The Tax Cuts and Jobs Act (“TCJA”) passed at the end of 2017 revised the additional (“bonus”) first year depreciation deduction under Code Sec. 168(k). The TCJA increased bonus depreciation from 50% to 100% for the cost of qualified property placed in service after September 27, 2017. Prior to the TCJA, in order for property to qualify for bonus depreciation, the property’s original use had to commence with the taxpayer, but the TCJA removed this requirement. Now, used assets can qualify for bonus depreciation.
Proposed Regulations Issued
On August 3, 2018, the IRS issued proposed regulations on the bonus depreciation deduction under Code Sec. 168(k). These proposed regulations provide more guidance on the requirements that must be met for property to qualify for bonus depreciation. Under the proposed regulations, for property to be eligible for bonus depreciation, the four requirements outlined below must be met.
- Property must be of a specified type, which includes the following:
- property with a MACRS recovery period of 20 years or less
- computer software
- water utility property
- qualified film or television production property
- qualified live theatrical production property
- specified plant property
- Qualified improvement property
- The property can be new or used. However, in order for used property to qualify, the property cannot be used by the taxpayer or a predecessor at any time prior to the acquisition, and the acquisition of the property cannot meet certain related party and carryover basis requirements.
- Qualified property must be placed in service by the taxpayer after September 27, 2017, and before January 1, 2027.
- The property must be acquired by the taxpayer after September 27, 2017.
Beneficial to Partnerships
Under the new proposed regulations, bonus depreciation may be allowable in the case of a partnership Code Sec. 743(b) basis adjustment. This means that when the basis of partnership property is adjusted as the result of a sale or exchange of an interest in a partnership, and the partnership has section 754 election in place, the increase in basis of depreciable property might be eligible for bonus depreciation. Prior to the proposed regulations, whether bonus depreciation would apply to Code Sec. 743 property was not clear. The proposed regulations provide that even though Code Sec. 743(b) property fails the original use test to be eligible for bonus depreciation, a Code Sec. 743(b) adjustment may satisfy the used property clause; thus, making it eligible for bonus depreciation, assuming the asset meets the other requirements of qualified property. This may be very beneficial for partners who acquire a new interest in a partnership as they might be allowed a greater depreciation deduction.
For more information on how these proposed bonus depreciation regulations affect your business, feel free to reach out to your SDK team member.
Dana Lee wrote this article.