Bonus Depreciation Now Carries A Bonus For Used Property
Bonus depreciation has had its ups and downs in the legislature. Just when you thought you had it all figured out, the depreciation percentage was modified to 100% and the definition of qualified property now includes “used” property! For now proposed guidance seems to appear to be a step in the right direction in providing taxpayers with additional clarity, but it is not necessarily taxpayer-favorable.
Changes made by the Tax Cuts and Jobs Act eliminated the “original use” requirement. Regulations provide new rules and definitions for applying bonus depreciation to acquisitions of used property. Such property may not have been used previously by the taxpayer, or predecessor, and cannot be acquired from a related party such as in a corporate reorganization. Of course when dealing with the IRS there are always exceptions and exemptions. However the definition is pretty broad and previous use is defined as “having a depreciable interest in the property at any time prior to such acquisition.”
Significantly for transactions involving the purchase and sale of a business, by eliminating the “original use” requirement, the TCJA made the additional first-year depreciation deduction available for qualifying “used” properties purchased in connection with a taxpayer’s acquisition of a business from another taxpayer.
The potential for bonus depreciation of acquired assets could be an important consideration in future merger-and-acquisition transactions and provide taxpayers an additional consideration during negotiations. However, questions remain. For example: if a lessee acquires the property it is leasing, the additional basis acquired in the property (over the lessee’s own improvements to the property) may be eligible for bonus depreciation. But used-property acquisition requirements appear to require tracking of every asset ever owned by the taxpayer or its predecessor from prior to the TCJA until bonus depreciation is phased out. Is 100% bonus depreciation valuable enough to justify the burden of tracking?
Proposed regulations clarify that qualified leasehold improvement property (QLIP), qualified retail improvement property (QRIP), and qualified improvement property (QIP), including qualified restaurant property that is qualified improvement property (QRP), continue to be eligible for bonus depreciation if the property was placed in service prior to Jan. 1, 2018. Therefore, it appears that a technical correction to TCJA is still necessary to fix the statute and grant a 15-year recovery period to QIP, which would make it eligible for bonus depreciation. Until a technical correction is passed, taxpayers need to decide whether to follow the statute and proposed regulations as written or to take a position consistent with the legislative history. Either choice may require amended tax returns when the issue is resolved. See our prior article here: https: Tax Reform Blunder has Repercussions for Restaurants and Retailers
Contact us: The proposed regulations have provided guidance and answers for many questions that taxpayers and preparers were asking after the enactment of the TCJA. Unfortunately many remain and tax payers need to discuss flexibility and options with their Fuoco Group advisors when tax planning for 2019.
