Proposed Regulations were issued providing preliminary insight into the modifications of §168(k) per the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97). These modifications include:
- Certain used property is eligible for the additional first year depreciation deduction, and
- An increase in the amount of that deduction to 100% of eligible property.
The Regulations indicate that in order to qualify for the 100% first year depreciation deduction, depreciable property must meet four requirements:
- The depreciable property must be of a specified type;
- The original use of the depreciable property must commence with the taxpayer, or used depreciable property must meet the acquisition requirements of Sec. 168(k)(2)(E)(ii);
- The depreciable property must be placed in service by the taxpayer within a specified time period or must be planted or grafted by the taxpayer before a specified date; and
- The depreciable property must be acquired by the taxpayer after Sept. 27, 2017.
An election to claim 50% bonus depreciation instead of 100% bonus depreciation is available for the tax year that includes September 28, 2017. The election must be made for qualifying property; no designation by individual class is allowed.
To expand upon the requirements to claim bonus depreciation on used property:
If the taxpayer had an interest in the property previously, they are ineligible to claim the deduction – regardless of whether or not depreciation had previously been claimed. In addition, members of a consolidated group are all deemed to have interest in all property owned by the consolidated group.
A discussion was also presented as it relates to the used property requirements to be eligible for bonus depreciation as it relates to partnership transactions:
- Remedial allocations under 704(c) do not qualify for bonus depreciation.
- Property contributed to a partnership with a zero adjusted tax basis is not allowed bonus depreciation.
- 734(b) basis adjustments are not eligible for bonus depreciation.
- For 743(b), each partner is treated as having owned and used the partner’s proportionate share of partnership property. An additional first year bonus depreciation deduction would be allowed if the partner acquiring the interest, or predecessor of such partner, has not used the portion of the partnership property to which the §743(b) basis adjustment relates at any time prior to the acquisition.
The proposed regulations did not address the recovery period of qualified improvement property placed in service after December 31, 2017. As a result, the taxpayer is left to assume that such property should be assigned a 39-year recovery period and be ineligible for bonus depreciation.
As these are proposed regulations, comments are requested and will be accepted within 60 days of the date the regulations are published in the Federal Register. Specifically, comments were requested for the implementation of a potential safe harbor for analyzing when a taxpayer may have previously had an interest in the depreciable property and would be unable to claim bonus depreciation.
If you have any questions or would like to submit comments, reach out to Julie Helms, Director of Specialty Tax at Lurie.