39292 Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–104397–18] 

RIN 1545–BO74 

Additional First Year Depreciation 

Deduction 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations that provide 

guidance regarding the additional first 

year depreciation deduction under 

section 168(k) of the Internal Revenue 

Code (Code). These proposed 

regulations reflect changes made by the 

Tax Cuts and Jobs Act. These proposed 

regulations affect taxpayers who deduct 

depreciation for qualified property 

acquired and placed in service after 

September 27, 2017. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by October 9, 2018. 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–104397–18), Room 

5203, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC 20044. Submissions 

may be hand-delivered Monday through 

Friday between the hours of 8 a.m. and 

4 p.m. to CC:PA:LPD:PR (REG–104397– 

18), Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue NW, 

Washington, DC 20224, or sent 

electronically via the Federal 

eRulemaking Portal at http://

www.regulations.gov (IRS REG–104397– 

18). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

Elizabeth R. Binder, (202) 317–7005; 

concerning submissions of comments or 

requests for a public hearing, Regina L. 

Johnson, (202) 317–6901 (not toll-free 

numbers). 

SUPPLEMENTARY INFORMATION: 

Background 

This document contains proposed 

amendments to 26 CFR part 1 under 

section 168(k). Section 168(k) was 

added to the Code by section 101 of the 

Job Creation and Worker Assistance Act 

of 2002, Public Law 107–147 (116 Stat. 

21). Section 168(k) allows an additional 

first year depreciation deduction in the 

placed-in-service year of qualified 

property. Subsequent amendments to 

section 168(k) increased the percentage 

of the additional first year depreciation 

deduction from 30 percent to 50 percent 

(to 100 percent for property acquired 

and placed in service after September 8, 

2010, and generally before January 1, 

2012), extended the placed-in-service 

date generally through December 31, 

2019, and made other changes. See 

section 201 of the Jobs and Growth Tax 

Relief Reconciliation Act of 2003, Public 

Law 108–27 (117 Stat. 752), sections 403 

and 408 of the Working Families Tax 

Relief Act of 2004, Public Law 108–311 

(118 Stat. 1166), sections 336 and 337 of 

the American Jobs Creation Act of 2004, 

Public Law 108–357 (118 Stat. 1418), 

sections 403 and 405 of the Gulf 

Opportunity Zone Act of 2005, Public 

Law 109–135 (119 Stat. 2577), section 

103 of the Economic Stimulus Act of 

2008, Public Law 110–185 (122 Stat. 

613), section 3081 of the Housing 

Assistance Tax Act of 2008, Public Law 

110–289 (122 Stat. 2654), section 1201 

of the American Recovery and 

Reinvestment Tax Act of 2009, Public 

Law 111–5 (123 Stat. 115), section 2022 

of the Small Business Jobs Act of 2010, 

Public Law 111–240 (124 Stat. 2504), 

section 401 of the Tax Relief, 

Unemployment Insurance 

Reauthorization, and Job Creation Act of 

2010, Public Law 111–312 (124 Stat. 

3296), section 331 of the American 

Taxpayer Relief Act of 2012, Public Law 

112–240 (126 Stat. 2313), sections 125, 

202, 210, 212, and 214 of the Tax 

Increase Prevention Act of 2014, Public 

Law 113–295 (128 Stat. 4010), and 

section 143 of the Protecting Americans 

from Tax Hikes Act of 2015, enacted as 

Division Q of the Consolidated 

Appropriations Act, 2016, Public Law 

114–113 (129 Stat. 2242). 

On December 22, 2017, section 168(k) 

and related provisions were amended by 

sections 12001(b)(13), 13201, and 13204 

of the Tax Cuts and Jobs Act, Public 

Law 115–97 (131 Stat. 2054) (the ‘‘Act’’) 

to provide further changes to the 

additional first year depreciation 

deduction. Unless otherwise indicated, 

all references to section 168(k) 

hereinafter are references to section 

168(k) as amended. 

Section 167(a) allows as a 

depreciation deduction a reasonable 

allowance for the exhaustion, wear and 

tear, and obsolescence of property used 

in a trade or business or of property 

held for the production of income. The 

depreciation deduction allowable for 

tangible depreciable property placed in 

service after 1986 generally is 

determined under the Modified 

Accelerated Cost Recovery System 

provided by section 168 (MACRS 

property). The depreciation deduction 

allowable for computer software that is 

placed in service after August 10, 1993, 

and is not an amortizable section 197 

intangible, is determined under section 

167(f)(1). 

Section 168(k), prior to amendment 

by the Act, allowed an additional first 

year depreciation deduction for the 

placed-in-service year equal to 50 

percent of the adjusted basis of qualified 

property. Qualified property was 

defined in part as property the original 

use of which begins with the taxpayer. 

Section 13201 of the Act made several 

amendments to the allowance for 

additional first year depreciation 

deduction in section 168(k). For 

example, the additional first year 

depreciation deduction percentage is 

increased from 50 to 100 percent; the 

property eligible for the additional first 

year depreciation deduction is 

expanded to include certain used 

depreciable property and certain film, 

television, or live theatrical 

productions; the placed-in-service date 

is extended from before January 1, 2020, 

to before January 1, 2027 (from before 

January 1, 2021, to before January 1, 

2028, for longer production period 

property or certain aircraft property 

described in section 168(k)(2)(B) or (C)); 

and the date on which a specified plant 

is planted or grafted by the taxpayer is 

extended from before January 1, 2020, to 

before January 1, 2027. 

Section 168(k) allows a 100-percent 

additional first year depreciation 

deduction for qualified property 

acquired and placed in service after 

September 27, 2017, and placed in 

service before January 1, 2023 (before 

January 1, 2024, for longer production 

period property or certain aircraft 

property described in section 

168(k)(2)(B) or (C)). If a taxpayer elects 

to apply section 168(k)(5), the 100- 

percent additional first year 

depreciation deduction also is allowed 

for a specified plant planted or grafted 

after September 27, 2017, and before 

January 1, 2023. The 100-percent 

additional first year depreciation 

deduction is decreased by 20 percent 

annually for qualified property placed 

in service, or a specified plant planted 

or grafted, after December 31, 2022 (after 

December 31, 2023, for longer 

production period property or certain 

aircraft property described in section 

168(k)(2)(B) or (C)). 

Section 168(k)(2)(A), as amended by 

the Act, defines ‘‘qualified property’’ as 

meaning, in general, property (1) to 

which section 168 applies that has a 

recovery period of 20 years or less, 

which is computer software as defined 

in section 167(f)(1)(B) for which a 

deduction is allowable under section 

167(a) without regard to section 168(k), 

which is water utility property, which is 


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a qualified film or television production 

as defined in section 181(d) for which 

a deduction would have been allowable 

without regard to section 181(a)(2) or (g) 

or section 168(k), or which is a qualified 

live theatrical production as defined in 

section 181(e) for which a deduction 

would have been allowable without 

regard to section 181(a)(2) or (g) or 

section 168(k); (2) the original use of 

which begins with the taxpayer or the 

acquisition of which by the taxpayer 

meets the requirements of section 

168(k)(2)(E)(ii); and (3) which is placed 

in service by the taxpayer before January 

1, 2027. Section 168(k)(2)(E)(ii) requires 

that the acquired property was not used 

by the taxpayer at any time prior to such 

acquisition and the acquisition of such 

property meets the requirements of 

section 179(d)(2)(A), (B), and (C) and 

section 179(d)(3). 

However, section 168(k)(2)(D) 

provides that qualified property does 

not include any property to which the 

alternative depreciation system under 

section 168(g) applies, determined 

without regard to section 168(g)(7) 

(relating to election to have the 

alternative depreciation system apply), 

and after application of section 280F(b) 

(relating to listed property with limited 

business use). 

Section 13201(h) of the Act provides 

the effective dates of the amendments to 

section 168(k) made by section 13201 of 

the Act. Except as provided in section 

13201(h)(2) of the Act, section 

13201(h)(1) of the Act provides that 

these amendments apply to property 

acquired and placed in service after 

September 27, 2017. However, property 

is not treated as acquired after the date 

on which a written binding contract is 

entered into for such acquisition. 

Section 13201(h)(2) provides that the 

amendments apply to specified plants 

planted or grafted after September 27, 

2017. 

Additionally, section 12001(b)(13) of 

the Act repealed section 168(k)(4) 

(relating to the election to accelerate 

alternative minimum tax credits in lieu 

of the additional first year depreciation 

deduction) for taxable years beginning 

after December 31, 2017. Further, 

section 13204(a)(4)(B)(ii) repealed 

section 168(k)(3) (relating to qualified 

improvement property) for property 

placed in service after December 31, 

2017. 

Explanation of Provisions 

The proposed regulations describe 

and clarify the statutory requirements 

that must be met for depreciable 

property to qualify for the additional 

first year depreciation deduction 

provided by section 168(k). Further, the 

proposed regulations instruct taxpayers 

how to determine the additional first 

year depreciation deduction and the 

amount of depreciation otherwise 

allowable for this property. Because the 

Act made substantial amendments to 

section 168(k), the proposed regulations 

update existing regulations in 

§ 1.168(k)–1 by providing a new section 

at § 1.168(k)–2 for property acquired 

and placed in service after September 

27, 2017, and make conforming 

amendments to the existing regulations. 

1. Eligibility Requirements for 

Additional First Year Depreciation 

Deduction 

The proposed regulations follow 

section 168(k)(2), as amended by the 

Act, and section 13201(h) of the Act to 

provide that depreciable property must 

meet four requirements to be qualified 

property. These requirements are (1) the 

depreciable property must be of a 

specified type; (2) the original use of the 

depreciable property must commence 

with the taxpayer or used depreciable 

property must meet the acquisition 

requirements of section 168(k)(2)(E)(ii); 

(3) the depreciable property must be 

placed in service by the taxpayer within 

a specified time period or must be 

planted or grafted by the taxpayer before 

a specified date; and (4) the depreciable 

property must be acquired by the 

taxpayer after September 27, 2017. 

2. Property of a Specified Type 

A. Property Eligible for the Additional 

First Year Depreciation Deduction 

The proposed regulations follow the 

definition of qualified property in 

section 168(k)(2)(A)(i) and (k)(5) and 

provide that qualified property must be 

one of the following: (1) MACRS 

property that has a recovery period of 20 

years or less; (2) computer software as 

defined in, and depreciated under, 

section 167(f)(1); (3) water utility 

property as defined in section 168(e)(5) 

and depreciated under section 168; (4) 

a qualified film or television production 

as defined in section 181(d) and for 

which a deduction would have been 

allowable under section 181 without 

regard to section 181(a)(2) and (g) or 

section 168(k); (5) a qualified live 

theatrical production as defined in 

section 181(e) and for which a 

deduction would have been allowable 

under section 181 without regard to 

section 181(a)(2) and (g) or section 

168(k); or (6) a specified plant as 

defined in section 168(k)(5)(B) and for 

which the taxpayer has made an 

election to apply section 168(k)(5). 

Qualified improvement property 

acquired after September 27, 2017, and 

placed in service after September 27, 

2017, and before January 1, 2018, also 

is qualified property. 

For property placed in service after 

December 31, 2017, section 13204 of the 

Act amended section 168(e) to eliminate 

the 15-year MACRS property 

classification for qualified leasehold 

improvement property, qualified 

restaurant property, and qualified retail 

improvement property, and amended 

section 168(k) to eliminate qualified 

improvement property as a specific 

category of qualified property. Because 

of the effective date of section 13204 of 

the Act (property placed in service after 

December 31, 2017), the proposed 

regulations provide that MACRS 

property with a recovery period of 20 

years or less includes the following 

MACRS property that is acquired by the 

taxpayer after September 27, 2017, and 

placed in service by the taxpayer after 

September 27, 2017, and before January 

1, 2018: (1) Qualified leasehold 

improvement property; (2) qualified 

restaurant property that is qualified 

improvement property; and (3) qualified 

retail improvement property. For the 

same reason, the proposed regulations 

provide that qualified property includes 

qualified improvement property that is 

acquired by the taxpayer after 

September 27, 2017, and placed in 

service by the taxpayer after September 

27, 2017, and before January 1, 2018. 

Further, to account for the statutory 

amendments to the definition of 

qualified improvement property made 

by the Act, the proposed regulations 

define qualified improvement property 

for purposes of section 168(k)(3) (before 

amendment by section 13204 of the Act) 

and section 168(e)(6) (as amended by 

section 13204 of the Act). 

For purposes of determining the 

eligibility of MACRS property as 

qualified property, the proposed 

regulations retain the rule in § 1.168(k)– 

1(b)(2)(i)(A) that the recovery period 

applicable for the MACRS property 

under section 168(c) of the general 

depreciation system (GDS) is used, 

regardless of any election made by the 

taxpayer to depreciate the class of 

property under the alternative 

depreciation system of section 168(g) 

(ADS). 

B. Property Not Eligible for the 

Additional First Year Depreciation 

Deduction 

The proposed regulations provide that 

qualified property does not include (1) 

property excluded from the application 

of section 168 as a result of section 

168(f); (2) property that is required to be 

depreciated under the ADS (as 

described below); (3) any class of 


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property for which the taxpayer elects 

not to deduct the additional first year 

depreciation under section 168(k)(7); (4) 

a specified plant placed in service by 

the taxpayer in the taxable year and for 

which the taxpayer made an election to 

apply section 168(k)(5) for a prior year 

under section 168(k)(5)(D); (5) any class 

of property for which the taxpayer elects 

to apply section 168(k)(4) (this 

exclusion applies to property placed in 

service in any taxable year beginning 

before January 1, 2018, because section 

12001(b)(13) of the Act repealed section 

168(k)(4) for taxable years beginning 

after December 31, 2017); or (6) property 

described in section 168(k)(9)(A) or (B). 

Section 168(k)(9) provides that qualified 

property does not include (A) any 

property that is primarily used in a 

trade or business described in section 

163(j)(7)(A)(iv), or (B) any property used 

in a trade or business that has had floor 

plan financing indebtedness (as defined 

in section 163(j)(9)) if the floor plan 

financing interest related to such 

indebtedness was taken into account 

under section 163(j)(1)(C). Section 163(j) 

applies to taxable years beginning after 

December 31, 2017. Accordingly, the 

exclusion of property described in 

section 168(k)(9) from the additional 

first year depreciation deduction applies 

to property placed in service in any 

taxable year beginning after December 

31, 2017. 

Property is required to be depreciated 

under the ADS if the property is 

described under section 168(g)(1)(A), 

(B), (C), (D), (F), or (G) or if other 

provisions of the Code require 

depreciation for the property to be 

determined under the ADS. 

Accordingly, MACRS property that is 

nonresidential real property, residential 

rental property, and qualified 

improvement property held by an 

electing real property trade or business 

(as defined in section 163(j)(7)(B)), and 

property with a recovery period of 10 

years or more that is held by an electing 

farming business (as defined in section 

163(j)(7)(C)), are not eligible for the 

additional first year depreciation 

deduction for taxable years beginning 

after December 31, 2017. Pursuant to 

section 168(k)(2)(D), MACRS property 

for which the taxpayer makes an 

election under section 168(g)(7) to 

depreciate the property under the ADS 

is eligible for the additional first year 

depreciation deduction (assuming all 

other requirements are met). 

C. Elections 

The proposed regulations provide 

rules for making the election out of the 

additional first year depreciation 

deduction pursuant to section 168(k)(7) 

and for making the election to apply 

section 168(k)(5) to a specified plant. 

Additionally, the proposed regulations 

provide rules for making the election 

under section 168(k)(10) to deduct 50 

percent, instead of 100 percent, 

additional first year depreciation for 

qualified property acquired after 

September 27, 2017, by the taxpayer and 

placed in service or planted or grafted, 

as applicable, by the taxpayer during its 

taxable year that includes September 28, 

2017. Because section 168(k)(10) does 

not state that the election may be made 

‘‘with respect to any class of property’’ 

as stated in section 168(k)(7) for making 

the election out of the additional first 

year depreciation deduction, the 

proposed regulations provide that the 

election under section 168(k)(10) 

applies to all qualified property. 

3. New and Used Property 

A. New Property 

The proposed regulations generally 

retain the original use rules in 

§ 1.168(k)–1(b)(3). Pursuant to section 

168(k)(2)(A)(ii), the proposed 

regulations do not provide any date by 

which the original use of the property 

must commence with the taxpayer. 

Because section 13201 of the Act 

removed the rules regarding saleleaseback transactions, the proposed 

regulations also do not retain the 

original use rules in § 1.168(k)– 

1(b)(3)(iii)(A) and (C) regarding such 

transactions, including a sale-leaseback 

transaction followed by a syndication 

transaction. The rule in the proposed 

regulations for syndication transactions 

involving new or used property is 

explained later in the preamble. 

