IRS Issues Final Regulations on Bonus Depreciation

This week, the IRS issued final regulations (T.D. 9916) which provide guidance on how to handle bonus depreciation under code section 168(k). These regulations supplement the final regulations issued in 2019 (T.D. 9874). In addition to clarifying positions taken in the 2019 regulations, these regulations also defined Qualified Improvement Property (QIP) based on the changes included in the CARES Act of 2020.

One of the most critical portions of these regulations is the confirmation that QIP be “made by the taxpayer.” The CARES Act updated QIP to include the “made by the taxpayer” terminology. Regs Sec 1.168(b)-1(a)(5)(i)(A) is amended to include this language. An asset is considered to be made by the taxpayer if “the taxpayer makes, manufactures, constructs, or produces the improvement for itself or if the improvement is made, manufactured, constructed, or produced for the taxpayer by another person under a written contract.” This change was required to confirm that QIP produced for someone else, included in a purchase, is not bonus eligible.

Additionally, these regulations confirm and clarify the five-year safe harbor. The regulations allow for bonus to be taken on used property unless the taxpayer or predecessor had a depreciable interest in the property prior to acquisition. Under the five-year rule, only the preceding five years need to be considered for this test. The regulations confirm that the “placed-in-service year” is the current calendar year and not the taxable year when applying this test. Additionally, they confirm the five-year safe harbor begins no earlier than the date such entity came into existence.

These regulations also address floor plan interest. Under the earlier regulations, floor plan financing did not trigger a restriction in bonus if the amount of interest taken was less than the sum of the amounts calculated in 163(j)(1)(A) and (B). Commenters questioned if a business could choose to limit its interest expense deduction to that amount. The IRS does not allow this under the regulations.

These regulations cover additional areas including rules for components of self-constructed property, the application of the de-minimis rule, and applying the mid-quarter convention. Although most of the items in these regulations were expected, it is important taxpayers review these regulations with a qualified tax professional.