IRS Finalizes Additional Regulations for 100 Percent Bonus Depreciation by Angie Adames, CPA
Posted on October 06, 2020
On Sept. 21, 2020, the IRS released the last set of final regulations regarding the 100 percent first-year bonus-depreciation deduction on qualifying business assets, which Congress introduced at the end of 2017 as a part of the Tax Cuts and Jobs Act (TCJA). The final regulations clarify and amend previous guidance relating to the definition of qualified property, including qualified improvement property (QIP), and how certain taxpayers must apply the rules for claiming the full deduction.
The bonus depreciation provisions of the TCJA increased the amount that businesses can immediately write off for an expanded pool of new and, for the first time, used property purchased and placed into service after Sept. 27, 2017.
Under the law, property qualifying for the larger 100 percent bonus depreciation deduction (previously 50 percent) includes new and previously owned assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally are eligible for the full deduction, provided they are placed in service before Jan. 1, 2027. Longer production period property and certain aircraft property must be placed into service before Jan. 1, 2028, to qualify for the accelerated deduction.
The Final Regulations
The 2020 final regulations modify and replace previously issued proposed and final guidance and provide greater certainty and consistency for taxpayers to claim and compute the additional first year bonus-depreciation deduction. This includes the following:
- Clarifying the definition of new and used bonus depreciation-eligible qualifying property and including modifications made by the CARES Act, which was enacted in response to the COVID-19 pandemic;
- Refining language to clearly define qualified improvement property (QIP), predecessor and class of property;
- Establishing rules for determining bonus depreciation eligibility when property transactions occur between related parties and consolidated groups, and when property is transferred in a series of transactions;
- Establishing rules for taxpayers to elect 100 percent bonus-depreciation eligibility for components acquired or self-constructed after Sept. 27, 2017, or for larger self-constructed property for which manufacture, construction or production began before Sept. 28, 2017;
- Establishing rules for applying mid-quarter conventions;
- Clarifying both the de minimis use and the five-year safe-harbor rules for determining prior depreciable interest that could disqualify a taxpayer from claiming bonus depreciation;
- Making available a 10 percent safe harbor for property not acquired pursuant to a written binding contract; and
- Revoking the partnership look-through rule for determining whether a partner had a previous interest in property, which would make it ineligible for additional first-year bonus depreciation deduction.
One of the most critical provisions of these final regulations is confirmation that qualified improvement property (QIP) be limited to property with improvements “made by the taxpayer.”
QIP eligible for an additional first-year bonus depreciation deduction is more clearly defined as property the taxpayer improves either 1) by making, manufacturing, constructing, or producing the improvement for itself or 2) by having another person make, manufacture, construct or produce the improvement for the taxpayer under a written contract. Therefore, a taxpayer generally may not claim as QIP the nonresidential real property it acquires from a seller that previously improved and placed into service. Special rules apply when transactions involving depreciable property occur between related parties that file consolidated tax returns and when they involve components acquired or self-constructed by the taxpayer after Sept. 27, 2017, for larger self-constructed property on which production began before Sept. 28, 2017.
Taxpayers should consult with professional advisors and CPAs to understand all the provisions in the final regulations, including how they may apply these changes to proactively and even retroactively claim an additional 100 percent bonus depreciation deduction on qualifying property placed in services after Sept. 27, 2017. In addition, special consideration should be given to the timing contained in the current law, which calls for a phase-out of the bonus depreciation deduction between 2023 through 2027. For example, bonus-depreciation on property placed into service in 2023 will qualify for an 80-percent deduction in the first year. The rate will decrease with each subsequent year (i.e. 60 percent in 2024 and 40 percent in 2025) until it is totally phased out in 2027.
About the Author: Angie Adames, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she provides tax and business consulting services to real estate companies, manufacturers and closely held entities. She can be reached at the firm’s Miami office at (305) 379-7000 or firstname.lastname@example.org.