B. Used Property 

Pursuant to section 168(k)(2)(A)(ii) 

and (k)(2)(E)(ii), the proposed 

regulations provide that the acquisition 

of used property is eligible for the 

additional first year depreciation 

deduction if such acquisition meets the 

following requirements: (1) The 

property was not used by the taxpayer 

or a predecessor at any time prior to the 

acquisition; (2) the acquisition of the 

property meets the related party and 

carryover basis requirements of section 

179(d)(2)(A), (B), and (C) and § 1.179– 

4(c)(1)(ii), (iii), and (iv), or (c)(2); and (3) 

the acquisition of the property meets the 

cost requirements of section 179(d)(3) 

and § 1.179–4(d). 

i. Section 336(e) Election 

A section 338 election and a section 

336(e) election share many of the same 

characteristics. Therefore, the proposed 

regulations modify § 1.179–4(c)(2), 

which addresses the treatment of a 

section 338 election, to include property 

deemed to have been acquired by a new 

target corporation as a result of a section 

336(e) election. Section 1.336–1(a)(1) 

provides that to the extent not 

inconsistent with section 336(e) or the 

regulations under section 336(e), the 

principles of section 338 and the 

regulations under section 338 apply for 

purposes of the regulations under 

section 336. To the extent that property 

is deemed to have been acquired by a 

‘‘new target corporation,’’ the Treasury 

Department and the IRS read § 1.179– 

4(c)(2), without modification, as 

applying to the deemed acquisition of 

property by a new target corporation as 

a result of a section 336(e) election, just 

as it applies as the result of a section 

338 election. However, to remove any 

doubt, the proposed regulations modify 

§ 1.179–4(c)(2) to provide that property 

deemed to have been acquired by a new 

target corporation as a result of a section 

338 or a section 336(e) election will be 

considered acquired by purchase for 

purposes of section 179. 

ii. Property Not Previously Used by the 

Taxpayer 

The proposed regulations provide that 

the property is treated as used by the 

taxpayer or a predecessor at any time 

before its acquisition of the property 

only if the taxpayer or the predecessor 

had a depreciable interest in the 

property at any time before the 

acquisition, whether or not the taxpayer 

or the predecessor claimed depreciation 

deductions for the property. If a lessee 

has a depreciable interest in the 

improvements made to leased property 

and subsequently the lessee acquires the 

leased property of which the 

improvements are a part, the proposed 

regulations provide that the unadjusted 

depreciable basis, as defined in 

§ 1.168(b)–1(a)(3), of the acquired 

property that is eligible for the 

additional first year depreciation 

deduction, assuming all other 

requirements are met, does not include 

the unadjusted depreciable basis 

attributable to the improvements. 

Further, if a taxpayer initially 

acquires a depreciable interest in a 

portion of the property and 

subsequently acquires an additional 

depreciable interest in the same 

property, the proposed regulations also 

provide that such additional depreciable 

interest is not treated as being 

previously used by the taxpayer. 

However, if a taxpayer holds a 

depreciable interest in a portion of the 

property, sells that portion or a part of 

that portion, and subsequently acquires 

a depreciable interest in another portion 


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of the same property, the proposed 

regulations provide that the taxpayer 

will be treated as previously having a 

depreciable interest in the property up 

to the amount of the portion for which 

the taxpayer held a depreciable interest 

in the property before the sale. 

The Treasury Department and the IRS 

request comments on whether a safe 

harbor should be provided on how 

many taxable years a taxpayer or a 

predecessor should look back to 

determine if the taxpayer or the 

predecessor previously had a 

depreciable interest in the property. 

Such comments should provide the 

number of taxable years recommended 

for the look-back period and the 

reasoning for such number. 

iii. Rules Applying to Consolidated 

Groups 

Members of a consolidated group 

generally are treated as separate 

taxpayers. See Woolford Realty Co. v. 

Rose, 286 U.S. 319, 328 (1932) (‘‘[a] 

corporation does not cease to be [a 

taxpayer] by affiliating with another’’). 

However, the Treasury Department and 

the IRS believe that the additional first 

year depreciation deduction should not 

be permitted to members of a 

consolidated group when property is 

disposed of by one member of a 

consolidated group outside the group 

and subsequently acquired by another 

member of the same group because 

permitting such a deduction would not 

clearly reflect the group’s income tax 

liability. See section 1502 (permitting 

consolidated group regulations different 

from the rules of chapter 1 of subtitle A 

of the Code otherwise applicable to 

separate corporations to clearly reflect 

the income tax liability of a 

consolidated group or each member of 

the group). To implement this position, 

these proposed regulations treat a 

member of a consolidated group as 

previously having a depreciable interest 

in all property in which the 

consolidated group is treated as 

previously having a depreciable interest. 

For purposes of this rule, a consolidated 

group will be treated as having a 

depreciable interest in property if any 

current or previous member of the group 

had a depreciable interest in the 

property while a member of the group. 

The Treasury Department and the IRS 

also believe that the additional first year 

depreciation deduction should not be 

allowed when, as part of a series of 

related transactions, one or more 

members of a consolidated group 

acquire both the stock of a corporation 

that previously had a depreciable 

interest in the property and the property 

itself. Assume a corporation (the selling 

corporation) has a depreciable interest 

in property and sells it to an unrelated 

party. Subsequently, as part of a series 

of related transactions, a member of a 

consolidated group, unrelated to the 

selling corporation, acquires the 

property and either that member or a 

different member of the group acquires 

the stock of the selling corporation. In 

substance, the series of transactions is 

the same as if the selling corporation 

reacquired the property and then 

transferred it to another member of the 

group, in which case the additional first 

year depreciation deduction would not 

be allowed. Accordingly, these 

proposed regulations deny the 

deduction in such circumstances. 

Additionally, if the acquisition of 

property is part of a series of related 

transactions that also includes one or 

more transactions in which the 

transferee of the property ceases to be a 

member of a consolidated group, then 

whether the taxpayer is a member of a 

consolidated group is tested 

immediately after the last transaction in 

the series. 

iv. Series of Related Transactions 

In determining whether property 

meets the requirements of section 

168(k)(2)(E)(ii), the Treasury 

Department and the IRS believe that the 

ordering of steps, or the use of an 

unrelated intermediary, in a series of 

related transactions should not control. 

For example, if a father buys and places 

equipment in service for use in the 

father’s trade or business and 

subsequently the father sells the 

equipment to his daughter for use in her 

trade or business, the father and 

daughter are related parties under 

section 179(d)(2)(A) and § 1.179– 

4(c)(1)(ii) and therefore, the daughter’s 

acquisition of the equipment is not 

eligible for the additional first year 

depreciation deduction. However, if in 

a series of related transactions, the 

father sells the equipment to an 

unrelated party and then the unrelated 

party sells the equipment to the father’s 

daughter, the daughter’s acquisition of 

the equipment from the unrelated party, 

absent the rule in the proposed 

regulations, is eligible for the additional 

first year depreciation deduction 

(assuming all other requirements are 

met). Thus, the proposed regulations 

provide that in the case of a series of 

related transactions, the transfer of the 

property will be treated as directly 

transferred from the original transferor 

to the ultimate transferee, and the 

relation between the original transferor 

and the ultimate transferee is tested 

immediately after the last transaction in 

the series. 

C. Application to Partnerships 

On September 8, 2003, the Treasury 

Department and the IRS published 

temporary regulations (T.D. 9091, 2003– 

2 C.B. 939) in the Federal Register (68 

FR 52986) relating to the additional first 

year depreciation deduction provisions 

of sections 168(k) and 1400L(b) (before 

amendment by sections 403 and 408 of 

the Working Families Tax Relief Act of 

2004). Those regulations provided that 

any increase in the basis of qualified 

property due to a section 754 election 

generally is not eligible for the 

additional first year depreciation 

deduction. The preamble to those 

regulations explained that any increase 

in basis due to a section 754 election 

does not satisfy the original use 

requirement. The final regulations (T.D. 

9283, 2006–2 C.B. 633, 642–43) 

published in the Federal Register on 

August 31, 2006 (71 FR 51738) retained 

the rule for increases in basis due to 

section 754 elections at § 1.168(k)– 

1(f)(9). Because the Act amended 

section 168(k) to allow the additional 

first year depreciation deduction for 

certain used property in addition to new 

property, the Treasury Department and 

the IRS have reconsidered whether basis 

adjustments under sections 734(b) and 

743(b) now qualify for the additional 

first year depreciation deduction. The 

Treasury Department and the IRS also 

have considered whether certain section 

704(c) adjustments as well as the basis 

of distributed property determined 

under section 732 should qualify for the 

additional first year depreciation 

deduction. 

i. Section 704(c) Remedial Allocations 

Section 1.704–3(d)(2) provides, in 

part, that under the remedial allocation 

method, the portion of a partnership’s 

book basis in contributed property that 

exceeds its adjusted tax basis is 

recovered using any recovery period 

and depreciation (or other cost recovery) 

method available to the partnership for 

newly purchased property (of the same 

type as the contributed property) that is 

placed in service at the time of 

contribution. The proposed regulations 

provide that remedial allocations under 

section 704(c) do not qualify for the 

additional first year depreciation 

deduction under section 168(k). 

Notwithstanding the language of 

§ 1.704–3(d)(2) that any method 

available to the partnership for newly 

purchased property may be used to 

recover the portion of the partnership’s 

book basis in contributed property that 

exceeds its adjusted tax basis, remedial 

allocations do not meet the 

requirements of section 168(k)(2)(E)(ii). 


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Because the underlying property is 

contributed to the partnership in a 

section 721 transaction, the 

partnership’s basis in the property is 

determined by reference to the 

contributing partner’s basis in the 

property, which violates sections 

179(d)(2)(C) and 168(k)(2)(E)(ii)(II). In 

addition, the partnership has already 

had a depreciable interest in the 

contributed property at the time the 

remedial allocation is made, which is in 

violation of section 168(k)(2)(E)(ii)(I) as 

well as the original use requirement. 

The same rule applies in the case of 

revaluations of partnership property 

(reverse section 704(c) allocations). 

ii. Zero Basis Property 

Section 1.704–1(b)(2)(iv)(g)(3) 

provides that, if partnership property 

has a zero adjusted tax basis, any 

reasonable method may be used to 

determine the book depreciation, 

depletion, or amortization of the 

property. The proposed regulations 

provide that the additional first year 

depreciation deduction under section 

168(k) will not be allowed on property 

contributed to the partnership with a 

zero adjusted tax basis because, with the 

additional first year depreciation 

deduction, the partners have the 

potential to shift built-in gain among 

partners. 

iii. Basis Determined Under Section 732 

Section 732(a)(1) provides that the 

basis of property (other than money) 

distributed by a partnership to a partner 

other than in liquidation of the partner’s 

interest is its adjusted basis to the 

partnership immediately before the 

distribution. Section 732(a)(2) provides 

that the basis determined under section 

732(a)(1) shall not exceed the adjusted 

basis of the partner’s interest in the 

partnership reduced by any money 

distributed in the same transaction. 

Section 732(b) provides that the basis of 

property (other than money) distributed 

by a partnership to a partner in 

liquidation of the partner’s interest is 

equal to the adjusted basis of the 

partner’s interest in the partnership 

reduced by any money distributed in 

the same transaction. 

Property distributed by a partnership 

to a partner fails to satisfy the original 

use requirement because the partnership 

used the property prior to the 

distribution. Distributed property also 

fails to satisfy the acquisition 

requirements of section 

168(k)(2)(E)(ii)(II). Any portion of basis 

determined by section 732(a)(1) fails to 

satisfy section 179(d)(2)(C) because it is 

determined by reference to the 

partnership’s basis in the distributed 

property. Similarly, any portion of basis 

determined by section 732(a)(2) or (b) 

fails to satisfy section 179(d)(3) because 

it is determined by reference to the 

distributee partner’s basis in its 

partnership interest (reduced by any 

money distributed in the same 

transaction). 

iv. Section 734(b) Adjustments 

Section 734(b)(1) provides that, in the 

case of a distribution of property to a 

partner with respect to which a section 

754 election is in effect (or when there 

is a substantial basis reduction under 

section 734(d)), the partnership will 

increase the adjusted basis of 

partnership property by the sum of (A) 

the amount of any gain recognized to 

the distributee partner under section 

731(a)(1), and (B) in the case of 

distributed property to which section 

732(a)(2) or (b) applies, the excess of the 

adjusted basis of the distributed 

property to the partnership immediately 

before the distribution (as adjusted by 

section 732(d)) over the basis of the 

distributed property to the distributee, 

as determined under section 732. 

Because a section 734(b) basis 

adjustment is made to the basis of 

partnership property (i.e., non-partner 

specific basis) and the partnership used 

the property prior to the partnership 

distribution giving rise to the basis 

adjustment, a section 734(b) basis 

adjustment fails the original use clause 

in section 168(k)(2)(A)(ii) and also fails 

the used property requirement in 

section 168(k)(2)(E)(ii)(I). The proposed 

regulations therefore provide that 

section 734(b) basis adjustments are not 

eligible for the additional first year 

depreciation deduction. 

v. Section 743(b) Adjustments 

Section 743(b)(1) provides that, in the 

case of a transfer of a partnership 

interest, either by sale or exchange or as 

a result of the death of a partner, a 

partnership that has a section 754 

election in effect (or if there is a 

substantial built-in loss immediately 

after such partnership interest transfer 

under section 743(d)), will increase the 

adjusted basis of partnership property 

by the excess of the transferee’s basis in 

the transferred partnership interest over 

the transferee’s share of the adjusted 

basis of partnership’s property. This 

increase is an adjustment to the basis of 

partnership property with respect to the 

transferee partner only and, therefore, is 

a partner specific basis adjustment to 

partnership property. The section 743(b) 

basis adjustment is allocated among 

partnership properties under section 

755. As stated above, prior to the Act, 

a section 743(b) basis adjustment would 

always fail the original use requirement 

in section 168(k)(2)(A)(ii) because 

partnership property to which a section 

743(b) basis adjustment relates would 

have been previously used by the 

partnership and its partners prior to the 

transfer that gave rise to the section 

743(b) adjustment. After the Act, while 

a section 743(b) basis adjustment still 

fails the original use clause in section 

168(k)(2)(A)(ii), a transaction giving rise 

to a section 743(b) basis adjustment may 

satisfy the used property clause in 

section 168(k)(2)(A)(ii) because of the 

used property acquisition requirements 

of section 168(k)(2)(E)(ii), depending on 

the facts and circumstances. 

Because a section 743(b) basis 

adjustment is a partner specific basis 

adjustment to partnership property, the 

proposed regulations take an aggregate 

view and provide that, in determining 

whether a section 743(b) basis 

adjustment meets the used property 

acquisition requirements of section 

168(k)(2)(E)(ii), each partner is treated 

as having owned and used the partner’s 

proportionate share of partnership 

property. In the case of a transfer of a 

partnership interest, section 

168(k)(2)(E)(ii)(I) will be satisfied if the 

partner acquiring the interest, or a 

predecessor of such partner, has not 

used the portion of the partnership 

property to which the section 743(b) 

basis adjustment relates at any time 

prior to the acquisition (that is, the 

transferee has not used the transferor’s 

portion of partnership property prior to 

the acquisition), notwithstanding the 

fact that the partnership itself has 

previously used the property. Similarly, 

for purposes of applying section 

179(d)(2)(A), (B), and (C), the partner 

acquiring a partnership interest is 

treated as acquiring a portion of 

partnership property, and the partner 

who is transferring a partnership 

interest is treated as the person from 

whom the property is acquired. 

For example, the relationship between 

the transferor partner and the transferee 

partner must not be a prohibited 

relationship under section 179(d)(2)(A). 

Also, the transferor partner and 

transferee partner may not be part of the 

same controlled group under section 

179(d)(2)(B). Finally, the transferee 

partner’s basis in the transferred 

partnership interest may not be 

determined in whole or in part by 

reference to the transferor’s adjusted 

basis, or under section 1014. 

The same result will apply regardless 

of whether the transferee partner is a 

new partner or an existing partner 

purchasing an additional partnership 

interest from another partner. Assuming 

that the transferor partner’s specific 


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interest in partnership property that is 

acquired by the transferee partner has 

not previously been used by the 

transferee partner or a predecessor, the 

corresponding section 743(b) basis 

adjustment will be eligible for the 

additional first year depreciation 

deduction in the hands of the transferee 

partner, provided all other requirements 

of section 168(k) are satisfied (and 

assuming § 1.743–1(j)(4)(i)(B)(2) does 

not apply). This treatment is appropriate 

notwithstanding the fact that the 

transferee partner may have an existing 

interest in the underlying partnership 

property, because the transferee’s 

existing interest in the underlying 

partnership property is distinct from the 

interest being transferred. 

