Bonus Depreciation Final Regulations
By: Ron Wainwright, Partner, Credits & Accounting Methods; Dawn Polin, Senior Manager, Credits & Accounting Methods; Sean O’Leary, Manager, Credits & Accounting Methods
The IRS and Treasury recently issued the last set of final regulations implementing the 100 percent additional first-year depreciation deduction that allows businesses to write off the cost of most depreciable business assets in the year they are placed in service by the business.
Also referred to as bonus depreciation, this deduction was created in 2017 by the Tax Cuts and Jobs Act and generally applies to depreciable business assets with a recovery period of 20 years or less as well as certain other property. Machinery, equipment, computers, appliances and furniture generally qualify. The deduction applies to qualifying property (including used property) acquired and placed in service after September 27, 2017.
The final regulations provide clarifying guidance on the requirements that must be met for property to qualify for the deduction, including used property.
Below are some of the highlights from the final regulations.
- Clarification is provided around the five-year safe harbor for used property to include the entire calendar year the asset was placed in service by the predecessor. A predecessor is partially defined as including a transferor of an asset to a transferee in a transaction where the basis of the asset is determined in whole or in part by reference to the basis of the asset in the hands of the transferor. The final regulations clarify that the term predecessor in this application is meant to be property specific.
- The de minimis use rule walks through a scenario in which the taxpayer acquires an asset and then sells it to an unrelated party within 90 days, then at a later time reacquires the asset. The 90-day-or-less period of ownership will be disregarded when determining if the asset was used by the taxpayer previously in applying first-year bonus depreciation unless the asset was originally purchased prior to the bonus depreciation rule change date of September 28, 2017.
- The partnership look-through rule has been withdrawn so that a taxpayer is no longer required to consider a prior depreciable interest in an asset owned by a partnership in which the taxpayer was a partner.
- Simplification of the related transactions rule. The final regulations provide that each transferee in a series of related transactions tests its relationship under sections 179(d)(2)(A) or (B) with the transferor from which the transferee directly acquires the depreciable property (immediate transferor) and with the original transferor of the depreciable property in the series. The transferee is treated as related to the immediate transferor or the original transferor if the relationship exists either immediately before the first transfer of the depreciable property in the series or when the transferee acquires the property. Any transferor in a series of related transactions that ceases to exist during the series is deemed to continue to exist for purposes of testing relatedness.
- The mid-quarter convention is modified to be determined on the basis of property before reduction for allowed or allowable additional first year depreciation.
- The definition of qualified improvement property is revised to specify that the improvement must be made by the taxpayer in addition to being placed in service by the taxpayer after December 31, 2017.
- The final regulations provide expanded options for taxpayers to utilize the component election and expand it by removing the prior cut-off dates, which prevented the election from being used on larger self-constructed property placed in service after December 31, 2019. In addition, the final regulations expand the definition of larger self-constructed property that is eligible for the election to include self-constructed property produced by another taxpayer under a contract that doesn’t meet the binding contract definition.
- For corporations that file as part of a consolidated group, the final regulations provide changes in how eligible property acquired from the consolidated group by a member who leaves the group is treated for purposes of applying bonus treatment to those assets. This approach, termed the “Delayed Bonus Approach”, treats the transferee member as selling the assets to an unrelated party and immediately re-acquiring the assets for the same amount. The final regulations also include a new election to opt out of the “Delayed Bonus Approach”.