Final and Proposed Regulations Relating to 168(k) – Bonus Depreciation

On Friday, September 13^th the IRS issued final regulations relating to 100% bonus depreciation, as well as a new set of proposed regulations. While the final regulations closely follow the proposed regulations issued in August 2018 there are key changes and confirmations. With many issues discussed in these regulations below are some changes to highlight:

Proposed Regulations (REG 106808-19):

1. Floor Plan Interest: The TCJA limited bonus depreciation for taxpayers who utilized floorplan interest. However, there was confusion on this provision. The bluebook issued in late 2018 conflicted with the regulations and stated that bonus restrictions did not apply if the taxpayer did not deduct interest in excess of the amounts calculated under section 163(j)(A) and (B). Under the proposed regulations the IRS leans more towards the intent of the law as defined in the Congressional Bluebook. This lessens the restrictions on bonus for certain taxpayers taking floorplan interest financing.
2. The IRS also confirmed that taxpayers who lease property to businesses with floor plan interest restrictions are not restricted in bonus depreciation.

Final Regulations (REG 104397-18):

1. Binding Contracts:  Under the proposed regulations more emphasis was put on binding contracts, detailing that the binding contract provision took precedence over the self-constructed property rules. This was a departure from the old rules enacted in 2011. Due to comments the IRS received, they reconsidered this decision. Under the final regulations, property that is manufactured, constructed, or produced for the taxpayer by another person under a binding contract is considered self-constructed. This means that the substantial construction test applies and more people will take 100% bonus depreciation even if contracts were in place prior to 9/27/17.
2. Qualified Improvement Property: Many people requested that the IRS extend bonus depreciation to Qualified Improvement Property “QIP”. Unfortunately, the IRS is not able to make this change. The IRS confirmed this will take legislative action. Until legislative action is taken QIP is considered 39-year property, and is not eligible for bonus depreciation.
3. Depreciable Interest: Under the TCJA taxpayers could not take bonus if they previously had a “Depreciable Interest” in the property. Under the proposed regulations there was a request for clarity on how many years a taxpayer should “look back” and determine if depreciable interest rules applied. After review, a five-year look back period was established. The IRS determined that this would provide a sufficient period of time keeping taxpayers from churning assets and taking advantage of bonus rules.

These are just a few provisions in the new regulations. It is important for taxpayers and CPAs to understand all of the included provisions. If you have any questions please feel free to reach out to us.