The Tax Cuts and Jobs Act (TCJA) included a number of provisions that expanded depreciation benefits. One of the most generous was the increase in first-year depreciation to 100% for qualified property placed in service through 2022. After 2022, the bonus expensing percentage is scheduled to reduce gradually until it sunsets in 2027.
The IRS recently released additional guidance on the 100% bonus depreciation, including final versions of regulations that were proposed in 2018, and a new set of proposed regulations that will be subject to comments and review. The new materials are a clarification and refinement of existing policies rather than a major change. Still, some of the revisions could provide better outcomes for businesses that made elections based on previous assumptions.
The final rules cover some of the basic operational processes by which businesses can elect and compute bonus depreciation under the new law, and they clear up some confusion. The additional bonus depreciation is for assets with a recovery period of 20 years or less, which were placed in service after September 27, 2017. Some commenters questioned whether or not the previous 50% bonus depreciation rules were in effect for assets placed in service in 2017, but before September 27. The final rules clarify that the 50% rules apply to assets placed in service up until the effective date of the 100% bonus provision. Businesses that filed 2017 returns without claiming the 50% bonus depreciation for assets placed in service pre-September 27 should review their returns and consider amending.
One of the most significant features in the TCJA was the expansion of bonus depreciation to the purchase of used assets. The final regulations clarify what requirements used assets and other property must meet to qualify for the bonus provisions. The rules include anti-abuse provisions designed to prevent related parties from taking advantage of the accelerated depreciation deduction by transferring assets among themselves. The guidance also clarifies the term “predecessor” as it applies to used property. The use of the term in the statute had caused confusion in some industries.
The proposed regulations offer additional guidance on several aspects of the new law, including:
- Property not eligible for the additional first-year depreciation deduction.
- A proposed de minimis rule for determining if a taxpayer has previously used property in a manner that makes it ineligible for bonus depreciation.
- A process for applying the additional first-year depreciation rules to components acquired after the September 27, 2017, effective date that were part of larger projects initiated before the effective date.
The proposals also provide insights into how the bonus depreciation provision might interact with partnership basis adjustments. In the past, incoming partners with stepped-up basis in partnership assets were not eligible for bonus depreciation, but the new rules may allow the benefit in certain circumstances. The change could add new complexity to basis calculations for partnerships with high turnover rates.
No Retail Fix
Some commenters had suggested that the IRS might use the regulatory process to offer an administrative fix to the so-called “retail glitch,” an apparent drafting error in the TCJA that significantly curtailed the availability of bonus depreciation on retail and certain other qualified improvement property. The IRS did not offer any administrative solution on this issue in either the final or the proposed rules. It appears that any fix on this issue will require congressional action. Legislators are aware of the problem and proposed fixes are under consideration, but it remains to be seen if any proposal will make it into a bill that can pass the House and Senate and be signed into law by the president.
Of course, all this guidance is being released while businesses continue to make good-faith efforts to timely file complete and accurate returns. While none of the information included in the latest IRS releases is considered particularly earth-shattering, there are still some changes that could make it worth your while to review previously filed returns for possible amendment.
To learn more about how these new regulations affect any previously filed returns, as well as your future tax plans, please contact your CRI tax advisor.