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Final Regulations Related to Bonus Depreciation

Teri M. Samples

October 05, 2020

The Internal Revenue Service and the Treasury Department recently issued the last set of final regulations relating to bonus depreciation. The Tax Cuts and Jobs Act of 2017 (TCJA) allowed taxpayers to write off the cost of qualifying business assets as 100% bonus depreciation in the year the asset was placed in service. These regulations provide additional guidance for claiming bonus depreciation.

Overview

Bonus depreciation typically applies to depreciable business assets with a recovery period of 20 years or less. The deduction applies to qualifying property (including used property) bought and placed in service after September 27, 2017. The final regulations include clarifying guidance on the requirements so that property can qualify for the deduction, including used property. They also offer rules for consolidated groups and for components bought or self-constructed after September 27, 2017; for larger self-constructed property on which production began before September 28, 2017.

Treasury and the IRS plan to issue procedural guidance for taxpayers so they can opt-in to apply final regulations in prior taxable years, or choose to rely on proposed regulations that were issued last September.

Bonus Depreciation

Bonus depreciation didn’t originate with the Tax Cuts and Jobs Act. Section 13201 of the TCJA made important amendments to the additional first-year depreciation deduction provisions in the existing tax law:

  • Bonus depreciation increased from 50 to 100 percent. The TCJA allows 100% bonus for qualifying assets placed in service between September 27, 2017 and December 31, 2022. The bonus depreciation begins to phase out in 2023. It then drops each year until it expires at the end of 2026.
  • Eligible property was expanded to include certain used depreciable property.
  • The placed-in-service date was extended from January 1, 2020, to January 1, 2027 (from January 1, 2021, to January 1, 2028), for longer production periods or certain aircraft property.

CARES Act

The final regulations clarify the effects of the technical correction in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This made qualified improvement property (QIP) eligible for bonus depreciation after a drafting error in the TCJA. Taxpayers can now deduct QIP, generally the improvements made to a business building’s interior, when “made by the taxpayer.”

The regulations address preexisting QIP. When a taxpayer buys a building with preexisting QIP, those improvements are not eligible for bonus depreciation. Rather, the taxpayer must make, manufacture, or construct the improvement for themselves in order to qualify. Additionally, when property with preexisting QIP is transferred in a nonrecognition event, such as a like-kind exchange, those improvements will not qualify for bonus depreciation.

Taxpayer Elections

Taxpayers can elect under the new regulations to treat long-term construction projects as components. The larger self-constructed property must be:

  • MACRS with a recovery period of 20 years or less, computer software, water utility property or QIP; AND
  • Qualified property eligible for bonus under the 2019 final regulations.

A taxpayer can make a special election to claim the 100% bonus rate on certain components acquired or self-constructed after September 27, 2017. These must be part of larger self-constructed properties where construction began before September 28, 2017. There is no longer a placed-in-service requirement for using the component election. The final regulations also expanded eligibility for larger self-constructed properties to include property that is manufactured, constructed, or produced under a written contract that does not meet the definition of a “binding contract.” This will allow more costs to be eligible for bonus depreciation.

We are here to help. Please contact your Mueller Prost specialist with any questions on these final regulations.

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