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IRS Releases Final Regulations on Additional First Year Depreciation Deductions

October 09, 2019

The IRS and Treasury have released the highly anticipated final regulations that provide guidance regarding additional first year bonus depreciation deductions. Learn more.

Attention businesses, the IRS and Treasury have released final regulations that provide guidance regarding additional first year bonus depreciation. These allow businesses to write off most depreciable business assets in the year they are placed in service. While the final regulations clarify some lingering questions, there are a few more issues that need to be resolved, which is why the IRS and Treasury have also released an additional set of proposed regulations. Here are the details.

The original proposed regulations

The final regulations finalize the proposed regulations issued in August 2018. The regulations provide guidance on Section 168(k) of the tax code (amended by the Tax Cuts and Jobs Act) to increase the allowable first year depreciation deduction for qualified property from 50% to 100%.

The final regulations adopt these proposed regulations with a few modifications to operational rules including- computing bonus depreciation, making certain elections under IRC Sec. 168(k) and qualifications that must be met for bonus depreciation to be available.

Let’s dive into the final regulations

Check out the final regulations here.

Qualified improvement property- Unfortunately, the technical corrections to Qualified Improvement Property (QIP) were not included in the final regulations. The IRS received multiple comments requesting clarification on QIP, specifically if property placed in service after 2017 can be considered QIP. In order for QIP placed into service post 2017, a legislative change must be enacted to provide a recovery period of 20 years or less. We have a blog on this- Bonus Depreciation: How Building Improvements Fell through the Cracks

Acquired and self-constructed property- The final regulations provide that property constructed for a taxpayer by a third party will now be treated as “self-constructed” property. The acquisition rule will be met under the self-constructed property rules for determining when construction of a substantial nature has been completed.

When is the acquisition date of used property acquired?

This date is the later of:

  • The date on which the contract is entered
  • The date on which the contract is enforceable under state law
  • The date on which all cancellation periods end (if the contract has one or more cancellation periods)
  • The date on which all conditions subject to clauses are satisfied (if the contract has one or more contingency clauses)

Definition of the term “predecessor”- The final regulations clarify the term “predecessor” for those taxpayers (or their predecessors) who have a prior depreciable interest in acquired property. Predecessor is defined as:

  • The transferor of an asset to a transferee in a transaction to which Section 381(a) applies
  • A transferor of an asset to a transferee in a transaction in which the transferee’s basis in the asset is determined (in whole or in part) by reference to the basis of the asset in the hands of the transferor
  • A partnership considered “continuing” under Section 708(b)(2)
  • The decedent, in the case of an asset acquired by an estate
  • A transferor of an asset to a trust

When are the final regulations effective?

The final regs are effective for qualified property placed in service after September 27, 2017.

What additional regulations were proposed?

The proposed regs clarify:

  • Certain property not eligible for the additional first year depreciation deduction
  • A de-minimis use rule for deciding whether property is used
  • The tax treatment of components acquired after September 27, 2017, of larger property for which construction began prior to September 28, 2017

The IRS and Treasury have also withdrawn and re-proposed rules regarding how the used property acquisition requirements apply to consolidated groups (and other related transactions).

Comments on the proposed regulations are due October 23rd, 2019.

Contact us for further guidance.

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