Final and Proposed 100 Percent Bonus Depreciation Regs
On Friday, September 13, 2019, the Internal Revenue Service released advance copies of final 100 percent bonus depreciation regulations and new, proposed 100 percent bonus depreciation regulations. These regulations have not yet been published in the Federal Register. Until they are, they are not effective and may not be relied upon. The versions published in the Federal Register may also be subject to slight editorial changes. Treasury Decision 9874 contains the final regulations for many Tax Cuts and Jobs Act (TCJA) 100 percent bonus depreciation provisions. The proposed regulations, REG-106808-19, address new or substantially modified provisions related to the TCJA 100 percent bonus depreciation rules.
The Final Regulations
In the final regulations, the Treasury Department has finalized most provisions in the August 2018 proposed regulations while markedly reversing course on one. Notable issues addressed in the regulations include:
- QIP: Since Congress has not yet passed a technical correction, Treasury again refused to treat Qualified Improvement Property as 15-year property eligible for 100 percent bonus depreciation in post-2017 tax years.
- QRP & QRIP: Since the statutory language eliminated qualified restaurant property (QRP) and qualified retail improvement property (QRIP), the final regulations do not provide that these property types are available for assets placed in service in post-2017 tax year.
- ADS Property: Generally, property that must be depreciated under the Alternative Depreciation System of §168(f) is ineligible for bonus depreciation.
- Using ADS to determine the adjusted basis of the taxpayer’s qualified business asset investment under §250(b)(2)(B) or §951A(d)(3) does not cause property to be ineligible for bonus depreciation.
- Similarly, using ADS to determine the adjusted basis to allocate business interest expense between
excepted and non-excepted trades or businesses under §163(j) does not cause property to be ineligible for bonus depreciation.
- The final regulations provide that only a tax-exempt entity’s proportionate share of partnership property is treated as tax-exempt use property that is ineligible for bonus depreciation.
- Predecessors: Property that was previously used by a taxpayer or the taxpayer’s predecessor is ineligible for bonus depreciation under the TCJA. The final regulations define “predecessor” to include the transferor in a §381(a) transaction; a transferor when the transferee’s basis is determined in whole, or in part, with reference to the transferor’s basis; a continuing partnership under §708(b)(2); the decedent for estates; and, the transferor of an asset to a trust.
- Lookback Safe Harbor: The final regulations provide a look-back period of five calendar years immediately prior to an asset’s current placed-in-service date to determine whether the taxpayer had
a prior depreciable interest in the asset.
- Acquisition Rules for Self-Constructed Property: Prior to the TCJA, taxpayers treated property constructed by general contractors as self-constructed property eligible to use 10 percent of construction costs safe harbor to determine the acquisition date. Under the August 2018 proposed regulations, Treasury provided that property constructed by a third party, such as a general contractor, was not self-constructed and was subject to the binding contract acquisition rule. In other words, if the general contractor constructed property under a written, binding contract entered into before September 28, 2017, the property would only be eligible for PATH Act bonus depreciation. In the final regulations, Treasury has now reversed course. Property constructed by third parties is once again considered self-constructed and is eligible for the 10 percent safe harbor. Due to the long lead times for the construction of property, this encourages taxpayers to finish long-term construction projects.In practical terms, new construction initiated prior to September 28, 2017 may still qualify for TCJA 100 percent bonus depreciation if no more than 10 percent of the physical construction occurred prior to September 28, 2017.
The Proposed Regulations
In the proposed regulations, the Treasury Department proposed new rules regarding:
- Floor Plan Financing Interest: The proposed regulations also address when floor plan financing interest is considered under §163(j). If business interest allocable to the trade or business (including floor plan interest and carryforwards) is less than the 30 percent of adjusted taxable income (“tax EBITDA”) plus interest income, the dealership taxpayer will be eligible to take bonus depreciation in its operating company. In a departure from the JCT Blue Book, if the business interest allocable to the trade or business exceeds 30 percent of tax EBITDA plus interest income, the dealership will not be able to take bonus depreciation in its operating company, even by forgoing the business interest in excess of the cap. Also, the proposed regulations provide that the dealership property company will not be treated as having property used in the operating company’s trade or business. Finally, the proposed regulations provide that the determination of whether a trade or business has taken into account floor plan financing interest is made annually.
- Components of Larger Property: The proposed regulations expand bonus eligibility for components acquired, post Sept. 27, 2017, of larger property for which construction began before Sept. 28, 2017. This mirrors a similar provision previously seen in Rev. Proc. 2011-26.
- Used Property Acquisition Rules: The proposed regulations also withdraw and re-propose the used property acquisition rules for consolidated groups or involving a series of related transactions.
Be on the lookout for our in-depth analysis of these regulations!