The Treasury Department and the IRS have released the last set of final regulations implementing the 100% additional first-year depreciation deduction. The provision allows businesses to write off the cost of most depreciable business assets in the year they are placed in service by the business.

The Tax Cuts and Jobs Act (TCJA) expanded bonus depreciation to allow for 100% write-off in the year an asset is placed in service. It generally applies to depreciable business assets with a recovery period of 20 years or less, including machinery, equipment, computers, appliances, and furniture, as well as certain other property.

The deduction applies to qualifying property (including used property) acquired and placed in service after September 27, 2017. The final regulations provide clarifying guidance on the requirements for property to qualify for the deduction, which includes further defining qualified used property. TCJA allowed taxpayers to claim bonus depreciation deductions for assets that were purchased used, as long as the taxpayer had no relationship to or affiliation with the prior owner. The final regulations clarify that a five-calendar-year lookback period will be applied to determine if such a relationship existed.

Additionally, the final regulations provide rules for components acquired or self-constructed after September 27, 2017, and for larger self-constructed property on which production began before September 28, 2017. The modifications clarify the timing of when self-constructed assets are placed in service for purposes of the provision, including when the completion of a component part may qualify.

The regulations also clarify some terms related to the provision in the Coronavirus Aid, Relief and Economic Security (CARES) Act that made qualified improvement property (QIP) eligible for 100% bonus depreciation. Under the CARES Act, QIP must be “made by the taxpayer” and Treasury determined that this requirement is met if the taxpayer “makes, manufactures, constructs or produces the improvement for itself” or if the improvement is done by another party under a written contract. The rules specify that if a taxpayer acquires nonresidential real property that includes QIP put in place by a previous owner, that improvement does not qualify as “made by the taxpayer.”

The IRS intends to issue guidance relating to transition relief for taxpayers with a trade or business that have floor plan financing indebtedness and want to revoke elections instead of claim bonus depreciation for property placed in service during 2018.

In addition to these final regulations, the Treasury Department and the IRS also announced that they plan to issue procedural guidance for taxpayers who opt to apply the final regulations in prior taxable years or to rely on the proposed regulations issued in September 2019.

For more information on these new regulations, as well as any other questions you may have about 100% bonus depreciation, please contact your CRI tax advisor.