Find Your Specialist


Contact Us

    Go Back

    IRS Clarification: Who Can Take Bonus Depreciation on Used Property?

    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.

    Related Articles

    Privacy Overview

    When you use or access the Site, we use cookies, device identifiers, and similar technologies such as pixels, web beacons, and local storage to collect information about how you use the Site. We process the information collected through such technologies, which may include Personal Information, to help operate certain features of the Site (e.g., to prevent online poll participants from voting more than once), to enhance your experience through personalization, and to help us better understand the features of the Site that you and other users are most interested in.

    You can enable or disable our use of cookies per category.
    Always Enabled

    Essential cookies enable you to navigate our Site and use certain features, such as accessing secure areas of our Site and using other features of our service that require us to keep track of certain information as you navigate from page to page. Although some of these cookies are “required” to enable certain functionality, you can disable them in the browser, but doing so will limit your ability to use the features supported by such cookies.

    Functionality cookies are cookies that support features of the Site, such as remembering your preferences.

    These cookies collect information about how you use our Site, including which pages you go to most often and if they receive error messages from certain pages. These cookies are only used to improve how our Site functions and performs.

    From time-to-time, we may engage third parties that track individuals who visit our Site. These third parties may track your use of the Site for purposes of providing us with certain marketing automation features (to help us improve our outreach to current and prospective clients) and providing you with targeted advertisements.