Qualified property
Five-Year safe harbor
The 2019 proposed regulations provided that if a taxpayer (or predecessor to the taxpayer) previously had a depreciable interest in property before acquisition, the taxpayer would be unable to claim the bonus depreciation. The proposed regulations also provided a safe harbor: taxpayers need only look back to the previous five calendar years to determine whether they had a depreciable interest.
The 2020 regulations clarify the safe harbor in two ways. First, to qualify for the safe harbor, taxpayers must look to the five years immediately prior to the calendar year in which the property is placed in service, and the portion of such current calendar year before the placed-in-service date. Second, the regulations clarify that the taxpayer and any predecessor to the taxpayer are subject to separate lookback periods (i.e., the taxpayer and predecessor do not both need to be in existence during the lookback period for the safe harbor to apply).
De Minimis use
To help taxpayers that reacquired property that had been briefly held within the past five years (which, as discussed above, would make them ineligible for bonus depreciation), the proposed regulations provided a de minimis use exception for taxpayers that had disposed of such property to an unrelated party within 90 calendar days after the original acquisition. The proposed regulations also provided that the de minimis use rule did not apply if the taxpayer later reacquired and placed the same property in service during the same taxable year.
The final regulations retain this de minimis use exception and provide examples to clarify when the rule applies.
Partnerships
The proposed regulations provided a partnership look-through rule that treated a taxpayer as having a depreciable interest in a portion of property prior to the taxpayer’s acquisition of the property if they were a partner in a partnership at any time the partnership owned the property.
The final regulations withdraw this rule because of complexity and administrative burden.
Rules for consolidated groups
The proposed regulations included a rule that would allow a departing member of a consolidated group to take bonus depreciation even if that member had acquired the relevant depreciable property from another member of the same consolidated group and then left the group as part of the same series of related transactions within 90 days of the property acquisition. The rule treated the departing member as if it had acquired the depreciable property the day after it stopped being a member of the consolidated group.
The 2020 regulations provide a similar rule, but do not include the 90-day limit. The preamble to the 2020 regulations, like the proposed regulations, note that the regulations do not extend to group separations that qualify under section 355.
Component Election
The proposed regulations provided a rule that allowed taxpayers to take bonus depreciation on one or more pieces of property (components) of certain larger, self-constructed property by electing to treat such components as eligible for bonus depreciation. The 2020 regulations revise the proposed rule to provide taxpayers with an expanded definition of larger, self-constructed property that is eligible for the election.
Qualified improvement property
The CARES Act amended the definition of qualified improvement property with the result that an improvement to non-residential real estate will only be considered qualified property if it is “made by the taxpayer.”
The 2020 final regulations incorporated this legislative change into the regulatory definition of qualified improvement property. The preamble explains that an improvement is considered to have been 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. If nonresidential real property is acquired in a taxable transaction and it includes an improvement previously placed in service by the seller, the improvement is not considered made by the taxpayer.
Mazars’ Insight
The final regulations are generally helpful for taxpayers and provide useful revisions to the proposed regulations in a number of places, including removing the partnership look-through rule and expanding the component election. The effective date of the regulations is January 11, 2021.
Please contact your Mazars professional for additional information.
This alert was produced in conjunction with Ivins, Phillips & Barker, Chtd.
Published on January 29, 2021
The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.