Finally, the proposed regulations 

provide that a section 743(b) basis 

adjustment in a class of property (not 

including the property class for section 

743(b) basis adjustments) may be 

recovered using the additional first year 

depreciation deduction under section 

168(k) without regard to whether the 

partnership elects out of the additional 

first year depreciation deduction under 

section 168(k)(7) for all other qualified 

property in the same class of property 

and placed in service in the same 

taxable year. Similarly, a partnership 

may make the election out of the 

additional first year depreciation 

deduction under section 168(k)(7) for a 

section 743(b) basis adjustment in a 

class of property (not including the 

property class for section 743(b) basis 

adjustments), and this election will not 

bind the partnership to such election for 

all other qualified property of the 

partnership in the same class of 

property and placed in service in the 

same taxable year. 

D. Syndication Transaction 

The syndication transaction rule in 

the proposed regulations is based on the 

rules in section 168(k)(2)(E)(iii) for 

syndication transactions. For new or 

used property, the proposed regulations 

provide that if (1) a lessor has a 

depreciable interest in the property and 

the lessor and any predecessor did not 

previously have a depreciable interest in 

the property, (2) the property is sold by 

the lessor or any subsequent purchaser 

within three months after the date the 

property was originally placed in 

service by the lessor (or, in the case of 

multiple units of property subject to the 

same lease, within three months after 

the date the final unit is placed in 

service, so long as the period between 

the time the first unit is placed in 

service and the time the last unit is 

placed in service does not exceed 12 

months), and (3) the user (lessee) of the 

property after the last sale during the 

three-month period remains the same as 

when the property was originally placed 

in service by the lessor, then the 

purchaser of the property in the last sale 

during the three-month period is 

considered the taxpayer that acquired 

the property and the taxpayer that 

originally placed the property in 

service, but not earlier than the date of 

the last sale. Thus, if a transaction is 

within the rules described above, the 

purchaser of the property in the last sale 

during the three-month period is 

eligible to claim the additional first year 

depreciation for the property (assuming 

all requirements are met), and the 

earlier purchasers of the property are 

not. 

4. Placed-in-Service Date 

The proposed regulations generally 

retain the placed-in-service date rules in 

§ 1.168(k)–1(b)(5). Pursuant to the 

effective date in section 13201(h) of the 

Act and section 168(k)(2)(A)(iii) and 

(k)(2)(B)(i)(II), the proposed regulations 

provide that qualified property must be 

placed in service by the taxpayer after 

September 27, 2017, and before January 

1, 2027, or, in the case of property 

described in section 168(k)(2)(B) or (C), 

before January 1, 2028. Because section 

13201 of the Act removed the rules 

regarding sale-leaseback transactions, 

the proposed regulations do not retain 

the placed-in-service date rules in 

§ 1.168(k)–1(b)(5)(ii)(A) and (C) 

regarding such transactions, including a 

sale-leaseback transaction followed by a 

syndication transaction. 

Further, the proposed regulations 

provide rules for specified plants. 

Pursuant to section 168(k)(5)(A), if the 

taxpayer has made an election to apply 

section 168(k)(5) for a specified plant, 

the proposed regulations provide that 

the specified plant must be planted 

before January 1, 2027, or grafted before 

January 1, 2027, to a plant that has 

already been planted, by the taxpayer in 

the ordinary course of the taxpayer’s 

farming business, as defined in section 

263A(e)(4). 

Pursuant to section 168(k)(2)(H), the 

proposed regulations also provide that a 

qualified film or television production 

is treated as placed in service at the time 

of initial release or broadcast as defined 

under § 1.181–1(a)(7), and a qualified 

live theatrical production is treated as 

placed in service at the time of the 

initial live staged performance. The 

proposed regulations also provide that 

the initial live staged performance of a 

qualified live theatrical production is 

the first commercial exhibition of a 

production to an audience. An initial 

live staged performance does not 

include limited exhibition, prior to 

commercial exhibition to general 

audiences, if the limited exhibition is 

primarily for purposes of publicity, 

determining the need for further 

production activity, or raising funds for 

the completion of production. For 

example, the initial live staged 

performance does not include a preview 

of the production if the preview is 

primarily to determine the need for 

further production activity. 

5. Date of Acquisition 

The proposed regulations provide 

rules applicable to the acquisition 

requirements of the effective date under 

section 13201(h) of the Act. The 

proposed regulations provide that these 

rules apply to all property, including 

self-constructed property or property 

described in section 168(k)(2)(B) or (C). 

A. Written Binding Contract 

Pursuant to section 13201(h)(1)(A) of 

the Act, the proposed regulations 

provide that the property must be 

acquired by the taxpayer after 

September 27, 2017, or, acquired by the 

taxpayer pursuant to a written binding 

contract entered into by the taxpayer 

after September 27, 2017. Because of the 

clear language of section 13201(h)(1) of 

the Act regarding written binding 

contracts, the proposed regulations also 

provide that property that is 

manufactured, constructed, or produced 

for the taxpayer by another person 

under a written binding contract that is 

entered into prior to the manufacture, 

construction, or production of the 

property for use by the taxpayer in its 

trade or business or for its production of 

income is acquired pursuant to a written 

binding contract. Further, if the written 

binding contract states the date on 

which the contract was entered into and 

a closing date, delivery date, or other 

similar date, the date on which the 

contract was entered into is the date the 

taxpayer acquired the property. The 

proposed regulations retain the rules in 

§ 1.168(k)–1(b)(4)(ii) defining a binding 

contract. Additionally, the proposed 

regulations provide that a letter of intent 

for an acquisition is not a binding 

contract. 

B. Self-Constructed Property 

If a taxpayer manufactures, 

constructs, or produces property for its 

own use, the Treasury Department and 

the IRS recognize that the written 

binding contract rule in section 

13201(h)(1) of the Act does not apply. 

In such case, the proposed regulations 

provide that the acquisition rules in 

section 13201(h)(1) of the Act are 

treated as met if the taxpayer begins 


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manufacturing, constructing, or 

producing the property after September 

27, 2017. The proposed regulations 

provide rules similar to those in 

§ 1.168(k)–1(b)(4)(iii)(B) for defining 

when manufacturing, construction, or 

production begins, including the safe 

harbor, and in § 1.168(k)–1(b)(4)(iii)(C) 

for a contract to acquire, or for the 

manufacture, construction, or 

production of, a component of the larger 

self-constructed property. As stated in 

the preceding paragraph, these selfconstructed rules in the proposed 

regulations do not apply to property that 

is manufactured, constructed, or 

produced for the taxpayer by another 

person under a written binding contract 

that is entered into prior to the 

manufacture, construction, or 

production of the property. 

C. Qualified Film, Television, or Live 

Theatrical Productions 

The proposed regulations also provide 

rules for qualified film, television, or 

live theatrical productions. For 

purposes of section 13201(h)(1)(A) of 

the Act, the proposed regulations 

provide that a qualified film or 

television production is treated as 

acquired on the date principal 

photography commences, and a 

qualified live theatrical production is 

treated as acquired on the date when all 

of the necessary elements for producing 

the live theatrical production are 

secured. These elements may include a 

script, financing, actors, set, scenic and 

costume designs, advertising agents, 

music, and lighting. 

D. Specified Plants 

Pursuant to section 13201(h)(2) of the 

Act, if the taxpayer makes an election to 

apply section 168(k)(5) for a specified 

plant, the proposed regulations provide 

that the specified plant must be planted 

after September 27, 2017, or grafted after 

September 27, 2017, to a plant that has 

already been planted, by the taxpayer in 

the ordinary course of the taxpayer’s 

farming business, as defined in section 

263A(e)(4). 

6. Longer Production Period Property or 

Certain Aircraft Property 

The proposed regulations provide 

rules for determining when longer 

production period property or certain 

aircraft property described in section 

168(k)(2)(B) or (C) meets the acquisition 

requirements of section 

168(k)(2)(B)(i)(III) or (k)(2)(C)(i), as 

applicable. Pursuant to section 

168(k)(2)(B)(i)(III) and (k)(2)(C)(i), the 

proposed regulations provide that 

property described in section 

168(k)(2)(B) or (C) must be acquired by 

the taxpayer before January 1, 2027, or 

acquired by the taxpayer pursuant to a 

written binding contract that is entered 

into before January 1, 2027. These 

acquisition requirements are in addition 

to those in section 13201(h)(1) of the 

Act, which require acquisition to occur 

after September 27, 2017. 

The proposed regulations provide that 

the written binding contract rules for 

longer production period property and 

certain aircraft property are the same 

rules that apply for purposes of 

determining whether the acquisition 

requirements of section 13201(h)(1) of 

the Act are met. 

With respect to self-constructed 

property described in section 

168(k)(2)(B) or (C), the proposed 

regulations follow the acquisition rule 

in section 168(k)(2)(E)(i) for selfconstructed property and provide that 

the acquisition requirements of section 

168(k)(2)(B)(i)(III) or (k)(2)(C)(i), as 

applicable, are met if a taxpayer 

manufactures, constructs, or produces 

the property for its own use and such 

manufacturing, construction, or 

productions begins before January 1, 

2027. Further, only for purposes of 

section 168(k)(2)(B)(i)(III) and 

(k)(2)(C)(i), the proposed regulations 

provide that property that is 

manufactured, constructed, or produced 

for the taxpayer by another person 

under a written binding contract that is 

entered into prior to the manufacture, 

construction, or production of the 

property for use by the taxpayer in its 

trade or business or for its production of 

income is considered to be 

manufactured, constructed, or produced 

by the taxpayer. The proposed 

regulations also provide rules similar to 

those in § 1.168(k)–1(b)(4)(iii)(B) for 

defining when manufacturing, 

construction, or production begins, 

including the same safe harbor, and in 

§ 1.168(k)–1(b)(4)(iii)(C) for a contract to 

acquire, or for the manufacture, 

construction, or production of, a 

component of the larger self-constructed 

property. 

7. Computation of Additional First Year 

Depreciation Deduction and Otherwise 

Allowable Depreciation 

Pursuant to section 168(k)(1)(A), the 

proposed regulations provide that the 

allowable additional first year 

depreciation deduction for qualified 

property is equal to the applicable 

percentage (as defined in section 

168(k)(6)) of the unadjusted depreciable 

basis (as defined in § 1.168(b)–1(a)(3)) of 

the property. For qualified property 

described in section 168(k)(2)(B), the 

unadjusted depreciable basis (as defined 

in § 1.168(b)–1(a)(3)) of the property is 

limited to the property’s basis 

attributable to manufacture, 

construction, or production of the 

property before January 1, 2027, as 

provided in section 168(k)(2)(B)(ii). 

Pursuant to section 168(k)(2)(G), the 

proposed regulations also provide that 

the additional first year depreciation 

deduction is allowed for both regular 

tax and alternative minimum tax (AMT) 

purposes. However, for AMT purposes, 

the amount of the additional first year 

depreciation deduction is based on the 

unadjusted depreciable basis of the 

property for AMT purposes. The 

amount of the additional first year 

depreciation deduction is not affected 

by a taxable year of less than 12 months 

for either regular or AMT purposes. 

The proposed regulations provide 

rules similar to those in § 1.168(k)– 

1(d)(2) for determining the amount of 

depreciation otherwise allowable for 

qualified property. That is, before 

determining the amount of depreciation 

otherwise allowable for qualified 

property, the proposed regulations 

require the taxpayer to first reduce the 

unadjusted depreciable basis (as defined 

in § 1.168(b)–1(a)(3)) of the property by 

the amount of the additional first year 

depreciation deduction allowed or 

allowable, whichever is greater (the 

remaining adjusted depreciable basis), 

as provided in section 168(k)(1)(B). 

Then, the remaining adjusted 

depreciable basis is depreciated using 

the applicable depreciation provisions 

of the Code for the property (for 

example, section 168 for MACRS 

property, section 167(f)(1) for computer 

software, and section 167 for film, 

television, or theatrical productions). 

This amount of depreciation is allowed 

for both regular tax and AMT purposes, 

and is affected by a taxable year of less 

than 12 months. However, for AMT 

purposes, the amount of depreciation 

allowed is determined by calculating 

the remaining adjusted depreciable 

basis of the property for AMT purposes 

and using the same depreciation 

method, recovery period, and 

convention that applies to the property 

for regular tax purposes. If a taxpayer 

uses the optional depreciation tables in 

Rev. Proc. 87–57 (1987–2 C.B. 687) to 

compute depreciation for qualified 

property that is MACRS property, the 

proposed regulations also provide that 

the remaining adjusted depreciable 

basis of the property is the basis to 

which the annual depreciation rates in 

those tables apply. 

8. Special Rules 

The proposed regulations also provide 

rules similar to those in § 1.168(k)–1(f) 

for certain situations. However, the 


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special rules in § 1.168(k)–1(f)(9) 

regarding the increase in basis due to a 

section 754 election are addressed in the 

proposed regulations regarding the used 

property acquisition requirements. 

Further, the special rules in § 1.168(k)– 

1(f)(1)(iii) regarding property placed in 

service and transferred in a section 

168(i)(7) transaction in the same taxable 

year, and in § 1.168(k)–1(f)(5) regarding 

like-kind exchanges or involuntary 

conversions, are updated to reflect the 

used property acquisition requirements 

in section 168(k)(2)(E)(ii). The special 

rules in the proposed regulations also 

are updated to reflect the applicable 

dates under section 168(k), and the 

changes by the Act to technical 

terminations of partnerships and the 

rehabilitation credit. 

The proposed regulations provide 

rules for the following situations: (1) 

Qualified property placed in service or 

planted or grafted, as applicable, and 

disposed of in the same taxable year; (2) 

redetermination of basis of qualified 

property; (3) recapture of additional first 

year depreciation for purposes of 

section 1245 and section 1250; (4) a 

certified pollution control facility that is 

qualified property; (5) like-kind 

exchanges and involuntary conversions 

of qualified property; (6) a change in use 

of qualified property; (7) the 

computation of earnings and profits; (8) 

the increase in the limitation of the 

amount of depreciation for passenger 

automobiles; (9) the rehabilitation credit 

under section 47; and (10) computation 

of depreciation for purposes of section 

514(a)(3). 

The proposed regulations provide a 

special rule for qualified property that is 

placed in service in a taxable year and 

then contributed to a partnership under 

section 721(a) in the same taxable year 

when one of the other partners 

previously had a depreciable interest in 

the property. Situation 1 of Rev. Rul. 

99–5 (1999–1 C.B. 434) is an example of 

such a fact pattern. Under § 1.168(k)– 

1(f)(1)(iii) and its cross-reference to 

§ 1.168(d)–1(b)(7)(ii), the additional first 

year depreciation deduction associated 

with the contributed property would be 

allocated between the contributing 

partner and the partnership based on 

the proportionate time the contributing 

partner and the partnership held the 

property throughout the taxable year. 

The partnership could then allocate a 

portion of the deduction to the partner 

with a previous depreciable interest in 

the property. The Treasury Department 

and the IRS believe that allocating any 

portion of the deduction to a partner 

who previously had a depreciable 

interest in the property would be 

inconsistent with section 

168(k)(2)(E)(ii)(I). Therefore, the 

proposed regulations provide that, in 

this situation, the additional first year 

depreciation deduction with respect to 

the contributed property is not allocated 

under the general rules of § 1.168(d)– 

1(b)(7)(ii). Instead, the additional first 

year depreciation deduction is allocated 

entirely to the contributing partner prior 

to the section 721(a) transaction and not 

to the partnership. 

With respect to like-kind exchanges 

and involuntary conversions, 

§ 1.168(k)–1(f)(5) provides that the 

exchanged basis and excess basis, if any, 

of the replacement property is eligible 

for the additional first year depreciation 

deduction if the replacement property is 

qualified property. The proposed 

regulations retain this rule if the 

replacement property also meets the 

original use requirement. Pursuant to 

section 168(k)(2)(E)(ii)(II) and its crossreference to section 179(d)(3), the 

proposed regulations also provide that 

only the excess basis, if any, of the 

replacement property is eligible for the 

additional first year depreciation 

deduction if the replacement property is 

qualified property and also meets the 

used property acquisition requirements. 

These rules also apply when a taxpayer 

makes the election under § 1.168(i)– 

6(i)(1) to treat, for depreciation purposes 

only, the total of the exchanged basis 

and excess basis, if any, in the 

replacement MACRS property as 

property placed in service by the 

taxpayer at the time of replacement and 

the adjusted depreciable basis of the 

relinquished MACRS property as 

disposed of by the taxpayer at the time 

of disposition. The proposed regulations 

also retain the other rules in § 1.168(k)– 

1(f)(5) for like-kind exchanges and 

involuntary conversions, but update the 

definitions to be consistent with the 

definitions in § 1.168(i)–6, which 

addresses how to compute depreciation 

of property involved in like-kind 

exchanges or involuntary conversions. 

