Tax Alert: Proposed Regulations Issued for the 100% Bonus Depreciation Deduction

On August 3, 2018 the Treasury Department and the IRS issued proposed regulations that provide guidance on the 100% bonus depreciation deduction which was added by the Tax Cuts and Jobs Act (“Act”). Below are highlights of the bonus depreciation deduction issued in the Act, along with new proposed regulations put forth this month.

Tax Cuts and Jobs Act Bonus Depreciation Recap:

  • The first-year bonus depreciation deduction is 100% for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. The deduction phases down between 2023 and 2026.
  • An election can be made to claim a 50% bonus depreciation deduction, instead of 100%, for property acquired and placed in service after September 27, 2017.
  • Now allowed on used property.

Proposed Regulations Issued on August 3, 2018: 

  • Applicable to qualified property acquired and placed in service after September 27, 2017.
  • The acquired property must satisfy the requirements for qualified property, original use or used property, placed in service date, and acquisition date.
  • Used property acquisition requirements are defined in detail. Issues affecting partnerships, corporations and related parties are discussed.
  • Acquisition date requirements involving written binding contracts are expanded.

Requirements:

  • Qualified Property is defined as follows:
    • MACRS property that has a recovery period of 20 years or less
    • Certain computer software
    • Water utility property
    • Qualified film or TV production
    • Qualified live theatrical production
    • Certain specified plants (i.e. fruit-bearing trees)
    • Property in the following categories that were acquired after September 27, 2017, and placed in service after September 27, 2017 and before January 1, 2018:
      • Qualified leasehold improvement property
      • Qualified restaurant property
      • Qualified retail improvement property
      • Qualified improvement property (prior definition)
  • The original use rules remained the same, which state that the original use of property must commence with the taxpayer.
  • The Act allowed used property to be eligible for the bonus depreciation deduction. The proposed regulations expand on the used property acquisition requirement.
  • The acquired used property must not have been used by the taxpayer or a predecessor that had a depreciable interest in the property at any time prior to the acquisition. Identifying who has a depreciable interest in the used property is a factor that should be considered closely when satisfying the acquisition requirement.
  • Leased property pursuant to a true tax lease that is acquired at the end of the lease term would be eligible for bonus depreciation.
  • The following does not satisfy the original use and/or the used property requirement:
    • Members of a consolidated group that have a depreciable interest in all the property of the consolidated group
    • Transactions between related taxpayers
    • Section 704(c) allocations and reverse Section 704(c) allocations
    • Zero adjusted tax basis property
    • Section 732 basis of distributed property
    • Section 734(b) basis adjustments
  • Section 743(b) basis adjustments may qualify under the used property rules based on facts and circumstances.
  • The qualified property must be placed in service by the taxpayer after September 27, 2017 and before January 1, 2027.
  • The date of acquisition must be after September 27, 2017 or acquired pursuant to a written binding contract entered into by the taxpayer after September 27, 2017.
  • A contract is binding only if it is enforceable under State law against the taxpayer or a predecessor and does not limit damages to a specified amount.  If the contract states a date on which the contract was entered into, then this is the date of the acquired property.
  • Note that the following are not binding contracts: a letter of intent, an option to either acquire or sell property, and a supply agreement without an amount and a design specification.

Sax LLP will continue to keep you informed as new legislation is developed and additional information is released.  If you have any questions or concerns, feel free to reach out to a Sax advisor at (973) 472-6250 or www.saxllp.com.

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Ivonne Rayo, CPA is a Tax Manager at Sax LLP and a member of Sax’s Construction and Tax Practices. She specializes in solving the complex tax challenges of businesses in multiple states.  Ivonne may be reached at irayo@saxllp.com.