The Ongoing Saga of First-Year Depreciation
By now you may have heard the IRS proposed temporary regulations (REG-104397-18), regarding first-year depreciation deductions. Specifically, what property can be accelerated by 100 percent depreciation.
Mind you, these are just proposed regulations and who knows when, or if, these REGs will be made permanent.
The TCJA made extensive changes to the depreciation (and expensing) rules. Among these changes, TCJA provided a 100 percent first-year deduction of the adjusted basis for qualified property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023 (after Sept. 27, 2017 and before Jan. 1, 2024 for certain aircraft and property with longer production periods).
In later years, the first-year bonus depreciation deduction phases down (i.e., to 80 percent in 2023, to 60 percent in 2024, 40 percent in 2015, and 20 percent in 2026—a one-year date adjustment applies for certain aircraft and property with longer production periods).
Under the TCJA, for productions placed in service after Sept. 27, 2017, qualified property eligible for a 100 percent first-year depreciation allowance includes qualified film, television and live theatrical productions. A production is considered placed in service at the time of initial release, broadcast, or live staged performance.
For trees and vines bearing fruit or nuts and certain other specified plants planted or grafted after Sept. 27, 2017 and before Jan. 1, 2027, the 100 percent first-year deduction is also available subject to phase-out rules similar to those above.
For property placed in service after Dec. 31, 2017, the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated under TCJA, and a general 15-year recovery period and straight-line depreciation are provided for qualified improvement property (generally, a less restrictive category than the aggregate of the three categories that it replaces). A 20-year ADS recovery period is provided for such property.
In addition, for the first tax year ending after Sept. 27, 2017, a taxpayer can elect to claim 50 percent bonus first-year depreciation (instead of claiming a 100 percent first-year depreciation allowance).
Under the proposed regs, as consistent with IRC.§ 168(k)(2), as amended by the TCJA, depreciable property must meet four requirements to be qualified property, eligible for bonus first-year depreciation:
1) the depreciable property must be of a specified type
2) the original use of the depreciable property must begin with the taxpayer, or used depreciable property must meet the IRC .§ 168(k)(2)(E)(ii) acquisition requirements
3) the depreciable property must be placed in service by the taxpayer within a specified time period or must be planted or grafted by the taxpayer before a specified date; and
4) the depreciable property must be acquired by the taxpayer after Sept. 27, 2017
What was clarified in these Proposed REGs was Leasehold Improvements, Restaurant Equipment, and other items are allowed the 100 percent deduction. Further, although most property that is eligible for the accelerated depreciation must commence with the taxpayer there are some exceptions to the rule. Those exceptions include:
1) The property was not used by the taxpayer or a predecessor at any time prior to the acquisition
2) The acquisition of the property meets the related party and carryover basis requirements of IRC .§ 179(d)(2)(A), IRC .§ 179(d)(2)(B), and IRC .§ 179(d)(2)(C) and Reg § 1.179-4(c)(1)(ii), Reg § 1.179-4(c)(1)(iii), and Reg § 1.179-4(c)(1)(iv), or Reg § 1.179-4(c)(2);
3) The acquisition of the property meets the cost requirements of IRC .§ 179(d)(3) and Prop Reg § 1.179-4(d).
Just a word of caution here, if you are using these depreciation rules as your main tax planning strategy, it should be pointed out that when the equipment is sold, there would be no basis. Thus, the sale could result in a large capital gain.
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...