Understanding Regulations Regarding 100% Bonus Depreciation for Qualified Property
The Internal Revenue Service and the Treasury Department have issued final regulations and proposed regulations regarding 100% bonus depreciation. The final regulations confirm regulations issued in August 2018 in accordance with the Tax Cuts and Jobs Act (The Act), including those allowing for a 100 percent deduction against income for certain qualified property acquired after September 27, 2017 and placed in service through December 31, 2022.
In particular, the final regulations affirm 100% first-year bonus depreciation on depreciable business assets with a life of 20 years or less. This includes used property purchased by the taxpayer as long as the property was not previously used by the taxpayer (or a predecessor). Prior to its inclusion as a proposed regulation in The Act, used property was never eligible for accelerated depreciation under the tax code.
Among other things, the newly proposed regulations include guidance on:
- Certain property not eligible for additional first-year depreciation deduction
- De minimis use rule for determining if a taxpayer previously used property
Property excluded from 100% bonus depreciation includes certain rate-regulated utilities and motor vehicle dealerships with floor-plan financing indebtedness. To clarify, the new proposed regulations allow taxpayers who lease property to certain utilities companies to claim 100% bonus depreciation as long as the other bonus depreciation requirements are met. With regard to dealerships with floor plan financing indebtedness, initially these dealerships are ineligible for bonus depreciation if floor plan financing was taken into account.
The new proposed regulations clarify that floor plan financing is only taken into account (thereby disallowing eligibility for 100% bonus depreciation) if the dealership benefited by the new floor plan financing rules enacted under The Act. In particular, this would occur if total business interest expense (including floor plan financing interest) exceeds business interest income plus 30% of adjusted taxable income.
The de minimis rule under the final proposed regulations states that a taxpayer will not be deemed to have had a prior ownership in property – and thus that property will be eligible for bonus depreciation – if the taxpayer previously disposed of that property within 90 days of the date in which that property was originally used by the taxpayer.
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