News on Bonus Depreciation – Final Regulations Issued

Last month the IRS released important regulations designed to help Atlanta business owners understand how to implement the 100% bonus depreciation which was enacted as part of the Tax Cuts and Jobs Act of 2017 (tax reform). Although the proposed rules did allow for certain depreciation to be leveraged under various conditions, the IRS has been in the process of reviewing changes for some time. On September 13, 2019, they issued final regulations that provide much-needed guidance on how and when bonus depreciation rules can be applied. The final regulations do have important differences from the temporary regulations previously issued. As an extra bonus, there were also additional proposed regulations issued around the development of a safe harbor status. To help clients, prospects and others understand the changes and how it impacts them, Wilson Lewis has provided a summary of key changes below.

Final Regulations – What Changed?

There were several important changes that were worked into the final regulations. These include:

• Definition of “qualified property”

Property eligible for bonus depreciation includes a depreciable property with MACRS recovery periods of 20 years or less, but does not include:

• Property placed in service and disposed of in the same year
• Qualified improvement property that was acquired any time other than the short period between September 27, 2017, and December 31, 2017 (In 2018, QIP became ineligible for bonus depreciation because its recovery period changed from 15 to 39 years.)
• Property required to use ADS depreciation, like property that is >50% personal use

• Definitions of “original use requirement” and “used property acquisition requirement”

To be eligible for bonus treatment, the property must meet one of these two definitions. The “original use requirement” will be met if the very first use of the property commences with the taxpayer. The “used property acquisition requirement” will be met if (1) neither the taxpayer nor a predecessor* used the property previously, and (2) the property was purchased (i.e. not gifted or purchased from a related party).

Another change made was concerning property which was manufactured or constructed. Under the proposed regulations, property that was manufactured under a binding contract would be considered as placed in service the date the contract was signed. The final regulations changed this to be the later of (1) the date the contract was signed, (2) the date the contract became enforceable, (3) the date when all cancellation periods end, or (4) the date when all conditions have been met. Manufactured property that does not include a written binding contract – including self-manufactured property – would be considered placed in service on the date on which construction began.

The last notable addition to the final regulations concerns substantially renovated property. The proposed regulations allowed taxpayers to apply bonus depreciation to property acquired from a predecessor only if the property had since been substantially renovated. The final regulations assume the property is “substantially renovated” when the cost of the used parts is no more than 20% of the total cost of the renovated property.

Wait- More Proposed Regulations?

This next round of proposed regulations introduces a safe harbor that helps taxpayers determine if the property they had previously owned is eligible for bonus treatment. The five-year lookback rule only takes the most recent five calendar years into account. If a taxpayer had owned property six or more years prior (and the property was otherwise eligible), they could take 100% bonus depreciation.

The proposal also discusses how large constructed property should be treated if construction began prior to September 27, 2017. If the manufacturing of property began before September 27^th but was completed later in the year, the taxpayer can elect to treat components constructed after this deadline as eligible for 100% bonus.

Taxpayers can elect to use 50% bonus (as was in play before the TCJA was passed) for the entire tax year as long as they apply it across the board. The election cannot be made only on certain classes of property.

Contact Us

The changes created in the final regulations are complex and can be applied based on individual variables. It’s important to consult with a qualified advisor to review your situation to determine how the new changes will impact your tax position. If you have questions about tax planning, bonus depreciation or need assistance with another issue, Wilson Lewis can help! For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.