Proposed Applicability Date 

These regulations are proposed to 

apply to qualified property placed in 

service or planted or grafted, as 

applicable, by the taxpayer during or 

after the taxpayer’s taxable year that 

includes the date of publication of a 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register. Pending the issuance of the 

final regulations, a taxpayer may choose 

to apply these proposed regulations to 

qualified property acquired and placed 

in service or planted or grafted, as 

applicable, after September 27, 2017, by 

the taxpayer during taxable years ending 

on or after September 28, 2017. 

Special Analyses 

The Administrator of the Office of 

Information and Regulatory Affairs 

(OIRA), Office of Management and 

Budget, has waived review of this 

proposed rule in accordance with 

section 6(a)(3)(A) of Executive Order 

12866. OIRA will subsequently make a 

significance determination of the final 

rule, pursuant to section 3(f) of 

Executive Order (E.O.) 12866 and the 

April 11, 2018, Memorandum of 

Agreement between the Department of 

Treasury and the Office of Management 

and Budget (OMB). 

The proposed regulations do not 

impose a collection of information on 

small entities and provide clarifying 

rules for taxpayers to enjoy the tax 

benefit of 100-percent additional first 

year depreciation as provided by the 

amendments to section 168 by the Act. 

Therefore, a regulatory flexibility 

analysis is not required under the 

Regulatory Flexibility Act (5 U.S.C. 

chapter 6). Pursuant to section 7805(f) of 

the Code, this notice of proposed 

rulemaking will be submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

Comments and Requests for a Public 

Hearing 

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

comments that are submitted timely to 

the IRS as prescribed in this preamble 

under the ADDRESSES heading. The 

Treasury Department and the IRS 

request comments on all aspects of the 

proposed rules. All comments will be 

available at http://www.regulations.gov 

or upon request. A public hearing will 

be scheduled if requested in writing by 

any person that timely submits written 

comments. If a public hearing is 

scheduled, notice of the date, time, and 

place for the public hearing will be 

published in the Federal Register. 

Drafting Information 

The principal authors of these 

proposed regulations are Kathleen Reed 

and Elizabeth R. Binder of the Office of 

Associate Chief Counsel (Income Tax 

and Accounting). However, other 

personnel from the Treasury 

Department and the IRS participated in 

their development. 

Statement of Availability 

The IRS Revenue Procedures and 

Revenue Rulings cited in this document 

are published in the Internal Revenue 

Bulletin (or Cumulative Bulletin) and 

are available from the Superintendent of 

Documents, U.S. Government 


amozie on DSK3GDR082PROD with PROPOSALS2
39300 Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules 

Publishing Office, Washington, DC 

20402, or by visiting the IRS website at 

http://www.irs.gov. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by adding an entry 

for § 1.168(k)––2 in numerical order to 

read in part as follows: 

Authority: 26 U.S.C. 7805 * * * 

* * * * * 

Section 1.168(k)–2 also issued under 26 

U.S.C. 1502. 

* * * * * 

■ Par. 2. Section 1.48–12 is amended 

by: 

■ 1. In the last sentence in paragraph 

(a)(2)(i), removing ‘‘The last sentence’’ 

and adding ‘‘The next to last sentence’’ 

in its place; 

■ 2. Adding two sentences at the end of 

paragraph (a)(2)(i); and 

■ 3. Adding a sentence to the end of 

paragraph (c)(8)(i). 

The additions read as follows: 

§ 1.48–12 Qualified rehabilitated building; 

expenditures incurred after December 31, 

1981. 

(a) * * * 

(2) * * * 

(i) * * * The last sentence of 

paragraph (c)(8)(i) of this section applies 

to qualified rehabilitation expenditures 

that are qualified property under section 

168(k)(2) and placed in service by a 

taxpayer during or after the taxpayer’s 

taxable year that includes the date of 

publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register. However, a 

taxpayer may rely on the last sentence 

in paragraph (c)(8)(i) of this section in 

these proposed regulations for qualified 

rehabilitation expenditures that are 

qualified property under section 

168(k)(2) and acquired and placed in 

service after September 27, 2017, by the 

taxpayer during taxable years ending on 

or after September 28, 2017, and ending 

before the taxpayer’s taxable year that 

includes the date of publication of a 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register. 

* * * * * 

(c) * * * 

(8) * * * 

(i) * * * Further, see § 1.168(k)– 

2(f)(9) if the qualified rehabilitation 

expenditures are qualified property 

under section 168(k), as amended by the 

Tax Cuts and Jobs Act, Public Law 115– 

97 (131 Stat. 2054 (December 22, 2017)). 

* * * * * 

■ Par. 3. Section 1.167(a)–14 is 

amended by: 

■ 1. In the third sentence in paragraph 

(b)(1), removing ‘‘under section 

168(k)(2) or § 1.168(k)–1,’’ and adding 

‘‘under section 168(k)(2) and § 1.168(k)– 

1 or 1.168(k)–2, as applicable,’’ in its 

place; 

■ 2. In the last sentence in paragraph 

(e)(3), removing ‘‘and before 2010’’; and 

■ 3. Adding two sentences at the end of 

paragraph (e)(3). 

The addition reads as follows: 

§ 1.167(a)–14 Treatment of certain 

intangible property excluded from section 

197. 

* * * * * 

(e) * * * 

(3) * * * The language ‘‘or 

§ 1.168(k)–2, as applicable,’’ in the third 

sentence in paragraph (b)(1) of this 

section applies to computer software 

that is qualified property under section 

168(k)(2) and placed in service by a 

taxpayer during or after the taxpayer’s 

taxable year that includes the date of 

publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register. However, a 

taxpayer may rely on the language ‘‘or 

§ 1.168(k)–2, as applicable,’’ in the third 

sentence in paragraph (b)(1) of this 

section in these proposed regulations for 

computer software that is qualified 

property under section 168(k)(2) and 

acquired and placed in service after 

September 27, 2017, by the taxpayer 

during taxable years ending on or after 

September 28, 2017, and ending before 

the taxpayer’s taxable year that includes 

the date of publication of a Treasury 

decision adopting these rules as final 

regulations in the Federal Register. 

■ Par. 4. Section 1.168(b)–1 is amended 

by adding paragraph (a)(5) and revising 

paragraph (b) to read as follows: 

§ 1.168(b)–1 Definitions. 

(a) * * * 

(5) Qualified improvement property— 

(i) Is any improvement that is section 

1250 property to an interior portion of 

a building, as defined in § 1.48–1(e)(1), 

that is nonresidential real property, as 

defined in section 168(e)(2)(B), if the 

improvement is placed in service by the 

taxpayer after the date the building was 

first placed in service by any person and 

if— 

(A) For purposes of section 168(e)(6), 

the improvement is placed in service by 

the taxpayer after December 31, 2017; 

(B) For purposes of section 168(k)(3) 

as in effect on the day before 

amendment by section 13204(a)(4)(B) of 

the Tax Cuts and Jobs Act, Public Law 

115–97 (131 Stat. 2054 (December 22, 

2017)) (‘‘Act’’), the improvement is 

acquired by the taxpayer before 

September 28, 2017, the improvement is 

placed in service by the taxpayer before 

January 1, 2018, and the improvement 

meets the original use requirement in 

section 168(k)(2)(A)(ii) as in effect on 

the day before amendment by section 

13201(c)(1) of the Act; or 

(C) For purposes of section 168(k)(3) 

as in effect on the day before 

amendment by section 13204(a)(4)(B) of 

the Act, the improvement is acquired by 

the taxpayer after September 27, 2017; 

the improvement is placed in service by 

the taxpayer after September 27, 2017, 

and before January 1, 2018; and the 

improvement meets the requirements in 

section 168(k)(2)(A)(ii) as amended by 

section 13201(c)(1) of the Act; and 

(ii) Does not include any qualified 

improvement for which an expenditure 

is attributable to— 

(A) The enlargement, as defined in 

§ 1.48–12(c)(10), of the building; 

(B) Any elevator or escalator, as 

defined in § 1.48–1(m)(2); or 

(C) The internal structural framework, 

as defined in § 1.48–12(b)(3)(iii), of the 

building. 

(b) Effective date—(1) In general. 

Except as provided in paragraph (b)(2) 

of this section, this section is applicable 

on or after February 27, 2004. 

(2) Application of paragraph (a)(5) of 

this section—(i) In general. Except as 

provided in paragraph (b)(2)(ii) of this 

section, paragraph (a)(5) of this section 

is applicable on or after the date of 

publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register. 

(ii) Early application of paragraph 

(a)(5) of this section. A taxpayer may 

rely on the provisions of paragraph 

(a)(5) of this section in these proposed 

regulations for the taxpayer’s taxable 

years ending on or after September 28, 

2017, and ending before the taxpayer’s 

taxable year that includes the date of 

publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register. 

■ Par. 5. Section 1.168(d)–1 is amended 

by: 

■ 1. Adding a sentence at the end of 

paragraph (b)(3)(ii); 

■ 2. Adding a sentence at the end of 

paragraph (b)(7)(ii); and 

■ 3. Adding two sentences at the end of 

paragraph (d)(2). 

The additions read as follows: 


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Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules 39301 

§ 1.168(d)–1 Applicable conventions—halfyear and mid-quarter conventions. 

* * * * * 

(b) * * * 

(3) * * * 

(ii) * * * Further, see § 1.168(k)– 

2(f)(1) for rules relating to qualified 

property under section 168(k), as 

amended by the Tax Cuts and Jobs Act, 

Public Law 115–97 (131 Stat. 2054 

(December 22, 2017)), that is placed in 

service by the taxpayer in the same 

taxable year in which either a 

partnership is terminated as a result of 

a technical termination under section 

708(b)(1)(B) or the property is 

transferred in a transaction described in 

section 168(i)(7). 

* * * * * 

(7) * * * 

(ii) * * * However, see § 1.168(k)– 

2(f)(1)(iii) for a special rule regarding 

the allocation of the additional first year 

depreciation deduction in the case of 

certain contributions of property to a 

partnership under section 721. 

* * * * * 

(d) * * * 

(2) * * * The last sentences in 

paragraphs (b)(3)(ii) and (b)(7)(ii) of this 

section apply to qualified property 

under section 168(k)(2) placed in 

service by a taxpayer during or after the 

taxpayer’s taxable year that includes the 

date of publication of a Treasury 

decision adopting these rules as final 

regulations in the Federal Register. 

However, a taxpayer may rely on the 

last sentences in paragraphs (b)(3)(ii) 

and (b)(7)(ii) of this section in these 

proposed regulations for qualified 

property under section 168(k)(2) 

acquired and placed in service after 

September 27, 2017, by the taxpayer 

during taxable years ending on or after 

September 28, 2017, and ending before 

the taxpayer’s taxable year that includes 

the date of publication of a Treasury 

decision adopting these rules as final 

regulations in the Federal Register. 

* * * * * 

■ Par. 6. Section 1.168(i)–4 is amended 

by: 

■ 1. In the penultimate sentence in 

paragraph (b)(1), removing ‘‘§§ 1.168(k)– 

1T(f)(6)(iii) and 1.1400L(b)–1T(f)(6)’’ 

and adding ‘‘§ 1.168(k)–1(f)(6)(iii) or 

1.168(k)–2(f)(6)(iii), as applicable, and 

§ 1.1400L(b)–1(f)(6)’’ in its place; 

■ 2. In the fifth sentence in paragraph 

(c), removing ‘‘§§ 1.168(k)–1T(f)(6)(ii) 

and 1.1400L(b)–1T(f)(6)’’ and adding 

‘‘§ 1.168(k)–1(f)(6)(ii) or 1.168(k)– 

2(f)(6)(ii), as applicable, and 

§ 1.1400L(b)–1(f)(6)’’ in its place; 

■ 3. In the second sentence in paragraph 

(d)(3)(i)(C), removing ‘‘§§ 1.168(k)– 

1T(f)(6)(iv) and 1.400L(b)–1T(f)(6)’’ and 

adding ‘‘§ 1.168(k)–1(f)(6)(iv) or 

1.168(k)–2(f)(6)(iv), as applicable, and 

§ 1.400L(b)–1(f)(6)’’ in its place; 

■ 4. In the last sentence in paragraph 

(d)(4)(i), removing ‘‘§§ 1.168(k)– 

1T(f)(6)(iv) and 1.1400L(b)–1T(f)(6)’’ 

and adding ‘‘§ 1.168(k)–1(f)(6)(iv) or 

1.168(k)–2(f)(6)(iv), as applicable, and 

§ 1.400L(b)–1(f)(6)’’ in its place; 

■ 5. Revising the first sentence in 

paragraph (g)(1); and 

■ 6. Redesignating paragraph (g)(2) as 

paragraph (g)(3) and adding new 

paragraph (g)(2). 

The addition and revision read as 

follows: 

§ 1.168(i)–4 Changes in use. 

* * * * * 

(g) * * * 

(1) * * * Except as provided in 

paragraph (g)(2) of this section, this 

section applies to any change in the use 

of MACRS property in a taxable year 

ending on or after June 17, 2004. * * * 

(2) Qualified property under section 

168(k) acquired and placed in service 

after September 27, 2017. The language 

‘‘or § 1.168(k)–2(f)(6)(iii), as applicable’’ 

in paragraph (b)(1) of this section, the 

language ‘‘or § 1.168(k)–2(f)(6)(ii), as 

applicable’’ in paragraph (c) of this 

section, and the language ‘‘or § 1.168(k)– 

2(f)(6)(iv), as applicable’’ in paragraphs 

(d)(3)(i)(C) and (d)(4)(i) of this section 

applies to any change in use of MACRS 

property, which is qualified property 

under section 168(k)(2), by a taxpayer 

during or after the taxpayer’s taxable 

year that includes the date of 

publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register. However, a 

taxpayer may rely on the language ‘‘or 

§ 1.168(k)–2(f)(6)(iii), as applicable’’ in 

paragraph (b)(1) of this section, the 

language ‘‘or § 1.168(k)–2(f)(6)(ii), as 

applicable’’ in paragraph (c) of this 

section, and the language ‘‘or § 1.168(k)– 

2(f)(6)(iv), as applicable’’ in paragraphs 

(d)(3)(i)(C) and (d)(4)(i) of this section in 

these proposed regulations for any 

change in use of MACRS property, 

which is qualified property under 

section 168(k)(2) and acquired and 

placed in service after September 27, 

2017, by the taxpayer during taxable 

years ending on or after September 28, 

2017, and ending before the taxpayer’s 

taxable year that includes the date of 

publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register. 

* * * * * 

■ Par. 7. Section 1.168(i)–6 is amended 

by: 

■ 1. In paragraph (d)(3)(ii)(B), removing 

‘‘1.168(k)–1(f)(5) or § 1.1400L(b)–1(f)(5)’’ 

wherever it appears and adding 

‘‘1.168(k)–1(f)(5), 1.168(k)–2(f)(5), or 

1.1400L(b)–1(f)(5)’’ in its place; 

■ 2. In paragraph (d)(3)(ii)(E), removing 

‘‘1.168(k)–1(f)(5) or § 1.1400L(b)–1(f)(5)’’ 

and adding ‘‘1.168(k)–1(f)(5), 1.168(k)– 

2(f)(5), or 1.1400L(b)–1(f)(5)’’ in its 

place; 

■ 3. Adding a sentence at the end of 

paragraph (d)(4); 

■ 4. Adding a sentence at the end of 

paragraph (h); and 

■ 5. Adding paragraph (k)(4). 

The additions read as follows: 

§ 1.168(i)–6 Like-kind exchanges and 

involuntary conversions. 

* * * * * 

(d) * * * 

(4) * * * Further, see § 1.168(k)– 

2(f)(5)(iv) for replacement MACRS 

property that is qualified property under 

section 168(k), as amended by the Tax 

Cuts and Jobs Act, Public Law 115–97 

(131 Stat. 2054 (December 22, 2017)). 

* * * * * 

(h) * * * Further, see § 1.168(k)– 

2(f)(5) for qualified property under 

section 168(k), as amended by the Tax 

Cuts and Jobs Act, Public Law 115–97 

(131 Stat. 2054 (December 22, 2017)). 

