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IRS Clarifies Assets Eligible for First-Year Bonus Depreciation Deductions for Real Estate Businesses by Angie Adames, CPA


Posted on August 23, 2018 by Angie Adames

The Tax Cuts and Jobs Act (TCJA) that went into effect on Jan. 1, 2018, provides an opportunity for taxpayers to accelerate generous depreciation deductions for “qualified property” acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2027. However, because lawmakers drafted and passed the Act in haste, many taxpayers are left confused by certain provisions of the new law, including the type of assets that qualify for first-year bonus depreciation. Following is the IRS’s recently issued guidance intended to answer taxpayers’ questions and help them to obtain the full benefit of immediately writing off the costs of certain business assets.

Confusion Created By Tax Reform

In general, the TCJA increases first-year bonus depreciation deductions from 50 percent to 100 percent for an expanded universe of qualified property, new and used, with a recovery period of 20 years or less, as long as the taxpayer acquired the property from an unrelated party after Sept. 27, 2017, and before Jan. 1, 2023. In 2023, these depreciation deductions phase down to 80 percent, followed by 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026. Taxpayers that build or acquire improvements can realize enhanced benefits from this provision of the new law when they conduct cost segregation studies that identify qualified property they can fully expense.

The language of the TCJA eliminates the availability of bonus depreciation to qualified leasehold improvement property, qualified restaurant improvement property, and qualified retail improvement property placed in service on or after Jan. 1, 2018. Instead, it consolidates these types of property into a new category of Qualified Improvement Property (QIP), defined as improvements to interior portions of non-residential buildings placed in service before the placed-in-service date of the improvements with a few exceptions.

IRS Clarification

While, the IRS does not specifically address QIP as qualified property for bonus depreciation for tax years 2018 and beyond, it does provide confirmation that taxpayers can fully expense QIP on their 2017 tax returns when they acquire and begin construction on QIP after Sept. 27, 2017, and before Jan. 1, 2018.

The IRS’s recently issued guidance also provides taxpayers with some clarity on what constitutes used property for purposes of qualifying for bonus depreciation. For example, used property will qualify for bonus depreciation as long as taxpayers meet the following criteria:

With this in mind, it is important for taxpayers to understand that property they previously leased could qualify for bonus depreciation when acquired after Sept. 27, 2017. In addition, they may apply bonus depreciation to basis step-ups that result from a sale or exchange or a partnership interest. This preferential treatment of certain basis step-ups should be considered when planning a full or a partial buy-out of a partner and, in many situations, could make sales of partnership interests more attractive than partnership redemptions. Furthermore, the proposed guidance clarifies that when a taxpayer acquires used property in a like-kind exchange, only the “new funds” basis (and not the carryover basis) may qualify for bonus depreciation.

To help taxpayers maximize tax savings opportunities under tax reform, they should meet with qualified accountants and advisors who understand all of the nuances of the law and how to apply subsequent guidance to taxpayers’ specific and unique circumstances.

About the Author: Angie Adames, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she provides tax and consulting services to real estate companies, manufacturers and closely held business. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.