With the enactment of the Tax Cuts and Jobs Act (TCJA), bonus depreciation under Sec. 168(k) was substantially modified to allow businesses to deduct 100% of the cost of eligible property when placed in service, subject to annual 20% phasedowns starting in 2023.
While the IRS had informally stated that qualified leasehold improvement, qualified retail improvement, qualified restaurant and qualified improvement property placed in service after September 27, 2017 and before January 1, 2018 would be eligible for bonus depreciation, it wasn’t until August 3, 2018 that this was formalized through the issuance of proposed regulations under Internal Revenue Code (IRC) Section 168(k).
Qualified property for purposes of the 100% bonus depreciation rules is now expanded to include qualified leasehold improvement, qualified retail improvement and qualified restaurant property as defined under the Internal Revenue Code of 1986, as amended on the day prior to the TCJA’s enactment (i.e., January 1, 2018). The proposed regulations clarify that the depreciable life of qualified leasehold improvements, qualified retail improvements and qualified restaurant property does not change to 39 years from 15 years until after December 31, 2017. These three types of property therefore have a 15 year life, and if acquired and placed in service after September 27, 2017 and before January 1, 2018 will be eligible for 100% bonus depreciation.
Under the TCJA, qualified improvement property was ascribed a 39 year life and was not eligible for bonus depreciation. The primary significance of qualified improvement property is that, in contrast with qualified leasehold improvements, there is no requirement that the placed-in-service date occurs more than three years after the date the base building was first placed in service. The proposed regulations provide relief here and allow 100% bonus depreciation on qualified improvement property acquired and placed in service after September 27, 2017 and before January 1, 2018.
Beginning January 1, 2018, all of the foregoing property types will fall under the category of qualified improvement property. As the law is currently drafted, qualified improvement property will have a 39 year depreciable life and will not be eligible for bonus depreciation.
Of course, Congress may choose to correct this, as it does appear the intention was to include it as bonus eligibility. Also worth noting is the interplay between this and other recent changes to the tax law (e.g., interest expense limitations under 163(j)).
In order to qualify for 100% bonus depreciation, the proposed regulations provide that the property be acquired after September 27, 2017, or acquired by the taxpayer pursuant to a written binding contract entered into after September 27, 2017. It is further provided that property manufactured, constructed or produced under a written binding contract entered into prior to an activity’s commencement is acquired pursuant to a written binding contract. The date on which the contract is entered into is the date the property is acquired, notwithstanding any closing, delivery or similar date referenced on the contract.
A letter of intent is not a binding contract under the proposed regulations.
Self-constructed property is not subject to the foregoing rules for written binding contracts. The proposed regulations provide that the September 27, 2017 timing requirement is met if manufacturing, constructing or production commences after that date. Regardless of the date the property is deemed acquired, the rules are clear that it be placed in service prior to January 1, 2018.
With the extended due date of 2017 calendar year tax returns quickly approaching, these clarifications may allow for bonus depreciation that was questionable before the introduction of the proposed regulations. One may want to consider whether bonus depreciation is available on returns that were already filed without the clarifications provided by these proposed regulations, and whether those returns could be amended to provide immediate tax benefits.
Please contact your Mazars USA LLP professional for additional information.