Treasury and IRS Release Final and Proposed Regulations for Bonus Depreciation

On Sept. 13, 2019, the Internal Revenue Service (IRS) and the U.S. Department of the Treasury (Treasury) released final regulations and additional proposed regulations for Section 168(k), which allows an additional first-year depreciation deduction – generally referred to as “bonus depreciation” – on qualifying property in the year placed in service.

These final and additional proposed regulations follow the first set of proposed regulations for Section 168(k) that were released in August 2018, providing clarification to changes made by the Tax Cuts and Jobs Act (TCJA) for the first-year bonus depreciation deduction for qualified property acquired and placed in service after Sept. 27, 2017. The bonus depreciation deduction generally applies to assets such as machinery, equipment, computers, furniture and fixtures.

The final regulations implement several provisions introduced by the TCJA, which states that qualified property must be one of the following to meet bonus depreciation applicability:

  • Modified Accelerated Cost Recovery System (MACRS) property with a recovery period of 20 years or less;
  • Computer software;
  • Water utility property;
  • Certain qualified film, television or life theatrical production property; or,
  • Specified plant property.

Property ineligible for the additional first-year depreciation deduction would generally include, but is not limited to, any of the following:

  • Property required to be depreciated under the alternative depreciation system;
  • Any class of property that the taxpayer elects not to deduct the additional first-year depreciation;
  • Specified plant placed in service by the taxpayer in the taxable year for which the taxpayer elected to apply bonus depreciation for a prior year;
  • Any class of property the taxpayer elects to accelerate alternative minimum credits in lieu of bonus depreciation for a taxable year beginning prior to Jan. 1, 2018; or
  • Property used in a trade or business not subject not subject to 163(j).

The additional proposed regulations include new proposed rules for guidance that is not addressed in the final regulations regarding the application of Section 168(k). Some of the highlights include rules for the following:

  • Certain property not eligible for bonus depreciation deduction, particularly property that is primarily used in a trade or business excepted from interest limitation under section 163(j);
  • A de minimis use rule for determining if a taxpayer previously used the property; and,
  • Components of larger self-constructed property for which manufacturing, construction or production commenced before Sept. 28, 2017, and the components in question were self-constructed or acquired after Sept. 27, 2017.

The proposed regulations also include reproposed rules for the application of used property acquisition requirements for consolidated groups and to a series of related transactions.

Taxpayers who elect out of the additional first-year bonus depreciation deduction can do so on their originally filed tax returns. Taxpayers who already filed their tax return, yet still wish to opt out, are given six months from the original filing deadline to file an amended return without an extension.

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