IRS Released Proposed Regulations for Section 168(k) Bonus Depreciation

August 23, 2018

On August 8, 2018, the IRS issued proposed regulations providing guidance on the 100% bonus expensing rules enacted by the Tax Cuts and Jobs Act (“TCJA”) last December. The proposed regulations update the existing regulations in Treas. Reg. § 1.168(k)-1 and add Prop. Treas. Reg. §1.168(k)-2.

Proposed Treasury Regulations Synopsis

Section 168(k) allows a taxpayer to take an additional first year depreciation deduction in the placed-in-service year of qualified property. In order to be eligible for the extended and modified 100% bonus depreciation, your property must meet four key requirements:

  • The depreciable property must be of a specific type. Your property must have a recovery period, as specified under MACRS, of 20 years or less. Depreciable property includes qualified improvement property, computer software, water utility property, qualified film, TV productions and live theatrical performances.
  • The property may be new or used, but must be “new” to you. The property is “new” if the original use of the property begins with the taxpayer. The sale-leaseback rules have been removed so property can be considered “new” even when you put a sale-leaseback transaction in place. The property is “new to you” if neither you, nor a related party, had a previously depreciable interest in the property. The property must also meet the carryover basis requirements of IRC § 179(d)(2)(A),(B),(C), and Treas. Reg. § 1.179-4(c)(1)(ii),(iii), and (iv).
  • The placed-in-service date of the property must be after September 27, 2017. The proposed regulations generally retain the rules set out in Treas. Reg. § 1.168(k)-1(b)(5).
  • The property must also be acquired after September 27, 2017. The binding contract rules in Treas. Reg. § 1.168(k)-1(b)(4)(ii) are retained. Property purchased or constructed for the taxpayer by a third party is considered acquired when a written binding contract for the property is signed. When a taxpayer constructs property itself, where no written contract is in place, the property is considered acquired when the taxpayer begins manufacturing, constructing or producing the property.

The new bonus depreciation schedule is as follows:

Property Placed in Service or Acquired Bonus Depreciation
9/28/2017 – 12/31/2022 100%
1/1/2023 – 12/31/2023 80%
1/1/2024 – 12/31/2024 60%
1/1/2025 – 12/31/2025 40%
1/1/2026 – 12/31/2026 20%

Overall, the provisions outlined in the proposed regulations describe and clarify the statutory requirements that must be met for depreciable property to qualify for the additional first year bonus depreciation. As explained in the Federal Register (Reg-104397-18), “the proposed regulations instruct taxpayers how to determine the additional first year depreciation deduction and the amount of depreciation otherwise allowable for this property.”

What are the key takeaways from the proposed regulations?

The new regulations help explain the new rules established by TCJA. There are many examples contained within these regulations that can help you clarify certain situations.

Still have questions? Feel free to reach out and start a conversation with the Credits and Accounting Methods team at Cherry Bekaert to gain a further understanding of the proposed regulations for bonus depreciation. We’re happy to help you make sense of it all.