100% Bonus Depreciation – the Final Regulations
On September 13, 2019 the IRS issued final regulations on the allowance for the additional first year 100% bonus depreciation deduction under Section 168(k). These final regulations adopt the proposed regulations that were issued in August of 2018, with some modifications.
The Tax Cuts and Jobs Act (TCJA) made several amendments to the allowance for the additional first year depreciation deduction in Section 168(k) (bonus depreciation). A few of the significant amendments are:
- Bonus depreciation is extended through 2026 (2027 for longer production period property and certain aircraft).
- Bonus depreciation is increased from 50% to 100% for property placed into service after September 27, 2017, and before January 1, 2023 (January 1, 2024 for longer production period property and certain aircraft).
- Bonus depreciation phases down as follows:
- 80% for property placed in service before January 1, 2024
- 60% for property placed in service before January 1, 2025
- 40% for property placed in service before January 1, 2026
- 20% for property placed in service before January 1, 2027
The changes also apply to certain plants planted or grafted after September 27, 2017 and before January 1, 2027.The final regulations remove qualified improvement property from the definition of qualified property, but add qualified film or television production and qualified live theatrical production as defined in Sections 181(d) and (e). A taxpayer can deduct up to a limited amount of aggregate production costs of a qualified film, television or live theatrical production for the year in which the costs are paid or incurred by the taxpayer. The production costs do not include the cost of obtaining a production after its initial release or broadcast. Also, only the owner of the qualified film or television production is eligible to make the Section 181 election. The final regulations clarify that the owner of the qualified film, television or live theatrical production is the only taxpayer eligible to claim the additional first year depreciation for such production and must be the taxpayer that places such production in service.
- The definition of qualified property was expanded to include both new and used property. The used property is “new to you” if neither the taxpayer, nor a related party, had a previously depreciable interest in the property and the original use of the property begins with the taxpayer.
- Qualified property includes property used in certain regulated utility trades or businesses.
- Any property used in a trade or business with floor plan financing interest is specifically excluded from the definition of qualified property.
- A new election has been added under Section 168(k)(10), which allows taxpayers to elect to claim 50% bonus depreciation in lieu of 100% bonus depreciation for property acquired after September 27, 2017 and placed in service in the first tax year ending after September 27, 2017.
- Section 168(k)(4) has been repealed. This relates to the election to accelerate alternative minimum tax (AMT) credits in lieu of claiming bonus depreciation.
Along with the final regulations, the IRS and Treasury also released new bonus depreciation regulations that propose rules on issues not addressed in the final regulations regarding:
- The definition of qualified property
- Components of self-constructed property
- The application of the mid-quarter convention
- Consolidated groups
The final regulations clarify the requirements that must be met for property to qualify for the bonus deduction under Section 168(k). For property to be “qualified” it must meet the following requirements:
- The property must be a specific type of property.
- The use of the property must begin with the taxpayer, or if it is used property it must be new to the taxpayer and not used by any other related party.
- The property must be acquired and placed into service after September 27, 2017 and before January 1, 2027.
The final regulations apply to qualified property placed in service on or after a tax year that includes the date the regulations are published in the Federal Register. Until the final regulations are published, a taxpayer may apply the proposed regulations to qualified property acquired and placed in service after September 27, 2017, in a tax year ending on or after September 28, 2017, and to the components acquired or self-constructed after September 27, 2017 to which the regulations are proposed to apply.
The taxpayer can apply the final regulations, in their entirely, to qualified property acquired and placed in service as outlined above, provided the taxpayer consistently applies all the rules in the final regulations.
For more information, please contact a member of the Herbein tax team, or email us at firstname.lastname@example.org
Article written by Terri Gray.