* * * * * 

(k) * * * 

(4) Qualified property under section 

168(k) acquired and placed in service 

after September 27, 2017. The language 

‘‘1.168(k)–2(f)(5),’’ in paragraphs 

(d)(3)(ii)(B) and (E) of this section and 

the last sentences in paragraphs (d)(4) 

and (h) of this section apply to a likekind exchange or an involuntary 

conversion of MACRS property, which 

is qualified property under section 

168(k)(2), for which the time of 

replacement occurs on or after the date 

of publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register. However, a 

taxpayer may rely on the language 

‘‘1.168(k)–2(f)(5),’’ in paragraphs 

(d)(3)(ii)(B) and (E) of this section and 

the last sentences in paragraphs (d)(4) 

and (h) of this section in these proposed 

regulations for a like-kind exchange or 

an involuntary conversion of MACRS 

property, which is qualified property 

under section 168(k)(2), for which the 

time of replacement occurs on or after 

September 28, 2017, and occurs before 

the date of publication of a Treasury 

decision adopting these rules as final 

regulations in the Federal Register. 

■ Par. 8. Section 1.168(k)–0 is amended 

by revising the introductory text and 

adding an entry for § 1.168(k)–2 in 

numerical order to the table of contents 

to read as follows: 


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39302 Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules 

§ 1.168(k)–0 Table of contents. 

This section lists the major 

paragraphs contained in §§ 1.168(k)–1 

and 1.168(k)–2. 

* * * * * 

§ 1.168(k)–2 Additional first year 

depreciation deduction for property 

acquired and placed in service after 

September 27, 2017. 

(a) Scope and definitions. 

(1) Scope. 

(2) Definitions. 

(b) Qualified property. 

(1) In general. 

(2) Description of qualified property. 

(i) In general. 

(ii) Property not eligible for additional 

first year depreciation deduction. 

(3) Original use or used property 

acquisition requirements. 

(i) In general. 

(ii) Original use. 

(A) In general. 

(B) Conversion to business or incomeproducing use. 

(C) Fractional interests in property. 

(iii) Used property acquisition 

requirements. 

(A) In general. 

(B) Property was not used by the 

taxpayer at any time prior to 

acquisition. 

(C) Special rules for a series of related 

transactions. 

(iv) Application to partnerships. 

(A) Section 704(c) remedial 

allocations. 

(B) Basis determined under section 

732. 

(C) Section 734(b) adjustments. 

(D) Section 743(b) adjustments. 

(v) Syndication transaction. 

(vi) Examples. 

(4) Placed-in-service date. 

(i) In general. 

(ii) Specified plant. 

(iii) Qualified film, television, or live 

theatrical production. 

(iv) Syndication transaction. 

(v) Technical termination of a 

partnership. 

(vi) Section 168(i)(7) transactions. 

(5) Acquisition of property. 

(i) In general. 

(ii) Acquisition date. 

(iii) Definition of binding contract. 

(A) In general. 

(B) Conditions. 

(C) Options. 

(D) Letter of intent. 

(E) Supply agreements. 

(F) Components. 

(iv) Self-constructed property. 

(A) In general. 

(B) When does manufacture, 

construction, or production begin. 

(C) Components of self-constructed 

property. 

(v) Qualified film, television, or live 

theatrical production. 

(vi) Specified plant. 

(vii) Examples. 

(c) Property described in section 

168(k)(2)(B) or (C). 

(1) In general. 

(2) Definition of binding contract. 

(3) Self-constructed property. 

(i) In general. 

(ii) When does manufacture, 

construction, or production begin. 

(A) In general. 

(B) Safe harbor. 

(iii) Components of self-constructed 

property. 

(A) Acquired components. 

(B) Self-constructed components. 

(iv) Examples. 

(d) Computation of depreciation 

deduction for qualified property. 

(1) Additional first year depreciation 

deduction. 

(i) Allowable taxable year. 

(ii) Computation. 

(iii) Property described in section 

168(k)(2)(B). 

(iv) Alternative minimum tax. 

(A) In general. 

(B) Special rules. 

(2) Otherwise allowable depreciation 

deduction. 

(i) In general. 

(ii) Alternative minimum tax. 

(3) Examples. 

(e) Elections under section 168(k). 

(1) Election not to deduct additional 

first year depreciation. 

(i) In general. 

(ii) Definition of class of property. 

(iii) Time and manner for making 

election. 

(A) Time for making election. 

(B) Manner of making election. 

(iv) Failure to make election. 

(2) Election to apply section 168(k)(5) 

for specified plants. 

(i) In general. 

(ii) Time and manner for making 

election. 

(A) Time for making election. 

(B) Manner of making election. 

(iii) Failure to make election. 

(3) Election for qualified property 

placed in service during the 2017 

taxable year. 

(i) In general. 

(ii) Time and manner for making 

election. 

(A) Time for making election. 

(B) Manner of making election. 

(iii) Failure to make election. 

(4) Alternative minimum tax. 

(5) Revocation of election. 

(i) In general. 

(ii) Automatic 6-month extension. 

(f) Special rules. 

(1) Property placed in service and 

disposed of in the same taxable year. 

(i) In general. 

(ii) Technical termination of a 

partnership. 

(iii) Section 168(i)(7) transactions. 

(iv) Examples. 

(2) Redetermination of basis. 

(i) Increase in basis. 

(ii) Decrease in basis. 

(iii) Definitions. 

(iv) Examples. 

(3) Sections 1245 and 1250 

depreciation recapture. 

(4) Coordination with section 169. 

(5) Like-kind exchanges and 

involuntary conversions. 

(i) Scope. 

(ii) Definitions. 

(iii) Computation. 

(A) In general. 

(B) Year of disposition and year of 

replacement. 

(C) Property described in section 

168(k)(2)(B). 

(D) Effect of § 1.168(i)–6(i)(1) election. 

(E) Alternative minimum tax. 

(iv) Replacement MACRS property or 

replacement computer software that is 

acquired and placed in service before 

disposition of relinquished MACRS 

property or relinquished computer 

software. 

(v) Examples. 

(6) Change in use. 

(i) Change in use of depreciable 

property. 

(ii) Conversion to personal use. 

(iii) Conversion to business or 

income-producing use. 

(A) During the same taxable year. 

(B) Subsequent to the acquisition 

year. 

(iv) Depreciable property changes use 

subsequent to the placed-in-service 

year. 

(v) Examples. 

(7) Earnings and profits. 

(8) Limitation of amount of 

depreciation for certain passenger 

automobiles. 

(9) Coordination with section 47. 

(i) In general. 

(ii) Example. 

(10) Coordination with section 

514(a)(3). 

(g) Applicability dates. 

(1) In general. 

(2) Early application. 

■ Par. 9. Section 1.168(k)–2 is added to 

read as follows: 

§ 1.168 (k)–2 Additional first year 

depreciation deduction for property 

acquired and placed in service after 

September 27, 2017. 

(a) Scope and definitions—(1) Scope. 

This section provides rules for 

determining the additional first year 

depreciation deduction allowable under 

section 168(k) for qualified property 


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acquired and placed in service after 

September 27, 2017. 

(2) Definitions. For purposes of this 

section— 

(i) Act is the Tax Cuts and Jobs Act, 

Public Law 115–97 (131 Stat. 2054 

(December 22, 2017)); and 

(ii) Applicable percentage is the 

percentage provided in section 

168(k)(6). 

(b) Qualified property—(1) In general. 

Qualified property is depreciable 

property, as defined in § 1.168(b)– 

1(a)(1), that meets all the following 

requirements in the first taxable year in 

which the property is subject to 

depreciation by the taxpayer whether or 

not depreciation deductions for the 

property are allowable: 

(i) The requirements in § 1.168(k)– 

2(b)(2) (description of qualified 

property); 

(ii) The requirements in § 1.168(k)– 

2(b)(3) (original use or used property 

acquisition requirements); 

(iii) The requirements in § 1.168(k)– 

2(b)(4) (placed-in-service date); and 

(iv) The requirements in § 1.168(k)– 

2(b)(5) (acquisition of property). 

(2) Description of qualified property— 

(i) In general. Depreciable property will 

meet the requirements of this paragraph 

(b)(2) if the property is— 

(A) MACRS property, as defined in 

§ 1.168(b)–1(a)(2), that has a recovery 

period of 20 years or less. For purposes 

of this paragraph (b)(2)(i)(A) and section 

168(k)(2)(A)(i)(I), the recovery period is 

determined in accordance with section 

168(c) regardless of any election made 

by the taxpayer under section 168(g)(7). 

This paragraph (b)(2)(i)(A) includes the 

following MACRS property that is 

acquired by the taxpayer after 

September 27, 2017, and placed in 

service by the taxpayer after September 

27, 2017, and before January 1, 2018: 

(1) Qualified leasehold improvement 

property as defined in section 168(e)(6) 

as in effect on the day before 

amendment by section 13204(a)(1) of 

the Act; 

(2) Qualified restaurant property, as 

defined in section 168(e)(7) as in effect 

on the day before amendment by section 

13204(a)(1) of the Act, that is qualified 

improvement property as defined in 

§ 1.168(b)–1(a)(5)(i)(C) and (a)(5)(ii); and 

(3) Qualified retail improvement 

property as defined in section 168(e)(8) 

as in effect on the day before 

amendment by section 13204(a)(1) of 

the Act; 

(B) Computer software as defined in, 

and depreciated under, section 167(f)(1) 

and the regulations under section 

167(f)(1); 

(C) Water utility property as defined 

in section 168(e)(5) and depreciated 

under section 168; 

(D) Qualified improvement property 

as defined in § 1.168(b)–1(a)(5)(i)(C) and 

(a)(5)(ii) and depreciated under section 

168; 

(E) Qualified film or television 

production, as defined in section 181(d) 

and § 1.181–3, for which a deduction 

would have been allowable under 

section 181 without regard to section 

181(a)(2) and (g), or section 168(k); 

(F) Qualified live theatrical 

production, as defined in section 181(e), 

for which a deduction would have been 

allowable under section 181 without 

regard to section 181(a)(2) and (g), or 

section 168(k); or 

(G) A specified plant, as defined in 

section 168(k)(5)(B), for which the 

taxpayer has properly made an election 

to apply section 168(k)(5) for the taxable 

year in which the specified plant is 

planted, or grafted to a plant that has 

already been planted, by the taxpayer in 

the ordinary course of the taxpayer’s 

farming business, as defined in section 

263A(e)(4) (for further guidance, see 

paragraph (e) of this section). 

(ii) Property not eligible for additional 

first year depreciation deduction. 

Depreciable property will not meet the 

requirements of this paragraph (b)(2) if 

the property is— 

(A) Described in section 168(f) (for 

example, automobiles for which the 

taxpayer uses the optional business 

standard mileage rate); 

(B) Required to be depreciated under 

the alternative depreciation system of 

section 168(g) pursuant to section 

168(g)(1)(A), (B), (C), (D), (F), or (G), or 

other provisions of the Internal Revenue 

Code (for example, property described 

in section 263A(e)(2)(A) if the taxpayer 

or any related person, as defined in 

section 263A(e)(2)(B), has made an 

election under section 263A(d)(3), or 

property described in section 

280F(b)(1)); 

(C) Included in any class of property 

for which the taxpayer elects not to 

deduct the additional first year 

depreciation (for further guidance, see 

paragraph (e) of this section); 

(D) A specified plant that is placed in 

service by the taxpayer during the 

taxable year and for which the taxpayer 

made an election to apply section 

168(k)(5) for a prior taxable year; 

(E) Included in any class of property 

for which the taxpayer elects to apply 

section 168(k)(4). This paragraph 

(b)(2)(ii)(E) applies to property placed in 

service in any taxable year beginning 

before January 1, 2018; 

(F) Described in section 168(k)(9)(A) 

and placed in service in any taxable 

year beginning after December 31, 2017; 

or 

(G) Described in section 168(k)(9)(B) 

and placed in service in any taxable 

year beginning after December 31, 2017. 

(3) Original use or used property 

acquisition requirements—(i) In general. 

Depreciable property will meet the 

requirements of this paragraph (b)(3) if 

the property meets the original use 

requirements in paragraph (b)(3)(ii) of 

this section or if the property meets the 

used property acquisition requirements 

in paragraph (b)(3)(iii) of this section. 

(ii) Original use—(A) In general. 

Depreciable property will meet the 

requirements of this paragraph (b)(3)(ii) 

if the original use of the property 

commences with the taxpayer. Except as 

provided in paragraphs (b)(3)(ii)(B) and 

(C) of this section, original use means 

the first use to which the property is 

put, whether or not that use corresponds 

to the use of the property by the 

taxpayer. Additional capital 

expenditures incurred by a taxpayer to 

recondition or rebuild property acquired 

or owned by the taxpayer satisfy the 

original use requirement. However, the 

cost of reconditioned or rebuilt property 

does not satisfy the original use 

requirement (but may satisfy the used 

property acquisition requirements in 

paragraph (b)(3)(iii) of this section). The 

question of whether property is 

reconditioned or rebuilt property is a 

question of fact. For purposes of this 

paragraph (b)(3)(ii)(A), property that 

contains used parts will not be treated 

as reconditioned or rebuilt if the cost of 

the used parts is not more than 20 

percent of the total cost of the property, 

whether acquired or self-constructed. 

(B) Conversion to business or incomeproducing use—(1) Personal use to 

business or income-producing use. If a 

taxpayer initially acquires new property 

for personal use and subsequently uses 

the property in the taxpayer’s trade or 

business or for the taxpayer’s 

production of income, the taxpayer is 

considered the original user of the 

property. If a person initially acquires 

new property for personal use and a 

taxpayer subsequently acquires the 

property from the person for use in the 

taxpayer’s trade or business or for the 

taxpayer’s production of income, the 

taxpayer is not considered the original 

user of the property. 

(2) Inventory to business or incomeproducing use. If a taxpayer initially 

acquires new property and holds the 

property primarily for sale to customers 

in the ordinary course of the taxpayer’s 

business and subsequently withdraws 

the property from inventory and uses 

the property primarily in the taxpayer’s 

trade or business or primarily for the 


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taxpayer’s production of income, the 

taxpayer is considered the original user 

of the property. If a person initially 

acquires new property and holds the 

property primarily for sale to customers 

in the ordinary course of the person’s 

business and a taxpayer subsequently 

acquires the property from the person 

for use primarily in the taxpayer’s trade 

or business or primarily for the 

taxpayer’s production of income, the 

taxpayer is considered the original user 

of the property. For purposes of this 

paragraph (b)(3)(ii)(B)(2), the original 

use of the property by the taxpayer 

commences on the date on which the 

taxpayer uses the property primarily in 

the taxpayer’s trade or business or 

primarily for the taxpayer’s production 

of income. 

(C) Fractional interests in property. If, 

in the ordinary course of its business, a 

taxpayer sells fractional interests in new 

property to third parties unrelated to the 

taxpayer, each first fractional owner of 

the property is considered as the 

original user of its proportionate share 

of the property. Furthermore, if the 

taxpayer uses the property before all of 

the fractional interests of the property 

are sold but the property continues to be 

held primarily for sale by the taxpayer, 

the original use of any fractional interest 

sold to a third party unrelated to the 

taxpayer subsequent to the taxpayer’s 

use of the property begins with the first 

purchaser of that fractional interest. For 

purposes of this paragraph (b)(3)(ii)(C), 

persons are not related if they do not 

have a relationship described in section 

267(b) or 707(b) and the regulations 

under section 267(b) or 707(b). 

(iii) Used property acquisition 

requirements—(A) In general. 

Depreciable property will meet the 

requirements of this paragraph (b)(3)(iii) 

if the acquisition of the used property 

meets the following requirements: 

(1) Such property was not used by the 

taxpayer or a predecessor at any time 

prior to such acquisition; 

(2) The acquisition of such property 

meets the requirements of section 

179(d)(2)(A), (B), and (C), and § 1.179– 

4(c)(1)(ii), (iii), and (iv), or 1.179–4(c)(2) 

(property is acquired by purchase); and 

(3) The acquisition of such property 

meets the requirements of section 

179(d)(3) and § 1.179–4(d) (cost of 

property) (for further guidance regarding 

like-kind exchanges and involuntary 

conversions, see paragraph (f)(5) of this 

section). 

(B) Property was not used by the 

taxpayer at any time prior to 

acquisition—(1) In general. Solely for 

purposes of paragraph (b)(3)(iii)(A)(1) of 

this section, the property is treated as 

used by the taxpayer or a predecessor at 

any time prior to acquisition by the 

taxpayer or predecessor if the taxpayer 

or the predecessor had a depreciable 

interest in the property at any time prior 

to such acquisition, whether or not the 

taxpayer or the predecessor claimed 

depreciation deductions for the 

property. If a lessee has a depreciable 

interest in the improvements made to 

leased property and subsequently the 

lessee acquires the leased property of 

which the improvements are a part, the 

unadjusted depreciable basis, as defined 

in § 1.168(b)–1(a)(3), of the acquired 

property that is eligible for the 

additional first year depreciation 

deduction, assuming all other 

requirements are met, must not include 

the unadjusted depreciable basis 

attributable to the improvements. 

