In September 2019 the IRS issued Regs. Sec. 1.168(k)-2 (T.D. 9874, the final regulations) and Prop. Regs. Sec. 1.168(k)-2 (REG-106808-19, the 2019 proposed regulations), which provide guidance regarding the bonus depreciation deduction under Sec. 168(k), as modified by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. Both the final regulations and the 2019 proposed regulations include significant, taxpayer-favorable changes from the proposed regulations issued in 2018 (REG-104397-18), including rules for self-constructed property, the determination of acquisition dates, predecessor ownership, certain partnership rules, and some industry-specific guidance.
The TCJA increased the additional first-year depreciation deduction in Sec. 168(k) from 50% to 100% for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 (or before Jan. 1, 2024, for longer-production-period property). The 100% additional first-year depreciation deduction is also allowed for specified plants planted or grafted after Sept. 27, 2017, and before Jan. 1, 2023. The 100% additional first-year depreciation deduction is then phased down by 20% each year for five years.
The TCJA also expanded bonus depreciation to certain used property, which is beneficial for taxpayers that acquire property that is not original-use. This change, among others, led to the need for new rules to address bonus depreciation post-TCJA.
One of the most significant changes in the final regulations is that the IRS reversed its position on property subject to a written binding contract that was constructed, manufactured, or produced for the taxpayer by another person so that it is now considered to be self-constructed, instead of being subject to the default written binding contract rules for determining the acquisition date. Because of this favorable change, third-party constructed property under a written binding contract is deemed to have been acquired on the date when physical work of a significant nature begins, including by application of the 10% safe-harbor test. This may favorably affect projects that started around the Sept. 27, 2017, date that were completed and placed in service in 2018 or later. For third-party constructed property without a written binding contract, the 2019 proposed regulations now provide that the property is deemed to have been acquired when more than 10% of the total cost of the property is paid or incurred.
ACQUISITION DATE OF PROPERTY
The final regulations provide additional clarity around determining the date when a written contract becomes binding, for purposes of determining a property's acquisition date. Property acquired under a contract that was signed prior to Sept. 27, 2017, but became binding at a later point qualifies for 100% bonus depreciation.
To be qualified for bonus depreciation, a used asset must not have been previously used by the taxpayer or a predecessor at any time prior to the acquisition. The IRS provided in the final regulations that a predecessor includes:
- A transferor of an asset to a transferee in a transaction to which Sec. 381(a) applies;
- A transferor of an asset to a transferee in a transaction in which the transferee's basis in the asset is determined, in whole or in part, by reference to the basis of the asset in the hands of the transferor;
- A partnership that is considered as continuing under Sec. 708(b)(2);
- The decedent in the case of an asset acquired by an estate; or
- A transferor of an asset in a trust.
A safe harbor was added that provides a five-calendar-year lookback period to determine if the asset was used by the taxpayer or a predecessor.
For a detailed discussion of the issues in this area, see "Tax Clinic: Bonus Depreciation Regs. Are Favorable for Taxpayers," in the February 2020 issue of The Tax Adviser.
— Caleb Cordonnier, CPA, Olivia McCarthy, CPA, and Jason Seo, J.D., LL.M.
The Tax Adviser is the AICPA's monthly journal of tax planning, trends, and techniques.
Also in the February issue:
- An update on developments affecting partners and partnerships.
- A discussion of tax function automation.
- A look at analytics in the classroom.
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