IRS and Treasury Issue Final and Proposed Regulations on Bonus Depreciation

The final and proposed bonus depreciation regulations provide clarity on several issues arising under the August 2018 proposed regulations. The new rules provide alternatives that taxpayers may want to consider before filing their 2018 tax returns, in particular for property previously treated as acquired prior to the 100% bonus depreciation effective date. We expect that additional guidance will be forthcoming to allow amended tax returns and accounting method changes to reflect the new rules for 2017 and 2018 tax returns that have already been filed.

Treasury and IRS released final (T.D. 9874) regulations that implement changes enacted under the Tax Cuts and Jobs Act (TCJA) to bonus depreciation under Sec. 168(k), as well as new proposed (REG-106808-19) rules. Section 168(k) was amended by the TCJA to allow taxpayers to claim 100% bonus depreciation for qualified property acquired after September 27, 2017 and placed in service through December 31, 2022. As expected, the final and proposed regulations do not fix the TCJA’s so-called retail glitch, under which qualified improvement property is not assigned a 15-year recovery period and is ineligible for bonus depreciation. Treasury and IRS stated that a legislative amendment must be enacted for the definition of qualified property to include qualified improvement property.

The final and proposed regulations offer clarity on several issues that taxpayers may want to consider prior to filing their 2018 returns. Specifically, the final and proposed regulations expand the eligibility for 100% bonus depreciation for some items that were treated as acquired prior to the 100% bonus depreciation effective date under the August 2018 proposed regulations. The guidance provides that:

• property that is manufactured, constructed, or produced for the taxpayer by another party under a written binding contract is no longer treated as property acquired under a written binding contract, but is treated as self-constructed property for which contract date does not determine the acquisition date;
• a component of a larger self-constructed property (LSCP) is eligible for 100% bonus depreciation under a limited special election if:
  • the manufacture, construction, or production of the LSCP began before September 28, 2017,
  • the LSCP is eligible property for bonus depreciation after the TCJA changes to the law (e.g., not qualified improvement property placed in service after December 31, 2017),
  • the component was acquired, or the manufacture, construction, or production of the component began, after September 27, 2017, and
  • the LSCP is placed in service by December 31, 2019 (December 31, 2020 for certain property);
• the deemed acquisition date of certain property not subject to a written binding contract is deferred until the date on which the taxpayer has paid or incurred more than 10% of the total cost (excluding land and preliminary activities); and
• the deemed acquisition date of property subject to a written binding contract may be deferred to the date the contract becomes binding, often a date that is later than the date on which the contract is entered into.

The final regulations adopt the regulations proposed on August 2018 with some modifications. Specifically, in addition to the items noted above, the final regulations clarify:

• taxpayers with floor plan financing remain eligible for 100% bonus depreciation for a tax year if business interest for that year is less than the taxpayer’s Sec. 163(j) interest expense limitation for such year (determined without regard to floor plan financing);
• the application of bonus depreciation to film, television and live theatrical performances;
• using the alternative depreciation system (ADS) to determine asset basis for purposes of determining the FDII deduction (Sec. 250) or measuring GILTI (Sec. 951A) does not make that property ineligible for bonus depreciation;
• the eligibility of partnership basis adjustments in the case of a transfer of a partnership interest under Sec. 743(b) for bonus depreciation;
• the eligibility of property deemed to be acquired pursuant to a Sec. 336(e) election;
• the treatment of tax-exempt use property under Sec. 168(h)(6); and
• the definition of prior use for determining whether used property is eligible for bonus depreciation.

The final regulations are effective on the date they are published in the federal register. However, a taxpayer may choose to apply the final regulations to qualified property acquired and placed in service or planted or grafted, as applicable, after September 27, 2017, during taxable years ending on or after September 28, 2017, provided the taxpayer consistently applies all rules in the final regulations.

In addition to the items noted above, the new proposed regulations:

• clarify the definition of a binding contract for purposes of the acquisition of an entity;
• add special rules for consolidated groups;
• address the treatment of property leased to a trade or business eligible for the special rules under the Sec. 163(j) interest expense limitation; and
• provide rules regarding the application of the mid-quarter convention under Sec. 168(d).

The proposed regulations would apply to qualified property placed in service by the taxpayer during or after the taxpayer’s taxable year that includes the date the rules are adopted as final. Pending the issuance of final regulations, a taxpayer may choose to rely on the proposed regulations, in their entirety, for qualified property acquired and placed in service after September 27, 2017, by the taxpayer during taxable years ending on or after September 28, 2017.

The Takeaway

Taxpayers that were previously uncertain whether they qualified for 100% bonus depreciation under the August 2018 proposed rules may benefit from the final and newly proposed bonus depreciation regulations. The final and newly proposed rules provide clarity on several important issues and offer new alternatives for determining whether property meets the acquisition requirement of the TCJA. Taxpayers who have not yet filed their 2018 tax returns may want to consider how the final and proposed regulation impact eligibility for 100% bonus depreciation in 2018. We anticipate that additional guidance will be provided to allow taxpayers to adopt the clarifications in the final and proposed regulations for tax returns that have already been filed by requesting an accounting method change or amending tax returns.