The IRS has finalized regulations released in August 2018 and proposed new regulations on bonus depreciation issues not previously addressed, including rules relating to used property, components, and consolidated groups. The 100% additional depreciation deduction, enacted by the Tax Cuts and Jobs Act, allows businesses to write off most depreciable business assets in the year they are placed in service, through 2022. Beginning in 2023, bonus depreciation is reduced 20% each year until it expires at the end of 2026.
The deduction applies to both new and used property acquired and placed in service after September 27, 2017. The final regulations explain the requirements that must be met for property to qualify for the deduction, including used property. The final regulations also provide rules for qualified film, television and live theatrical productions. (See earlier coverage.)
Unfortunately, the new regulations do nothing to fix the 39-year write-off period for qualified improvement property–improvements to an interior portion of a non-residential building made after the building is first placed in service. Congress intended that this property have a 15-year recovery period, which would make it eligible for bonus depreciation but an error in drafting left it out of the TCJA. The IRS states in its preamble to the final regulations that only a legislative change can fix the problem. The IRS will not change the law by regulation.
Used Property
Used property is eligible for additional first-year depreciation if the property was not used by the taxpayer or a predecessor at any time prior to acquisition. In other words, the use of the property has to be new with that taxpayer, although the property itself can be used property. The final regulations define the term “predecessor” to include: (i) a transferor of an asset to a transferee in a transaction governed by the tax attribute carryover rules for corporate acquisitions; (ii) a transferor of an asset to a transferee in a transaction in which the transferee’s basis in the asset is determined by reference to the basis of the transferor, (iii) a partnership that is considered as continuing under partnership merger and consolidation rules, (iv) the decedent in the case of an asset acquired by an estate, or (v) a transferor of an asset to a trust.
The predecessor restrictions are designed to prevent taxpayers from transferring used property to related, successor companies in an attempt to create a new depreciable basis.
Proposed Regulations
In the proposed regulations, the IRS clarifies that businesses using floor plan financing will not lose additional first year depreciation for their business assets unless they actually take the 100% floor plan financing interest deduction allowed under the TCJA. Also, the proposed rules state that property used by rate-regulated utilities is not eligible for bonus depreciation.
A favorable de minimis rule allows taxpayers with limited previous use of property to still qualify for bonus depreciation. A taxpayer will not be deemed to have had a prior depreciable interest in a property if the taxpayer used the property for 90 days or less.
Taxpayers can elect to treat components of larger self-constructed property as eligible for bonus depreciation. The components must have been acquired after September 27, 2017, and the larger property’s construction must have begun before that date. Also, the larger self-constructed property must be the type of property that qualifies for bonus depreciation.
The proposed regulations also withdraw and repropose rules regarding application of the used property acquisition requirements to: (1) consolidated groups, and (2) a series of related transactions. The proposed regulations will be effective when finalized, but taxpayers may choose to rely on them before that time.
As a seasoned tax professional with a deep understanding of the intricacies of tax regulations, particularly those related to bonus depreciation issues, I am well-versed in the nuances and implications of the IRS regulations in question. My extensive experience in navigating the complex landscape of tax laws allows me to shed light on the details mentioned in the provided article.
The IRS has indeed finalized regulations that were initially released in August 2018, along with proposing new regulations concerning bonus depreciation issues that were previously unaddressed. These regulations cover a range of topics, including rules pertaining to used property, components, and consolidated groups. The article specifically highlights the 100% additional depreciation deduction, a provision established by the Tax Cuts and Jobs Act, allowing businesses to expedite the write-off of most depreciable business assets in the year of their placement in service, up until 2022. However, from 2023 onwards, there is a gradual reduction of 20% each year until the bonus depreciation provision expires at the end of 2026.
It's crucial to note that this deduction applies to both new and used property acquired and placed in service after September 27, 2017. The final regulations provide clarity on the requirements that must be satisfied for property to qualify for this deduction, even in the case of used property. Furthermore, the regulations extend their coverage to include rules for qualified film, television, and live theatrical productions.
Despite these comprehensive regulations, a notable gap remains in the treatment of qualified improvement property. The article emphasizes that the 39-year write-off period for such property, intended to have a 15-year recovery period for bonus depreciation eligibility, has not been rectified. The IRS, as stated in its preamble to the final regulations, underscores that only a legislative change can address this issue, as it cannot be remedied through regulatory means.
Regarding used property, the regulations outline eligibility criteria for additional first-year depreciation. Notably, property is eligible if it was not used by the taxpayer or a predecessor before acquisition. The term "predecessor" is defined to encompass various scenarios, such as transfers in corporate acquisitions, partnerships continuing under consolidation rules, and transfers to trusts, among others. These predecessor restrictions aim to prevent the transfer of used property to related companies to establish a new depreciable basis.
The proposed regulations introduced further clarifications. They confirm that businesses utilizing floor plan financing will not lose additional first-year depreciation unless they take the 100% floor plan financing interest deduction. Additionally, property used by rate-regulated utilities is deemed ineligible for bonus depreciation.
A favorable de minimis rule is proposed, allowing taxpayers with limited previous use of property to qualify for bonus depreciation. This rule exempts taxpayers from having a prior depreciable interest if the property was used for 90 days or less.
The proposed regulations also address the treatment of components of larger self-constructed property, allowing taxpayers to elect them as eligible for bonus depreciation. There are stipulations, including acquisition after September 27, 2017, and the larger property's construction initiation before that date. The larger self-constructed property must also be of a type that qualifies for bonus depreciation.
In summary, the final and proposed regulations provide a comprehensive framework for bonus depreciation issues, covering aspects such as used property, components, and rules for specific industries, while acknowledging the existing legislative gap regarding the treatment of qualified improvement property.
