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IRS Clarifies New Rules for Bonus Depreciation

Bonus Depreciation Guidance Clears Up Important Questions on 100% Write-Offs

The expansion of bonus depreciation was a welcome part of the Tax Cuts and Jobs Act, and now the IRS has released regulations to clarify many aspects of the new rules. The proposed regulations address such topics as when “used” property is eligible for bonus depreciation and how to determine when property is “acquired.” A large portion of the 31-page regulation explains how the bonus depreciation rules apply to partnership adjustments.

To be eligible for first-year depreciation, the property must meet these basic requirements: (1) the depreciable property must be MACRS property with a recovery period of 20 years or less (or other special types of property); (2) the depreciable property can be new or used; (3) the depreciable property must be placed in service by the taxpayer within a specified time period; and (4) the depreciable property must be acquired by the taxpayer after September 27, 2017.

New Bonus Depreciation Rules under TCJA

TCJA expands bonus depreciation by allowing a 100% write-off of business assets for five years, through 2022. This rule is retroactive to September 28, 2017, so assets placed in service from that date forward qualify. Purchases of both new and used property qualify. Prior law only allowed bonus depreciation for purchases of new property.

The Act also allows bonus depreciation and a 15-year recovery period for an expanded class of property improvements, such as building interior renovations, roofs, ventilation, heating and air conditioning systems, fire protection, alarm systems, and security systems now qualify as 15-year property.

Beginning in 2023, bonus depreciation is reduced 20% each year until it expires after 2026.

New Rules for 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 the acquisition. The property is treated as used by the taxpayer before acquisition only if the taxpayer had a depreciable interest in the property at any time before the acquisition, whether or not depreciation was actually claimed. Also, if a taxpayer initially acquires a depreciable interest in a portion of property and later acquires an additional depreciable interest in the same property, the additional depreciable interest won’t be considered as previously used by the taxpayer.

Binding Contracts and Acquisition Time of Property

To be eligible for bonus depreciation, property must be acquired by the taxpayer after September 27, 2017, or acquired by the taxpayer under a written binding contract entered into by the taxpayer after September 27, 2017. Property that is manufactured, constructed, or produced for the taxpayer by another person under a binding contract qualifies for the extra depreciation. Further, if the written binding contract states the date on which the contract was entered into and a closing date, delivery date, or other similar date, the date on which the contract was entered into is the date the taxpayer “acquired” the property. Note that a letter of intent for an acquisition is not a binding contract. For self-constructing property, if the taxpayer begins manufacturing, constructing, or producing the property after Sept. 27, 2017, the property will qualify.

Partnership Adjustments

The proposed regulations also explain in detail the bonus depreciation rules for depreciable property contributed to the partnership. Bonus depreciation may now be allowable in the case of a partnership Code Section 743 adjustment, when a partnership adjusts the basis of partnership property after a sale or exchange of a partnership interest. The partnership basis adjustment rules are extensive and complex, something that businesses should discuss with their tax advisors.

Public comments on the proposed regulations must be submitted by October 9, 2018, and the IRS has not yet scheduled a hearing on the new rules. No doubt that tax professionals and businesses are still sorting through the complexities and may have plenty to comment on later.

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