(2) Taxpayer has a depreciable 

interest in a portion of the property. If 

a taxpayer initially acquires a 

depreciable interest in a portion of the 

property and subsequently acquires a 

depreciable interest in an additional 

portion of the same property, such 

additional depreciable interest is not 

treated as used by the taxpayer at any 

time prior to its acquisition by the 

taxpayer. This paragraph (b)(3)(iii)(B)(2) 

does not apply if the taxpayer or a 

predecessor previously had a 

depreciable interest in the subsequently 

acquired additional portion. For 

purposes of this paragraph 

(b)(3)(iii)(B)(2), a portion of the property 

is considered to be the percentage 

interest in the property. If a taxpayer 

holds a depreciable interest in a portion 

of the property, sells that portion or a 

part of that portion, and subsequently 

acquires a depreciable interest in 

another portion of the same property, 

the taxpayer will be treated as 

previously having a depreciable interest 

in the property up to the amount of the 

portion for which the taxpayer held a 

depreciable interest in the property 

before the sale. 

(3) Application to members of a 

consolidated group—(i) Same 

consolidated group. Solely for purposes 

of applying paragraph (b)(3)(iii)(A)(1) of 

this section, if a member of a 

consolidated group, as defined in 

§ 1.1502–1(h), acquires depreciable 

property in which the consolidated 

group had a depreciable interest at any 

time prior to the member’s acquisition 

of the property, the member will be 

treated as having a depreciable interest 

in the property prior to the acquisition. 

For purposes of this paragraph 

(b)(3)(iii)(B)(3)(i), a consolidated group 

will be treated as having a depreciable 

interest in property during the time any 

current or previous member of the group 

had a depreciable interest in the 

property while a member of the group. 

(ii) Certain acquisitions pursuant to a 

series of related transactions. Solely for 

purposes of applying paragraph 

(b)(3)(iii)(A)(1) of this section, if a series 

of related transactions includes one or 

more transactions in which property is 

acquired by a member of a consolidated 

group and one or more transactions in 

which a corporation that had a 

depreciable interest in the property 

becomes a member of the group, the 

member that acquires the property will 

be treated as having a depreciable 

interest in the property prior to the time 

of its acquisition. 

(iii) Time for testing membership. 

Solely for purposes of applying 

paragraph (b)(3)(iii)(B)(3)(i) and (ii) of 

this section, if a series of related 

transactions includes one or more 

transactions in which property is 

acquired by a member of a consolidated 

group and one or more transactions in 

which the transferee of the property 

ceases to be a member of a consolidated 

group, whether the taxpayer is a 

member of a consolidated group is 

tested immediately after the last 

transaction in the series. 

(C) Special rules for a series of related 

transactions. Solely for purposes of 

section 168(k)(2)(E)(ii) and paragraph 

(b)(3)(iii)(A) of this section, in the case 

of a series of related transactions (for 

example, a series of related transactions 

including the transfer of a partnership 

interest, the transfer of partnership 

assets, or the disposition of property 

and the disposition, directly or 

indirectly, of the transferor or transferee 

of the property)— 

(1) The property is treated as directly 

transferred from the original transferor 

to the ultimate transferee; and 

(2) The relation between the original 

transferor and the ultimate transferee is 

tested immediately after the last 

transaction in the series. 

(iv) Application to partnerships—(A) 

Section 704(c) remedial allocations. 

Remedial allocations under section 

704(c) do not satisfy the requirements of 

paragraph (b)(3) of this section. See 

§ 1.704–3(d)(2). 

(B) Basis determined under section 

732. Any basis of distributed property 

determined under section 732 does not 

satisfy the requirements of paragraph 

(b)(3) of this section. 

(C) Section 734(b) adjustments. Any 

increase in basis of depreciable property 

under section 734(b) does not satisfy the 

requirements of paragraph (b)(3) of this 

section. 

(D) Section 743(b) adjustments—(1) In 

general. For purposes of determining 

whether the transfer of a partnership 


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interest meets the requirements of 

paragraph (b)(3)(iii)(A) of this section, 

each partner is treated as having a 

depreciable interest in the partner’s 

proportionate share of partnership 

property. Any increase in basis of 

depreciable property under section 

743(b) satisfies the requirements of 

paragraph (b)(3)(iii)(A) of this section 

if— 

(i) At any time prior to the transfer of 

the partnership interest that gave rise to 

such basis increase, neither the 

transferee partner nor a predecessor of 

the transferee partner had any 

depreciable interest in the portion of the 

property deemed acquired to which the 

section 743(b) adjustment is allocated 

under section 755 and the regulations 

under section 755; and 

(ii) The transfer of the partnership 

interest that gave rise to such basis 

increase satisfies the requirements of 

paragraphs (b)(3)(iii)(A)(2) and (3) of 

this section. 

(2) Relatedness tested at partner level. 

Solely for purposes of paragraph 

(b)(3)(iv)(D)(1)(ii) of this section, 

whether the parties are related or 

unrelated is determined by comparing 

the transferor and the transferee of the 

transferred partnership interest. 

(v) Syndication transaction. If a lessor 

has a depreciable interest in the 

property and the lessor and any 

predecessor did not previously have a 

depreciable interest in the property, and 

the property is sold by the lessor or any 

subsequent purchaser within three 

months after the date the property was 

originally placed in service by the lessor 

(or, in the case of multiple units of 

property subject to the same lease, 

within three months after the date the 

final unit is placed in service, so long 

as the period between the time the first 

unit is placed in service and the time 

the last unit is placed in service does 

not exceed 12 months), and the user of 

the property after the last sale during 

the three-month period remains the 

same as when the property was 

originally placed in service by the 

lessor, the purchaser of the property in 

the last sale during the three-month 

period is considered the taxpayer that 

acquired the property for purposes of 

applying paragraphs (b)(3)(ii) and (iii) of 

this section. 

(vi) Examples. The application of this 

paragraph (b)(3) is illustrated by the 

following examples. Unless the facts 

specifically indicate otherwise, assume 

that the parties are not related within 

the meaning of section 179(d)(2)(A) or 

(B) and § 1.179–4(c), no corporation is a 

member of a consolidated or controlled 

group, and the parties do not have 

predecessors: 

Example 1. (i) On August 1, 2018, A buys 

a new machine for $35,000 from an unrelated 

party for use in A’s trade or business. On July 

1, 2020, B buys that machine from A for 

$20,000 for use in B’s trade or business. On 

October 1, 2020, B makes a $5,000 capital 

expenditure to recondition the machine. B 

did not have any depreciable interest in the 

machine before B acquired it on July 1, 2020. 

(ii) A’s purchase price of $35,000 satisfies 

the original use requirement of paragraph 

(b)(3)(ii) of this section and, assuming all 

other requirements are met, qualifies for the 

additional first year depreciation deduction. 

(iii) B’s purchase price of $20,000 does not 

satisfy the original use requirement of 

paragraph (b)(3)(ii) of this section, but it does 

satisfy the used property acquisition 

requirements of paragraph (b)(3)(iii) of this 

section. Assuming all other requirements are 

met, the $20,000 purchase price qualifies for 

the additional first year depreciation 

deduction. Further, B’s $5,000 expenditure 

satisfies the original use requirement of 

paragraph (b)(3)(ii) of this section and, 

assuming all other requirements are met, 

qualifies for the additional first year 

depreciation deduction, regardless of 

whether the $5,000 is added to the basis of 

the machine or is capitalized as a separate 

asset. 

Example 2. C, an automobile dealer, uses 

some of its automobiles as demonstrators in 

order to show them to prospective customers. 

The automobiles that are used as 

demonstrators by C are held by C primarily 

for sale to customers in the ordinary course 

of its business. On November 1, 2017, D buys 

from C an automobile that was previously 

used as a demonstrator by C. D will use the 

automobile solely for business purposes. The 

use of the automobile by C as a demonstrator 

does not constitute a ‘‘use’’ for purposes of 

the original use requirement and, therefore, 

D will be considered the original user of the 

automobile for purposes of paragraph 

(b)(3)(ii) of this section. Assuming all other 

requirements are met, D’s purchase price of 

the automobile qualifies for the additional 

first year depreciation deduction for D, 

subject to any limitation under section 280F. 

Example 3. On April 1, 2015, E acquires 

a horse to be used in E’s thoroughbred racing 

business. On October 1, 2018, F buys the 

horse from E and will use the horse in F’s 

horse breeding business. F did not have any 

depreciable interest in the horse before F 

acquired it on October 1, 2018. The use of the 

horse by E in its racing business prevents F 

from satisfying the original use requirement 

of paragraph (b)(3)(ii) of this section. 

However, F’s acquisition of the horse satisfies 

the used property acquisition requirements of 

paragraph (b)(3)(iii) of this section. Assuming 

all other requirements are met, F’s purchase 

price of the horse qualifies for the additional 

first year depreciation deduction for F. 

Example 4. In the ordinary course of its 

business, G sells fractional interests in its 

aircraft to unrelated parties. G holds out for 

sale eight equal fractional interests in an 

aircraft. On October 1, 2017, G sells five of 

the eight fractional interests in the aircraft to 

H and H begins to use its proportionate share 

of the aircraft immediately upon purchase. 

On February 1, 2018, G sells to I the 

remaining unsold 3⁄8 fractional interests in 

the aircraft. H is considered the original user 

as to its 5⁄8 fractional interest in the aircraft 

and I is considered the original user as to its 3⁄8 fractional interest in the aircraft. Thus, 

assuming all other requirements are met, H’s 

purchase price for its 5⁄8 fractional interest in 

the aircraft qualifies for the additional first 

year depreciation deduction and I’s purchase 

price for its 3⁄8 fractional interest in the 

aircraft qualifies for the additional first year 

depreciation deduction. 

Example 5. On September 1, 2017, J, an 

equipment dealer, buys new tractors that are 

held by J primarily for sale to customers in 

the ordinary course of its business. On 

October 15, 2017, J withdraws the tractors 

from inventory and begins to use the tractors 

primarily for producing rental income. The 

holding of the tractors by J as inventory does 

not constitute a ‘‘use’’ for purposes of the 

original use requirement and, therefore, the 

original use of the tractors commences with 

J on October 15, 2017, for purposes of 

paragraph (b)(3)(ii) of this section. However, 

the tractors are not eligible for the 100- 

percent additional first year depreciation 

deduction because J acquired the tractors 

before September 28, 2017. 

Example 6. K is in the trade or business of 

leasing equipment to others. During 2016, K 

buys a new machine (Machine #1) and then 

leases it to L for use in L’s trade or business. 

The lease between K and L for Machine #1 

is a true lease for federal income tax 

purposes. During 2018, L enters into a 

written binding contract with K to buy 

Machine #1 at its fair market value on May 

15, 2018. L did not have any depreciable 

interest in Machine #1 before L acquired it 

on May 15, 2018. As a result, L’s acquisition 

of Machine #1 satisfies the used property 

acquisition requirements of paragraph 

(b)(3)(iii) of this section. Assuming all other 

requirements are met, L’s purchase price of 

Machine #1 qualifies for the additional first 

year depreciation deduction for L. 

Example 7. The facts are the same as in 

Example 6 of this paragraph (b)(3)(vi), except 

that K and L are related parties within the 

meaning of section 179(d)(2)(A) or (B) and 

§ 1.179–4(c). As a result, L’s acquisition of 

Machine #1 does not satisfy the used 

property acquisition requirements of 

paragraph (b)(3)(iii) of this section. Thus, 

Machine #1 is not eligible for the additional 

first year depreciation deduction for L. 

Example 8. The facts are the same as in 

Example 6 of this paragraph (b)(3)(vi), except 

L incurred capital expenditures of $5,000 to 

improve Machine #1 on September 5, 2017, 

and has a depreciable interest in such 

improvements. L’s purchase price of $5,000 

for the improvements to Machine #1 satisfies 

the original use requirement of § 1.168(k)– 

1(b)(3)(i) and, assuming all other 

requirements are met, qualifies for the 50- 

percent additional first year depreciation 

deduction. Because L had a depreciable 

interest only in the improvements to 

Machine #1, L’s acquisition of Machine #1, 

excluding L’s improvements to such 

machine, satisfies the used property 

acquisition requirements of paragraph 

(b)(3)(iii) of this section. Assuming all other 

requirements are met, L’s unadjusted 


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depreciable basis of Machine #1, excluding 

the amount of such unadjusted depreciable 

basis attributable to L’s improvements to 

Machine #1, qualifies for the 100-percent 

additional first year depreciation deduction. 

Example 9. During 2016, M and N 

purchased used equipment for use in their 

trades or businesses and each own a 50 

percent interest in such equipment. Prior to 

this acquisition, M and N did not have any 

depreciable interest in the equipment. 

Assume this ownership arrangement is not a 

partnership. During 2018, N enters into a 

written binding contract with M to buy M’s 

interest in the equipment. Pursuant to 

paragraph (b)(3)(iii)(B)(2) of this section, N is 

not treated as using M’s interest in the 

equipment prior to N’s acquisition of M’s 

interest. As a result, N’s acquisition of M’s 

interest in the equipment satisfies the used 

property acquisition requirements of 

paragraph (b)(3)(iii) of this section. Assuming 

all other requirements are met, N’s purchase 

price of M’s interest in the equipment 

qualifies for the additional first year 

depreciation deduction for N. 

Example 10. The facts are the same as in 

Example 9 of this paragraph (b)(3)(vi), except 

N had a 100 percent depreciable interest in 

the equipment prior to 2016 and M 

purchased from N a 50 percent interest in the 

equipment during 2016. As a result, N’s 

acquisition of M’s interest in the equipment 

during 2018 does not satisfy the used 

property acquisition requirements of 

paragraphs (b)(3)(iii)(A)(1) and 

(b)(3)(iii)(B)(1) of this section. Paragraph 

(b)(3)(iii)(B)(2) of this section does not apply 

because N initially acquired a 100 percent 

depreciable interest in the equipment. 

Accordingly, N’s purchase price of M’s 

interest in the equipment during 2018 does 

not qualify for the additional first year 

depreciation deduction for N. 

Example 11. The facts are the same as in 

Example 9 of this paragraph (b)(3)(vi), except 

during 2018, M also enters into a written 

binding contract with N to buy N’s interest 

in the equipment. Pursuant to paragraph 

(b)(3)(iii)(B)(2) of this section, both M and N 

are treated as previously having a depreciable 

interest in a 50-percent portion of the 

equipment. Accordingly, the acquisition by 

M of N’s 50-percent interest and the 

acquisition by N of M’s 50-percent interest in 

the equipment during 2018 do not qualify for 

the additional first year depreciation 

deduction. 

Example 12. O and P form an equal 

partnership, OP, in 2018. O contributes cash 

to OP, and P contributes equipment to OP. 

OP’s basis in the equipment contributed by 

P is determined under section 723. Because 

OP’s basis in such equipment is determined 

in whole or in part by reference to P’s 

adjusted basis in such equipment, OP’s 

acquisition of such equipment does not 

satisfy section 179(d)(2)(C) and § 1.179– 

4(c)(1)(iv) and, thus, does not satisfy the used 

property acquisition requirements of 

paragraph (b)(3)(iii) of this section. 

Accordingly, OP’s acquisition of such 

equipment is not eligible for the additional 

first year depreciation deduction. 

Example 13. Q, R, and S form an equal 

partnership, QRS, in 2019. Each partner 

contributes $100, which QRS uses to 

purchase a retail motor fuels outlet for $300. 

Assume this retail motor fuels outlet is QRS’ 

only property and is qualified property under 

section 168(k)(2)(A)(i). QRS makes an 

election not to deduct the additional first 

year depreciation for all qualified property 

placed in service during 2019. QRS has a 

section 754 election in effect. QRS claimed 

depreciation of $15 for the retail motor fuels 

outlet for 2019. During 2020, when the retail 

motor fuels outlet’s fair market value is $600, 

Q sells all of his partnership interest to T in 

a fully taxable transaction for $200. T never 

previously had a depreciable interest in the 

retail motor fuels outlet. T takes an outside 

basis of $200 in the partnership interest 

previously owned by Q. T’s share of the 

partnership’s previously taxed capital is $95. 

Accordingly, T’s section 743(b) adjustment is 

$105 and is allocated entirely to the retail 

motor fuels outlet under section 755. 

Assuming all other requirements are met, T’s 

section 743(b) adjustment qualifies for the 

additional first year depreciation deduction. 

