The IRS and Treasury have released proposed regulations concerning the first-year bonus depreciation deduction, also known as immediate expensing.  The proposed regulations reflect changes made to bonus depreciation rules by the Tax Cuts and Jobs Act.  Namely, the proposed regulations provide guidance on bonus depreciation for used property, including property acquired in an acquisition, and how the rules affect consolidated groups and partnerships.

Under section 168(k)[1], an additional first-year depreciation deduction is permitted for qualified property acquired and placed in service after September 27, 2017.  To be qualified, property must be subject to the modified accelerated cost recovery system (“MACRS”) as opposed to the alternative depreciation system (“ADS”) and have a recovery period of 20 years or less—generally, tangible personal property.  Prior to the Tax Cuts and Jobs Act, the deduction allowed was 50% of the adjusted basis of qualified property for the placed-in-service year.  Qualified property referred to property for which, among other requirements, the original use began with the taxpayer.  Practically, this requirement meant that the property had to be new property in order for the taxpayer to take advantage of bonus depreciation.  With tax reform, however, the deduction percentage has increased to 100% (for property placed in service after September 27, 2017 but before January 1, 2023), and the definition of original use was changed to encompass used property.

Under the changes, for property to be eligible for bonus depreciation, either (1) the original use must begin with the taxpayer or (2) the property was not used by the taxpayer prior to its acquisition.  The property cannot have been acquired from a related party, and the taxpayer’s adjusted basis in the property cannot have been determined by reference to the adjusted basis of the property in the hands of the transferor (i.e., generally, the property cannot have been acquired in a tax-free transaction). The proposed regulations reiterate these statutory requirements.[2]

In addition to rules concerning used property, the proposed regulations also address the following issues, to name a few:

• Consolidated groups – disallowance of the deduction when property is disposed of by one member of a consolidated group and subsequently acquired by another member; disallowance of the deduction with respect to series of related transactions among members of the group.
• Partnerships – whether the deduction is allowed when the basis of property is adjusted when a section 754 election is in effect (generally allowing immediate expensing of partnership property upon the purchase of an interest in a partnership, but disallowing immediate expensing when basis is adjusted to account for a partnership distribution); disallowance of the deduction with respect to allocations in connection with contributions of appreciated property.
• Election for asset acquisition treatment – clarification concerning the equalization of treatment when an election is made to treat an equity acquisition as an asset acquisition under section 338 or section 336(e).
• 1031 exchanges – exchanged basis and excess basis, if any, of replacement property that is qualified property is eligible for immediate expensing.

[1] Unless otherwise provided, all “section” references are to the Internal Revenue Code of 1986, as amended.

[2] The proposed regulations are scheduled to be published in the Federal Register on August 8, 2018 and available online at https://federalregister.gov/d/2018-16716.