IRS Releases Final Guidance on 100 Percent Bonus Depreciation

By:
Chris Gaetano
Published Date:
Sep 22, 2020
The IRS released final guidance on the part of the 2017 Tax Cuts and Jobs Act ( TCJA) that allows businesses to write off the cost of most depreciable business assets in the year they are placed in service, also known as 100 percent bonus depreciation.

The TCJA, when it passed, made four major changes to the first-year depreciation deduction provisions in Section 168(k). First, the first-year depreciation deduction percentage was increased from 50 to 100 percent; second, the property eligible for the additional first-year depreciation deduction was expanded, for the first time, to include certain used depreciable property and certain film, television, or live theatrical productions; third, the placed-in-service date was extended from before Jan. 1, 2020, to before Jan. 1, 2027 (and from before Jan. 1, 2021, to before Jan. 1, 2028, for longer production period property or certain aircraft property); and fourth, the date on which a specified plant may be planted or grafted by the taxpayer was extended from before Jan. 1, 2020, to before Jan. 1, 2027.

The IRS had previously released guidance on the implementation of these provisions; the latest regulations address issues not included in the previous release.

One of the new provisions is the five-year safe harbor rule when considering used property. Under the TCJA, property is treated as used by the taxpayer or a predecessor at any time prior to acquisition if either had a depreciable interest in the property at any time prior to such acquisition, whether or not they claimed depreciation deductions for the property. To determine this value, the 2019 Final Regulations also provide that only the five calendar years immediately prior to the taxpayer’s current placed-in-service year of the property are taken into account.

The latest guidance clarifies that the safe harbor rule accounts for the five calendar years immediately prior to the current calendar year in which the property was placed in service by the taxpayer, as well as the portion of the current calendar year before the placed-in-service date when determining whether there is a depreciable interest in the property at any time prior to the acquisition. The guidance also said that both the taxpayer and the predecessor be subject to separate lookback periods, and that if the taxpayer or a predecessor, or both, have not been in existence during the entire lookback period, then only the portion of the lookback period during which the taxpayer or a predecessor, or both, have been in existence is taken into account to determine if the taxpayer or the predecessor had a depreciable interest in the property.

The guidance contains a large number of other provisions, including rules relevant to the definition of qualified property, components acquired or self-constructed after Sept. 27, 2017, consolidated groups, the application of the mid-quarter convention, and changes to the definition of the terms "qualified improvement property," "predecessor" and 'class of property."

Click here to see more of the latest news from the NYSSCPA.