IRC §168(k) allows an additional first-year (“bonus”) depreciation deduction in the placed-in-service year of qualified property. In August 2019, IRS issued detailed proposed regulations on additional first-year depreciation. IRS has now finalized portions of the Proposed Regulations. The final regulations reflect and clarify the increase of the benefit and expansion of the universe of qualifying property authorized by the Tax Cuts and Jobs Act (TCJA, PL 115-97, 2017).
The final regulations apply to qualified property placed in service by the taxpayer during or after the taxpayer’s tax year that includes the date the regulations are published in the Federal Register. However, a taxpayer may choose to apply the final regulations, in their entirety, to qualified property acquired and placed in service by the taxpayer after September 27, 2017, during tax years ending on or after September 28, 2017, provided the taxpayer consistently applies all rules in the final regulations.
Additionally, a taxpayer may rely on the Proposed Regulations for qualified property acquired and placed in service by the taxpayer after September 27, 2017, during tax years ending on or after September 28, 2017, and ending before the date the regulations are published in the Federal Register.
Here are some of the areas in which the final regulations clarify, or make changes to, the Proposed Regulations:
For property placed in service after December 31, 2017, Section 13204 of TCJA amended IRC §168(k) to eliminate qualified improvement property as a specific category of qualified property, and amended IRC §168(e) to eliminate the 15-year MACRS property classification for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.
The legislative history of section 13204 of TCJA provides that the MACRS recovery period is 15 years for qualified improvement property. However, IRC §168(e), as amended by TCJA, does not classify qualified improvement property as having a recovery period of 20 years or less. It has been widely reported that these TCJA changes were in error.
However, the final regulations’ Preamble provides that: a) a legislative change must be enacted to provide for a recovery period of 20 years or less for qualified improvement property placed in service after 2017 to be qualified property; and b) because TCJA eliminates the 15-year MACRS property classifications for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property, those property classifications are no longer in effect for property placed in service after 2017. Therefore those items cannot qualify for additional first-year depreciation.
Qualified Film, Television and Live Theatrical Productions
Consistent with IRC §168(k)(2)(A)(i)(IV) and IRC §168(k)(2)(A)(i)(V), the Proposed Regulations provided that qualified property includes a qualified film or television production, or a qualified live theatrical production, for which a deduction would have been allowable under IRC §181 without regard to IRC §181(a)(2) and IRC §181(g), or IRC §168(k).
IRC §181 allows a taxpayer to elect to deduct up to a limited amount of the aggregate production costs of a qualified film, television, or live theatrical production for the tax year in which the costs are paid or incurred by the taxpayer. Pursuant to Reg §1.181-1(a)(3), production costs do not include the cost of obtaining a production after its initial release or broadcast. Further, Reg §1.181-1(a)(1) provides that only an owner of the qualified film or television production is eligible to a make a IRC §181 election.
The final regulations clarify that the owner, as defined in Reg §1.181-1(a)(2), of the qualified film, television, or live theatrical production is the only taxpayer eligible to claim the additional first-year depreciation for such production and must be the taxpayer that places such production in service. (Reg §1.168(k)-2(b)(4)(iii))
Reg §1.181-1(a)(2)(ii) provides that a person that acquires only a limited license or right to exploit a production is not an owner of a production for purposes of Reg §1.181-1 through Reg §1.181-6. Thus, such a person cannot claim additional first-year depreciation. (Preamble)
The Proposed Regulations listed several types of property that are not qualified property for purposes of the additional first-year depreciation rules. One of the categories of ineligible property is property required to be depreciated under the alternative depreciation system (ADS). (Prop Reg §1.168(k)-2(b)(2)(ii)(B))
In some instances, taxpayers use the ADS to determine the adjusted basis of the taxpayer’s qualified business asset investment pursuant to IRC §250(b)(2)(B) (foreign derived intangible income, “FDII”) or IRC §951A(d)(3) (global intangible low-taxed income, “GILTI”). The final regulations provide that such a use does not make that property ineligible for the bonus depreciation deduction. The final regulations also clarify that using the ADS to determine the adjusted basis of the taxpayer’s tangible assets for allocating business interest expense between excepted and non-excepted trades or businesses under IRC §163(j) does not make that property ineligible for the bonus depreciation deduction. In both instances, however, this rule does not apply if the property is required to be depreciated under the ADS pursuant to IRC §168(g)(1) or other provisions of the IRC other than IRC §163(j), IRC §250(b)(2)(B), or IRC §951A(d)(3). (Reg §1.168(k)-2(b)(2)(ii)(B))
IRC §168(g)(1)(B) requires that tax-exempt use property be depreciated under ADS. IRC §168(h)(6) provides rules with respect to property owned by partnerships that have some tax-exempt partners. If IRC §168(h)(6) applies, IRC §168(h)(6)(A) provides that the tax-exempt entity’s proportionate share of the property is treated as tax-exempt use property. Accordingly, the final regulations clarify that only the tax-exempt entity’s proportionate share of the property is described in IRC §168(g)(1)(B) and is not eligible for the additional first-year depreciation deduction. (Reg §1.168(k)-2(b)(2)(ii)(B))
New Proposed Regulations
Along with these final regulations, IRS concurrently issued new proposed regulations on additional first-year depreciation. See coverage of these new proposed regulations in Federal Tax Update, available on Checkpoint. To continue your research on additional first-year depreciation, see FTC 2d/FIN ¶L-9310.