On August 3, Treasury released proposed regulations on bonus depreciation under Section 168(k) (the Proposed Regulations). The 2017 tax reform act makes substantial changes to the federal income tax rules for depreciation. One of the most substantial changes allows taxpayers to expense 100% of the cost of certain qualified property acquired after September 27, 2017, and placed in service through December 31, 2022. Previously, taxpayers generally could claim only 50% bonus depreciation for qualified property placed in service through the end of 2017, with phase-downs to 40% and 30% for qualified property placed in service in 2018 and 2019, respectively.
The Proposed Regulations address numerous issues relevant to partnerships and partnership transactions. The good news is that Section 743(b) basis adjustments allocated to depreciable property of a partnership will qualify for the additional first year depreciation deduction (a ‘Section 168(k) deduction’), provided that certain requirements under Section 168(k) are met, generally determined by applying aggregate principles. The proposed regulations, however, deny Section 168(k) deductions for basis adjustments arising from partnership distributions under Sections 734(b) or 732, and Section 704(c) remedial allocations with respect to otherwise qualified property of a partnership.
The proposed regulations also address the interaction of Section 168(k) and the ‘step-in-the-shoes’ depreciation rule and Section 704(b) implications of contributed property having a Section 704(b) basis in excess of tax basis, among other issues that can impact partnerships.
The Proposed Regulations address the partnership questions that arose as a result of the modification of the bonus depreciation provisions in the 2017 tax reform act. These questions resolved in a manner that is favorable to taxpayers for some issues (i.e., basis adjustments on acquired interests and applicability date) while other issues are resolved in an unfavorable manner (i.e., basis adjustments for distributions and Section 704(c) remedial allocations). Taxpayers will need to understand these new rules and their potential implications in partnership structuring transactions.
A more comprehensive PwC Insight addressing Section 168(k) generally and its impact on partnerships will be published in the near future. In addition, we will discuss the guidance in a special Tax Reform Readiness Series webcast on Wednesday, August 29, at 2:00pm EDT. Registration information for the webcast is available on the following webpage.