problems for taxpayers and needed to be addressed through further tax regulation.

The proposed regulations come in the form of an entirely new section at Prop. Regs. Sec. 1.168(k)-2 and also makes conforming amendments to the existing regulations. This new guidance provides that depreciable property must meet four requirements to be considered qualified property:

  • The depreciable property must be of a specified type;
  • The original use of the depreciable property must commence with the taxpayer, or used depreciable property must meet the acquisition requirements of Sec. 168(k)(2)(E)(ii);
  • The depreciable property must be placed in service by the taxpayer within a specified time period or must be planted or grafted by the taxpayer before a specified date; and
  • The depreciable property must be acquired by the taxpayer after Sept. 27, 2017.

Property of a specified type retains many of the original provisions and adds a few new categories. This section also clarifies that Qualified Improvement Property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2018 does in fact qualify for 100% bonus depreciation as 39-year property. This category was inadvertently removed in the TCJA and will not qualify for bonus pending further technical correction legislation.

Used property still requires a taxpayer or a predecessor to have not held a depreciable interest in used property prior to the acquisition. This anti-churning provision limits related parties from trading property back and forth to achieve depreciation benefits. However, if a taxpayer lessee acquires the overall leased property of which the taxpayer already has a depreciable basis in the improvements, the acquired property would qualify. This is not to include any unadjusted depreciable basis attributable to the improvements of the lessee. Further, the Treasury and the IRS believe that additional first year depreciation should not be permitted to members of a consolidated group and for purposes of this rule consolidated members will be treated as having a depreciable interest in the property.

The proposed regulations provide rules applicable to the acquisition requirements to include self-constructed property or property described in 168(k)(2(B) or (C). Much of the guidance borrows language and concepts from the 1603 grant program for payments of Specified Energy Property in lieu of Tax Credits arising from the American Recovery and Reinvestment Tax Act of 2009. Central to the acquisition requirement is a written binding contract provision and examples that provide clarification.

Bonus depreciation is required on any property that meets the criteria unless a taxpayer makes an irrevocable election out. The election is on a class by class basis and is done on the current year Form 4562 “Depreciation and Amortization” and its instructions. Taxpayers may elect out of bonus depreciation altogether or the taxpayer may elect 50% additional first year depreciation deduction instead of 100%. The election must be made on a timely filed return. Taxpayers are allowed to rely on these proposed rules until final regulations are published. Taxpayers that have already filed their 2017 return and either did not claim the mandatory deduction on qualifying property, or did not elect out but still wish to do so, will need to file an amended return.

If you have questions on bonus depreciation, please contact an ICS representative.

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