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 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.
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.