The Final Bonus Depreciation Regulations

On September 21, 2020, the IRS released an advance copy of the final bonus depreciation regulations. With some modifications, these regulations finalize the proposed regulations issued one year ago.

What Changed:

The highlights of the Treasury Decision 9916 final regulations are:

  • The rule prohibiting a dealership from forgoing floorplan financing interest deductions to get below the section 163(j) cap and claim bonus depreciation remains. Additional transition guidance that allows taxpayers who took this approach to fix it will be issued.
  • The Five-Year Safe Harbor was clarified to use calendar years and to include the current year when determining whether the taxpayer had a prior depreciable interest in an asset. If a predecessor or taxpayer (or both), have not been in existence for the entire lookback period, only the portion of the lookback period during which they have existed is taken into consideration.
  • The De Minimis Use Rule has been clarified to consider additional factual situations involving placing in service an asset, disposing of it to an unrelated taxpayer, and re-acquiring it.
  • The Partnership Look-through Rule was withdrawn without replacement. Partners will no longer be treated as having owned partnership property in their role as a partner. The related party rule of section 179 and the series of related transactions rule will prevent abuse.
  • The Series of Related Transaction Rule has been simplified. Under the new rule, each transferee will test its relatedness with the immediately prior transferor and the original transferor.
  • Corporate stock sales treated as asset sales due to a section 336(e) election will be treated the same as section 338 elections.
  • There is a new Component Election that provides far more generous opportunities for bonus depreciation for components of larger property that was under construction on September 28th, 2017.
  • If, in a section 168(i)(7)(B) transaction, a transferee acquires Qualified Improvement Property (QIP) placed in service by the transferor, the transferred basis will qualify as QIP in the hands of the transferee. It will not qualify for bonus depreciation.

The regulations will be effective 60 days after publication in the Federal Register. With certain exceptions, including early application, the regulations are applicable for property acquired after September 27th, 2017 and placed in service during or after a taxpayer’s first taxable year beginning on or after January 1, 2021. As noted early, transition guidance will be forthcoming.

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