The 2017 tax reform act (the Act) expanded the additional first-year depreciation deduction for qualified property (so-called bonus depreciation), allowing 100% bonus depreciation for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property (LPPP) and certain aircraft), with decreasing percentages applying for property placed in service in tax years beginning before January 1, 2027. The IRS and Treasury in August published proposed regulations implementing the Act’s bonus depreciation provisions.
PwC on October 17 hosted a webcast featuring PwC specialists who discussed in depth several issues arising out of those regulations. This Insight highlights those discussions. Watch the webcast replay and register for future webcasts in PwC’s Tax Reform Readiness series, which addresses other areas affected by tax reform.
The next webcast — Tax reform readiness: So you (still) haven't digested the proposed 951A regs? Don't feel GILTI — will take place on Wednesday, October 24, from 2:00 PM - 3:00 PM (EDT).
The bonus depreciation provisions under the Act are generally expanded as compared to prior law. Not only is qualified property acquired and placed in service after September 27, 2017 eligible for 100% bonus depreciation, considerably more property will be eligible for bonus depreciation because of the expansion of applicability to used property, qualified films and television productions, and qualified live theatrical productions.
However, the rules are complex and require careful consideration of planned fixed asset transactions to obtain maximum benefit. While the proposed regulations provide welcome substantive guidance to assist taxpayers in applying the new bonus depreciation provisions, the proposed regulations also create many questions, including how to determine when a series of transactions is related and whether a previous owner of property is a predecessor of the taxpayer, for purposes of applying the used property limitations. Final regulations may provide additional clarity in some of these areas; however, taxpayers should work closely with their tax advisors to ensure the rules are interpreted and applied correctly.
Changes to the rules for the acquisition of self-constructed property have greatly narrowed the availability of bonus depreciation for self-constructed property. The IRS and Treasury have received a number of comments on the written binding contract standard regarding contracted-out construction. Commenters also have requested component relief similar to Rev. Proc. 2011-26. Taxpayers should review their construction contracts to determine the extent to which these changes affect their bonus depreciation eligibility.
Observation: Webcast participants were divided regarding which qualification issue about bonus depreciation will most affect their business: 39% said qualified improvement property; 16% said written binding contracts; 14% said self-constructed property, both by the taxpayer and/or by another party; another 14% said the original use requirement; and the remaining 17% said another issue.
Note that the proposed regulations fail to provide relief regarding the treatment of qualified improvement property placed in service after December 31, 2017. Despite two letters submitted to Treasury by Senate Finance Committee Republicans and Democrats urging Treasury to provide guidance that reflects Congressional intent regarding this property, the consistent message from both IRS and Treasury is that a technical correction is needed. Thus, without a technical correction, it is likely that qualified improvement property will remain ineligible for bonus depreciation if placed in service after December 31, 2017.