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IRS Proposes Regulations Interpreting TCJA Amendments to Bonus Depreciation Rules

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On August 3, 2018, the Treasury Department and Internal Revenue Service (the "IRS") released proposed regulations (the "Proposed Regulations" available here) that provide guidance regarding the additional first year depreciation deduction (the "bonus depreciation deduction") under Section 168(k) of the Internal Revenue Code (the "Code"), as recently amended by the Tax Cuts and Jobs Act (the "TCJA"). These Proposed Regulations affect taxpayers who deduct depreciation for qualified property acquired and placed in service after September 27, 2017.

The TCJA made several amendments to the bonus depreciation deduction. Most importantly, the TCJA (i) increased the bonus depreciation deduction percentage from 50% to 100% (subject to phase-downs for property placed in service generally between 2023 and 2026); (ii) expanded the property eligible for the bonus depreciation deduction to include certain used depreciable property; and (iii) generally extended the placed-in-service date from before January 1, 2020, to before January 1, 2027. Under the TCJA, used depreciable property is generally eligible for the bonus depreciation deduction if the taxpayer never used the property prior to acquiring it, is unrelated to the transferor, and did not take a carry-over basis (in whole or in part) from the transferor.

The Proposed Regulations provide additional guidance regarding these amendments. Noteworthy guidance includes the following:

  • Bonus depreciation deductions are unavailable for "forward" and "reverse" remedial allocations under Code Section 704(c).
  • Bonus depreciation deductions are unavailable for basis adjustments under Code Section 732 (adjusting the basis of property distributed by a partnership) and Code Section 734(b) (adjusting the basis of partnership property).
  • Bonus depreciation deductions are generally available to the extent a taxpayer increases its interest in depreciable property.
  • If the taxpayer or a predecessor owns, or has ever previously owned, an interest in the property, the taxpayer can claim bonus depreciation deductions only as to its increased ownership above that prior level.
  • The IRS is requesting comments on whether a safe harbor should be provided to limit the backward-looking period of time during which prior ownership must be taken into account.
  • In making the determination whether a member of a consolidated group previously used property prior to acquiring it, such member is generally treated as previously having an interest in all property in which the consolidated group is treated as previously having an interest.
  • Bonus depreciation deductions are generally available for Code Section 743(b) basis adjustments of partnership property arising from transfers of partnership interests when an election is in effect under Code Section 754.
  • The rules described above limiting bonus depreciation deductions to the taxpayer’s (indirect) increased interest in depreciable property apply.
  • For purposes of the restrictions on bonus depreciation deductions for used depreciable property, relatedness is tested at the partner level.
  • Where used property eligible for bonus depreciation deductions is contributed to a partnership in the same year it is purchased by the contributing partner,
  • The bonus depreciation deduction is generally allocated between the contributing partner and the partnership based upon the relative number of months during the year they each own the property, but
  • If, apart from the contributing partner, any partner or predecessor of a partner owns or previously owned an interest in the property, the bonus depreciation deduction is allocated entirely to the contributing partner.
  • In making the determination whether the transferor of used property is related to the transferee, related transactions are generally stepped together.

The Proposed Regulations are proposed to apply to qualified property placed in service by the taxpayer during or after the taxable year that includes the date of publication of final regulations. Prior to the publication of final regulations, taxpayers may apply the Proposed Regulations to qualified property acquired and placed in service after September 27, 2017, by the taxpayer during taxable years ending after that date.

Written or electronic comments and requests for a public hearing must be received by October 9, 2018.

Should you have any questions or concerns about the impact the Proposed Regulations may have on your business, please contact any of the authors of this update.

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