Example 14. The facts are the same as in 

Example 13 of this paragraph (b)(3)(vi), 

except that Q sells his partnership interest to 

U, a related person within the meaning of 

section 179(d)(2)(A) or (B) and § 1.179–4(c). 

U’s section 743(b) adjustment does not 

qualify for the additional first year 

depreciation deduction. 

Example 15. The facts are the same as in 

Example 13 of this paragraph (b)(3)(vi), 

except that Q dies and his partnership 

interest is transferred to V. V takes a basis in 

Q’s partnership interest under section 1014. 

As a result, section 179(d)(2)(C)(ii) and 

§ 1.179–4(c)(1)(iv) are not satisfied, and V’s 

section 743(b) adjustment does not qualify 

for the additional first year depreciation 

deduction. 

Example 16. The facts are the same as in 

Example 13 of this paragraph (b)(3)(vi), 

except that QRS purchased the retail motor 

fuels outlet from T prior to T purchasing Q’s 

partnership interest in QRS. T had a 

depreciable interest in such retail motor fuels 

outlet. Because T had a depreciable interest 

in the retail motor fuels outlet before T 

acquired its interest in QRS, T’s section 

743(b) adjustment does not qualify for the 

additional first year depreciation deduction. 

Example 17. In November 2017, AA 

Corporation purchases a used drill press 

costing $10,000 and is granted a trade-in 

allowance of $2,000 on its old drill press. 

The used drill press is qualified property 

under section 168(k)(2)(A)(i). The old drill 

press had a basis of $1,200. Under sections 

1012 and 1031(d), the basis of the used drill 

press is $9,200 ($1,200 basis of old drill press 

plus cash expended of $8,000). Only $8,000 

of the basis of the used drill press satisfies 

the requirements of section 179(d)(3) and 

§ 1.179–4(d) and, thus, satisfies the used 

property acquisition requirement of 

paragraph (b)(3)(iii) of this section. The 

remaining $1,200 of the basis of the used 

drill press does not satisfy the requirements 

of section 179(d)(3) and § 1.179–4(d) because 

it is determined by reference to the old drill 

press. Accordingly, assuming all other 

requirements are met, only $8,000 of the 

basis of the used drill press is eligible for the 

additional first year depreciation deduction. 

Example 18. In a series of related 

transactions, a father sells a machine to an 

unrelated party who sells the machine to the 

father’s daughter for use in the daughter’s 

trade or business. Pursuant to paragraph 

(b)(3)(iii)(C) of this section, the transfers of 

the machine are treated as a direct transfer 

from the father to his daughter and the time 

to test whether the parties are related is 

immediately after the last transaction in the 

series. Because the father and the daughter 

are related parties within the meaning of 

section 179(d)(2)(A) and § 1.179–4(c)(ii), the 

daughter’s acquisition of the machine does 

not satisfy the used property acquisition 

requirements of paragraph (b)(3)(iii) of this 

section. Further, because the transfers of the 

machine are treated as a direct transfer from 

the father to his daughter, the unrelated 

party’s acquisition of the machine is not 

eligible for the additional first year 

depreciation deduction. 

Example 19. Parent owns all of the stock 

of B Corporation and C Corporation. Parent, 

B Corporation, and C Corporation are all 

members of the Parent consolidated group. C 

Corporation has a depreciable interest in 

Equipment #1. During 2018, C Corporation 

sells Equipment #1 to B Corporation. Prior to 

this acquisition, B Corporation never had a 

depreciable interest in Equipment #1. B 

Corporation’s acquisition of Equipment #1 

does not satisfy the used property acquisition 

requirements of paragraph (b)(3)(iii) of this 

section for two reasons. First, B Corporation 

and C Corporation are related parties within 

the meaning of section 179(d)(2)(B) and 

§ 1.179–4(c)(2)(iii). Second, pursuant to 

paragraph (b)(3)(iii)(B)(3)(i) of this section, B 

Corporation is treated as previously having a 

depreciable interest in Equipment #1 because 

B Corporation is a member of the Parent 

consolidated group and C Corporation, while 

a member of the Parent consolidated group, 

had a depreciable interest in Equipment #1. 

Accordingly, B Corporation’s acquisition of 

Equipment #1 is not eligible for the 

additional first year depreciation deduction. 

Example 20. (i) Parent owns all of the stock 

of D Corporation and E Corporation. Parent, 

D Corporation, and E Corporation are all 

members of the Parent consolidated group. D 

Corporation has a depreciable interest in 

Equipment #2. No other members of the 

Parent consolidated group ever had a 

depreciable interest in Equipment #2. During 

2018, D Corporation sells Equipment #2 to 

BA, a person not related, within the meaning 

of section 179(d)(2)(A) or (B) and § 1.179– 

4(c), to any member of the Parent 

consolidated group. In an unrelated 

transaction during 2019, E Corporation 

acquires Equipment #2 from BA or another 

person not related to any member of the 

Parent consolidated group within the 

meaning of section 179(d)(2)(A) or (B) and 

§ 1.179–4(c). 

(ii) Pursuant to paragraph (b)(3)(iii)(B)(3)(i) 

of this section, E Corporation is treated as 

previously having a depreciable interest in 

Equipment #2 because E Corporation is a 

member of the Parent consolidated group, 

and D Corporation, while a member of the 

Parent consolidated group, had a depreciable 

interest in Equipment #2. As a result, E 

Corporation’s acquisition of Equipment #2 


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does not satisfy the used property acquisition 

requirements of paragraph (b)(3)(iii) of this 

section. Thus, E Corporation’s acquisition of 

Equipment #2 is not eligible for the 

additional first year depreciation deduction. 

The results would be the same if D 

Corporation had ceased to be a member of the 

Parent consolidated group prior to E 

Corporation’s acquisition of Equipment #2. 

Example 21. (i) Parent owns all of the stock 

of F Corporation and G Corporation. Parent, 

F Corporation, and G Corporation are all 

members of the Parent consolidated group. G 

Corporation has a depreciable interest in 

Equipment #3. No other members of the 

Parent consolidated group ever had a 

depreciable interest in Equipment #3. X 

Corporation is the common parent of a 

consolidated group and is not related, within 

the meaning of section 179(d)(2)(A) or (B) 

and § 1.179–4(c), to any member of the Parent 

consolidated group. No member of the X 

consolidated group ever had a depreciable 

interest in Equipment #3. In a series of 

related transactions, G Corporation sells 

Equipment #3 to F Corporation, and Parent 

sells all of the stock of F Corporation to X 

Corporation. 

(ii) F Corporation was a member of the 

Parent consolidated group at the time it 

acquired Equipment #3 from G Corporation, 

another member of the group. Paragraph 

(b)(3)(iii)(B)(3)(i) of this section generally 

treats each member of a consolidated group 

as having a depreciable interest in property 

during the time any member of the group had 

a depreciable interest in such property while 

a member of the group. Nevertheless, because 

there is a series of related transactions that 

includes the acquisition of Equipment #3 and 

a transaction in which F Corporation, the 

transferee of the property, leaves the Parent 

consolidated group and joins the X 

consolidated group, the time to test whether 

F Corporation is a member of the Parent 

consolidated group for purposes of paragraph 

(b)(3)(iii)(B)(3)(i) of this section is met is 

immediately after the last transaction in the 

series, that is, the sale of the F Corporation 

stock to X Corporation. See paragraph 

(b)(3)(iii)(B)(3)(iii) of this section. 

Accordingly, because F Corporation is not a 

member of the Parent consolidated group 

after the last transaction of the series, F 

Corporation is not treated as previously 

having a depreciable interest in Equipment 

#3 by virtue of G Corporation’s depreciable 

interest in Equipment #3 under paragraph 

(b)(3)(iii)(B)(3)(i) of this section. 

(iii) After the sale of the F Corporation 

stock to X Corporation, F Corporation is a 

member of the X consolidated group. Because 

no member of the X consolidated group 

previously had a depreciable interest in 

Equipment #3, F Corporation is not treated as 

previously having a depreciable interest in 

Equipment #3 under paragraph 

(b)(3)(iii)(B)(3)(i) of this section. 

(iv) Because relatedness is tested after F 

Corporation leaves the Parent consolidated 

group, F Corporation and G Corporation are 

not related within the meaning of section 

179(d)(2)(A) or (B) and § 1.179–4(c). 

Accordingly, F Corporation’s acquisition of 

Equipment #3 satisfies the used property 

acquisition requirements of paragraph 

(b)(3)(iii)(A)(1) of this section and, assuming 

all other requirements are met, F 

Corporation’s acquisition of Equipment #3 is 

eligible for the additional first year 

depreciation deduction. 

Example 22. (i) H Corporation, which is 

not a member of a consolidated group, has a 

depreciable interest in Equipment #4. Parent 

owns all the stock of I Corporation, and 

Parent and I Corporation are members of the 

Parent consolidated group. No member of the 

Parent consolidated group ever had a 

depreciable interest in Equipment #4. Neither 

Parent nor I Corporation is related to H 

Corporation within the meaning of section 

179(d)(2)(A) or (B) and § 1.179–4(c). During 

2018, H Corporation sells Equipment #4 to a 

person not related to H Corporation, Parent, 

or I Corporation within the meaning of 

section 179(d)(2)(A) or (B) and § 1.179–4(c). 

In a series of related transactions, during 

2019, Parent acquires all of the stock of H 

Corporation, and I Corporation purchases 

Equipment #4 from an unrelated person. 

(ii) In a series of related transactions, H 

Corporation became a member of the Parent 

consolidated group, and I Corporation, also a 

member of the Parent consolidated group, 

acquired Equipment #4. Because H 

Corporation previously had a depreciable 

interest in Equipment #4, pursuant to 

paragraph (b)(3)(iii)(B)(3)(ii) of this section, I 

Corporation is treated as having a depreciable 

interest in Equipment #4. As a result, I 

Corporation’s acquisition of Equipment #4 

does not satisfy the used property acquisition 

requirements of paragraph (b)(3)(iii) of this 

section. Accordingly, I Corporation’s 

acquisition of Equipment #4 is not eligible 

for the additional first year depreciation 

deduction. 

Example 23. (i) J Corporation, K 

Corporation, and L Corporation are unrelated 

parties within the meaning of section 

179(d)(2)(A) or (B) and § 1.179–4(c). None of 

J Corporation, K Corporation, and L 

Corporation is a member of a consolidated 

group. J Corporation has a depreciable 

interest in Equipment #5. During 2018, J 

Corporation sells Equipment #5 to K 

Corporation. During 2020, J Corporation 

merges into L Corporation in a transaction 

described in section 368(a)(1)(A). In 2021, L 

Corporation acquires Equipment #5 from K 

Corporation. 

(ii) Because J Corporation is the 

predecessor of L Corporation and J 

Corporation previously had a depreciable 

interest in Equipment #5, L Corporation’s 

acquisition of Equipment #5 does not satisfy 

paragraphs (b)(3)(iii)(A)(1) and 

(b)(3)(iii)(B)(1) of this section and, thus, does 

not satisfy the used property acquisition 

requirements of paragraph (b)(3)(iii) of this 

section. Accordingly, L Corporation’s 

acquisition of Equipment #5 is not eligible 

for the additional first year depreciation 

deduction. 

Example 24. (i) M Corporation acquires 

and places in service a used airplane on 

March 26, 2018. Prior to this acquisition, M 

Corporation never had a depreciable interest 

in this airplane. On March 26, 2018, M 

Corporation also leases the used airplane to 

N Corporation, an airline company. On May 

27, 2018, M Corporation sells to O 

Corporation the used airplane subject to the 

lease with N Corporation. M Corporation and 

O Corporation are related parties within the 

meaning of section 179(d)(2)(A) or (B) and 

§ 1.179–4(c). As of May 27, 2018, N 

Corporation is still the lessee of the used 

airplane. Prior to this acquisition, O 

Corporation never had a depreciable interest 

in the used airplane. O Corporation is a 

calendar-year taxpayer. 

(ii) The sale transaction of May 27, 2018, 

satisfies the requirements of paragraph 

(b)(3)(v) of this section. As a result, O 

Corporation is considered the taxpayer that 

acquired the used airplane for purposes of 

applying the used property acquisition 

requirements in paragraph (b)(3)(iii) of this 

section. In applying these rules, the fact that 

M Corporation and O Corporation are related 

parties is not taken into account because O 

Corporation, not M Corporation, is treated as 

acquiring the used airplane. Further, 

pursuant to paragraph (b)(4)(iv) of this 

section, the used airplane is treated as 

originally placed in service by O Corporation 

on May 27, 2018. Because O Corporation 

never had a depreciable interest in the used 

airplane and assuming all other requirements 

are met, O Corporation’s purchase price of 

the used airplane qualifies for the 100- 

percent additional first year depreciation 

deduction for O Corporation. 

Example 25. (i) The facts are the same as 

in Example 24 of this paragraph (b)(3)(vi). 

Additionally, on September 5, 2018, O 

Corporation sells to P Corporation the used 

airplane subject to the lease with N 

Corporation. Prior to this acquisition, P 

Corporation never had a depreciable interest 

in the used airplane. 

(ii) Because O Corporation, a calendar-year 

taxpayer, placed in service and disposed of 

the used airplane during 2018, the used 

airplane is not eligible for the additional first 

year depreciation deduction for O 

Corporation pursuant to paragraph (f)(1)(i) of 

this section. 

(iii) Because P Corporation never had a 

depreciable interest in the used airplane and 

assuming all other requirements are met, P 

Corporation’s purchase price of the used 

airplane qualifies for the 100-percent 

additional first year depreciation deduction 

for P Corporation. 

(4) Placed-in-service date—(i) In 

general. Depreciable property will meet 

the requirements of this paragraph (b)(4) 

if the property is placed in service by 

the taxpayer for use in its trade or 

business or for production of income 

after September 27, 2017; and, except as 

provided in paragraphs (b)(2)(i)(A) and 

(D) of this section, before January 1, 

2027, or, in the case of property 

described in section 168(k)(2)(B) or (C), 

before January 1, 2028. 

(ii) Specified plant. If the taxpayer has 

properly made an election to apply 

section 168(k)(5) for a specified plant, 

the requirements of this paragraph (b)(4) 

are satisfied only if the specified plant 

is planted before January 1, 2027, or is 

grafted before January 1, 2027, to a plant 

that has already been planted, by the 


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taxpayer in the ordinary course of the 

taxpayer’s farming business, as defined 

in section 263A(e)(4). 

(iii) Qualified film, television, or live 

theatrical production—(A) For purposes 

of this paragraph (b)(4), a qualified film 

or television production is treated as 

placed in service at the time of initial 

release or broadcast as defined under 

§ 1.181–1(a)(7). 

(B) For purposes of this paragraph 

(b)(4), a qualified live theatrical 

production is treated as placed in 

service at the time of the initial live 

staged performance. Solely for purposes 

of this paragraph, the term initial live 

staged performance means the first 

commercial exhibition of a production 

to an audience. However, the term 

initial live staged performance does not 

include limited exhibition, prior to 

commercial exhibition to general 

audiences, if the limited exhibition is 

primarily for purposes of publicity, 

determining the need for further 

production activity, or raising funds for 

the completion of production. For 

example, an initial live staged 

performance does not include a preview 

of the production if the preview is 

primarily to determine the need for 

further production activity. 

(iv) Syndication transaction. If a 

lessor has a depreciable interest in the 

property and the lessor and any 

predecessor did not previously have a 

depreciable interest in the property, and 

the property is sold by the lessor or any 

subsequent purchaser within three 

months after the date the property was 

originally placed in service by the lessor 

(or, in the case of multiple units of 

property subject to the same lease, 

within three months after the date the 

final unit is placed in service, so long 

as the period between the time the first 

unit is placed in service and the time 

the last unit is placed in service does 

not exceed 12 months), and the user of 

the property after the last sale during 

this three-month period remains the 

same as when the property was 

originally placed in service by the 

lessor, the property is treated as 

originally placed in service by the 

purchaser of the property in the last sale 

during the three-month period but not 

earlier than the date of the last sale. 

(v) Technical termination of a 

partnership. For purposes of this 

paragraph (b)(4), in the case of a 

technical termination of a partnership 

under section 708(b)(1)(B) occurring in 

a taxable year beginning before January 

1, 2018, qualified property placed in 

service by the terminated partnership 

during the taxable year of termination is 

treated as originally placed in service by 

the new partnership on the date the 

qualified property is contributed by the 

terminated partnership to the new 

partnership. 

(vi) Section 168(i)(7) transactions. For 

purposes of this paragraph (b)(4), if 

qualified property is transferred in a 

transaction described in section 

168(i)(7) in the same taxable year that 

the qualified property is placed in 

service by the transferor, the transferred 

property is treated as originally placed 

in service on the date the transferor 

placed in service the qualified property. 

In the case of multiple transfers of 

qualified property in multiple 

transactions described in section 

168(i)(7) in the same taxable year, the 

placed-in-service date of the transferred 

property is deemed to be the date on 

which the first transferor placed in 

service the qualified property. 

(5) Acquisition of property—(i) In 

general. This paragraph (b)(5) provides 

rules for the acquisition requirements in 

section 13201(h) of the Act. These rules 

apply to all property, including selfconstructed property or property 

described in section 168(k)(2)(B) or (C). 

(ii) Acquisition date. Except as 

provided in paragraph (b)(5)(vi) of this 

section, depreciable property will meet 

the requirements of this paragraph (b)(5) 

if the property is acquired by the 

taxpayer after September 27, 2017, or is 

acquired by the taxpayer pursuant to a 

written binding contract entered into by 

the taxpayer after September 27, 2017. 

Property that is manufactured, 

constructed, or produced for the 

taxpayer by another person under a 

written binding contract that is entered 

into prior to the manufacture, 

construction, or production of the 

property for use by the taxpayer in its 

trade or business or for its production of 

income is acquired pursuant to a written 

binding contract. If a taxpayer acquired 

the property pursuant to a written 

binding contract and such contract 

states the date on which the contract 

was entered into and a closing date, 

delivery date, or other similar date, the 

date on which the contract was entered 

into is the date the taxpayer acquired 

the property. See paragraph (b)(5)(v) of 

this section for when a qualified film, 

television, or live theatrical production 

is treated as acquired for purposes of 

this paragraph (b)(5). 

(iii) Definition of binding contract— 

(A) In general. A contract is binding 

only if it is enforceable under State law 

against the taxpayer or a predecessor, 

and does not limit damages to a 

specified amount (for example, by use of 

a liquidated damages provision). For 

this purpose, a contractual provision 

that limits damages to an amount equal 

to at least 5 percent of the total contract 

price will not be treated as limiting 

damages to a specified amount. In 

determining whether a contract limits 

damages, the fact that there may be little 

or no damages because the contract 

price does not significantly differ from 

fair market value will not be taken into 

account. For example, if a taxpayer 

entered into an irrevocable written 

contract to purchase an asset for $100 

and the contract did not contain a 

provision for liquidated damages, the 

contract is considered binding 

notwithstanding the fact that the asset 

had a fair market value of $99 and under 

local law the seller would only recover 

the difference in the event the purchaser 

failed to perform. If the contract 

provided for a full refund of the 

purchase price in lieu of any damages 

allowable by law in the event of breach 

or cancellation, the contract is not 

considered binding. 

(B) Conditions. A contract is binding 

even if subject to a condition, as long as 

the condition is not within the control 

of either party or a predecessor. A 

contract will continue to be binding if 

the parties make insubstantial changes 

in its terms and conditions or if any 

term is to be determined by a standard 

beyond the control of either party. A 

contract that imposes significant 

obligations on the taxpayer or a 

predecessor will be treated as binding 

notwithstanding the fact that certain 

terms remain to be negotiated by the 

parties to the contract. 

(C) Options. An option to either 

acquire or sell property is not a binding 

contract. 

(D) Letter of intent. A letter of intent 

for an acquisition is not a binding 

contract. 

(E) Supply agreements. A binding 

contract does not include a supply or 

similar agreement if the amount and 

design specifications of the property to 

be purchased have not been specified. 

The contract will not be a binding 

contract for the property to be 

purchased until both the amount and 

the design specifications are specified. 

For example, if the provisions of a 

supply or similar agreement state the 

design specifications of the property to 

be purchased, a purchase order under 

the agreement for a specific number of 

assets is treated as a binding contract. 

(F) Components. A binding contract to 

acquire one or more components of a 

larger property will not be treated as a 

binding contract to acquire the larger 

property. If a binding contract to acquire 

the component does not satisfy the 

requirements of this paragraph (b)(5), 

the component does not qualify for the 

additional first year depreciation 

deduction. 


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(iv) Self-constructed property—(A) In 

general. If a taxpayer manufactures, 

constructs, or produces property for use 

by the taxpayer in its trade or business 

or for its production of income, the 

acquisition rules in paragraph (b)(5)(ii) 

of this section are treated as met for the 

property if the taxpayer begins 

manufacturing, constructing, or 

producing the property after September 

27, 2017. This paragraph (b)(5)(iv) does 

not apply to property that is 

manufactured, constructed, or produced 

for the taxpayer by another person 

under a written binding contract that is 

entered into prior to the manufacture, 

construction, or production of the 

property for use by the taxpayer in its 

trade or business or for its production of 

income (for further guidance, see 

paragraphs (b)(5)(ii) and (iii) of this 

section). 

(B) When does manufacture, 

construction, or production begin—(1) 

In general. For purposes of paragraph 

(b)(5)(iv)(A) of this section, 

manufacture, construction, or 

production of property begins when 

physical work of a significant nature 

begins. Physical work does not include 

preliminary activities such as planning 

or designing, securing financing, 

exploring, or researching. The 

determination of when physical work of 

a significant nature begins depends on 

the facts and circumstances. For 

example, if the taxpayer constructs a 

retail motor fuels outlet on-site for use 

by the taxpayer in its trade or business, 

construction begins when physical work 

of a significant nature commences at the 

site by the taxpayer; that is, when work 

begins on the excavation for footings, 

pouring the pads for the outlet, or the 

driving of foundation pilings into the 

ground. Preliminary work, such as 

clearing a site, test drilling to determine 

soil condition, or excavation to change 

the contour of the land (as distinguished 

from excavation for footings) does not 

constitute the beginning of construction. 

However, if the taxpayer assembles a 

retail motor fuels outlet on-site from 

modular units manufactured off-site by 

the taxpayer and delivered to the site 

where the outlet will be used, 

manufacturing begins when physical 

work of a significant nature commences 

at the off-site location by the taxpayer. 

(2) Safe harbor. For purposes of 

paragraph (b)(5)(iv)(B)(1) of this section, 

a taxpayer may choose to determine 

when physical work of a significant 

nature begins in accordance with this 

paragraph (b)(5)(iv)(B)(2). Physical work 

of a significant nature will be 

considered to begin at the time the 

taxpayer incurs (in the case of an 

accrual basis taxpayer) or pays (in the 

case of a cash basis taxpayer) more than 

10 percent of the total cost of the 

property (excluding the cost of any land 

and preliminary activities such as 

planning or designing, securing 

financing, exploring, or researching). A 

taxpayer chooses to apply this 

paragraph (b)(5)(iv)(B)(2) by filing a 

federal income tax return for the placedin-service year of the property that 

determines when physical work of a 

significant nature begins consistent with 

this paragraph (b)(5)(iv)(B)(2). 

(C) Components of self-constructed 

property—(1) Acquired components. If a 

binding contract, as defined in 

paragraph (b)(5)(iii) of this section, to 

acquire a component does not satisfy 

the requirements of paragraph (b)(5)(ii) 

of this section, the component does not 

qualify for the additional first year 

depreciation deduction. A binding 

contract described in the preceding 

sentence to acquire one or more 

components of a larger self-constructed 

property will not preclude the larger 

self-constructed property from satisfying 

the acquisition rules in paragraph 

(b)(5)(iv)(A) of this section. Accordingly, 

the unadjusted depreciable basis of the 

larger self-constructed property that is 

eligible for the additional first year 

depreciation deduction, assuming all 

other requirements are met, must not 

include the unadjusted depreciable 

basis of any component that does not 

satisfy the requirements of paragraph 

(b)(5)(ii) of this section. If the 

manufacture, construction, or 

production of the larger self-constructed 

property begins before September 28, 

2017, the larger self-constructed 

property and any acquired components 

related to the larger self-constructed 

property do not qualify for the 

additional first year depreciation 

deduction under this section. 

(2) Self-constructed components. If 

the manufacture, construction, or 

production of a component by the 

taxpayer does not satisfy the 

requirements of this paragraph (b)(5)(iv), 

the component does not qualify for the 

additional first year depreciation 

deduction. However, if the manufacture, 

construction, or production of a 

component does not satisfy the 

requirements of this paragraph (b)(5)(iv), 

but the manufacture, construction, or 

production of the larger self-constructed 

property satisfies the requirements of 

this paragraph (b)(5)(iv), the larger selfconstructed property qualifies for the 

additional first year depreciation 

deduction, assuming all other 

requirements are met, even though the 

component does not qualify for the 

additional first year depreciation 

deduction. Accordingly, the unadjusted 

depreciable basis of the larger selfconstructed property that is eligible for 

the additional first year depreciation 

deduction, assuming all other 

requirements are met, must not include 

the unadjusted depreciable basis of any 

component that does not qualify for the 

additional first year depreciation 

deduction. If the manufacture, 

construction, or production of the larger 

self-constructed property began before 

September 28, 2017, the larger selfconstructed property and any selfconstructed components related to the 

larger self-constructed property do not 

qualify for the additional first year 

depreciation deduction under this 

section. 

(v) Qualified film, television, or live 

theatrical production—(A) For purposes 

of section 13201(h)(1)(A) of the Act, a 

qualified film or television production 

is treated as acquired on the date 

principal photography commences. 

(B) For purposes of section 

13201(h)(1)(A) of the Act, a qualified 

live theatrical production is treated as 

acquired on the date when all of the 

necessary elements for producing the 

live theatrical production are secured. 

These elements may include a script, 

financing, actors, set, scenic and 

costume designs, advertising agents, 

music, and lighting. 

(vi) Specified plant. If the taxpayer 

has properly made an election to apply 

section 168(k)(5) for a specified plant, 

the requirements of this paragraph (b)(5) 

are satisfied if the specified plant is 

planted after September 27, 2017, or is 

grafted after September 27, 2017, to a 

plant that has already been planted, by 

the taxpayer in the ordinary course of 

the taxpayer’s farming business, as 

defined in section 263A(e)(4). 

(vii) Examples. The application of this 

paragraph (b)(5) is illustrated by the 

following examples. Unless the facts 

specifically indicate otherwise, assume 

that the parties are not related within 

the meaning of section 179(d)(2)(A) or 

(B) and § 1.179–4(c), and the parties do 

not have predecessors: 

Example 1. On September 1, 2017, BB, a 

corporation, entered into a written agreement 

with CC, a manufacturer, to purchase 20 new 

lamps for $100 each within the next two 

years. Although the agreement specifies the 

number of lamps to be purchased, the 

agreement does not specify the design of the 

lamps to be purchased. Accordingly, the 

agreement is not a binding contract pursuant 

to paragraph (b)(5)(iii)(E) of this section. 

Example 2. The facts are the same as in 

Example 1 of this paragraph (b)(5)(vii). On 

December 1, 2017, BB placed a purchase 

order with CC to purchase 20 new model 

XPC5 lamps for $100 each for a total amount 

of $2,000. Because the agreement specifies 

the number of lamps to be purchased and the 


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purchase order specifies the design of the 

lamps to be purchased, the purchase order 

placed by BB with CC on December 1, 2017, 

is a binding contract pursuant to paragraph 

(b)(5)(iii)(E) of this section. Accordingly, 

assuming all other requirements are met, the 

cost of the 20 lamps qualifies for the 100- 

percent additional first year depreciation 

deduction. 

Example 3. The facts are the same as in 

Example 1 of this paragraph (b)(5)(vii), 

except that the written agreement between 

BB and CC is to purchase 100 model XPC5 

lamps for $100 each within the next two 

years. Because this agreement specifies the 

amount and design of the lamps to be 

purchased, the agreement is a binding 

contract pursuant to paragraph (b)(5)(iii)(E) of 

this section. However, because the agreement 

was entered into before September 28, 2017, 

no lamp acquired by BB under this contract 

qualifies for the 100-percent additional first 

year depreciation deduction. 

Example 4. On September 1, 2017, DD 

began constructing a retail motor fuels outlet 

for its own use. On November 1, 2018, DD 

ceases construction of the retail motor fuels 

outlet prior to its completion. Between 

September 1, 2017, and November 1, 2018, 

DD incurred $3,000,000 of expenditures for 

the construction of the retail motor fuels 

outlet. On May 1, 2019, DD resumed 

construction of the retail motor fuels outlet 

and completed its construction on August 31, 

2019. Between May 1, 2019, and August 31, 

2019, DD incurred another $1,600,000 of 

expenditures to complete the construction of 

the retail motor fuels outlet and, on 

September 1, 2019, DD placed the retail 

motor fuels outlet in service. None of DD’s 

total expenditures of $4,600,000 qualify for 

the 100-percent additional first year 

depreciation deduction because, pursuant to 

paragraph (b)(5)(iv)(A) of this section, DD 

began constructing the retail motor fuels 

outlet before September 28, 2017. 

Example 5. The facts are the same as in 

Example 4 of this paragraph (b)(5)(vii) except 

that DD began constructing the retail motor 

fuels outlet for its own use on October 1, 

2017, and DD incurred the $3,000,000 

between October 1, 2017, and November 1, 

2018. DD’s total expenditures of $4,600,000 

qualify for the 100-percent additional first 

year depreciation deduction because, 

pursuant to paragraph (b)(5)(iv)(A) of this 

section, DD began constructing the retail 

motor fuels outlet after September 27, 2017, 

and DD placed the retail motor fuels outlet 

in service on September 1, 2019. 

Accordingly, assuming all other requirements 

are met, the additional first year depreciation 

deduction for the retail motor fuels outlet 

will be $4,600,000, computed as $4,600,000 

multiplied by 100 percent. 

Example 6. On August 15, 2017, EE 

entered into a written binding contract with 

FF to manufacture an aircraft described in 

section 168(k)(2)(C) for use in EE’s trade or 

business. FF begins to manufacture the 

aircraft on October 1, 2017. EE places the 

aircraft in service on March 1, 2018. Pursuant 

to paragraph (b)(5)(ii) of this section, the 

aircraft is acquired by EE pursuant to a 

written binding contract. Because EE entered 

into such contract before September 28, 2017, 

the aircraft does not qualify for the 100- 

percent additional first year depreciation 

deduction. 

Example 7. On June 1, 2017, HH entered 

into a written binding contract to acquire a 

new component part of property that is being 

constructed by HH for its own use in its trade 

or business. HH commenced construction of 

the property in November 2017, and placed 

the property in service in November 2018. 

Because HH entered into a written binding 

contract to acquire a component part prior to 

September 28, 2017, pursuant to paragraphs 

(b)(5)(ii) and (b)(5)(iv)(C)(1) of this section, 

the component part does not qualify for the 

100-percent additional first year depreciation 

deduction. However, pursuant to paragraphs 

(b)(5)(iv)(A) and (b)(5)(iv)(C)(1) of this 

section, the property constructed by HH will 

qualify for the 100-percent additional first 

year depreciation deduction, because 

construction of the property began after 

September 27, 2017, assuming all other 

requirements are met. Accordingly, the 

unadjusted depreciable basis of the property 

that is eligible for the 100-percent additional 

first year depreciation deduction must not 

include the unadjusted depreciable basis of 

the component part. 

Example 8. The facts are the same as in 

Example 7 of this paragraph (b)(5)(vii) except 

that HH entered into the written binding 

contract to acquire the new component part 

on September 30, 2017, and HH commenced 

construction of the property on August 1, 

2017. Pursuant to paragraphs (b)(5)(iv)(A) 

and (C) of this section, neither the property 

constructed by HH nor the component part 

will qualify for the 100-percent additional 

first year depreciation deduction, because 

HH began construction of the property prior 

to September 28, 2017. 

Example 9. On September 1, 2017, II 

acquired and placed in service equipment. 

On October 15, 2017, II sells the equipment 

to JJ and leases the property back from JJ in 

a sale-leaseback transaction. Pursuant to 

paragraph (b)(5)(ii) of this section, II’s cost of 

the equipment does not qualify for the 100- 

percent additional first year depreciation 

deduction because II acquired the equipment 

prior to September 28, 2017. However, JJ 

acquired used equipment from an unrelated 

party after September 27, 2017, and, 

assuming all other requirements are met, JJ’s 

cost of the used equipment does qualify for 

the 100-percent additional first year 

depreciation deduction for JJ. 

Example 10. On July 1, 2017, KK began 

constructing property for its own use in its 

trade or business. KK placed this property in 

service on September 15, 2017. On October 

15, 2017, KK sells the property to LL and 

leases the property back from LL in a saleleaseback transaction. Pursuant to paragraph 

(b)(5)(iv) of this section, KK’s cost of the 

property does not qualify for the 100-percent 

additional first year depreciation deduction 

because construction began prior to 

September 28, 2017. However, LL acquired 

used property from an unrelated party after 

September 27, 2017, and, assuming all other 

requirements are met, LL’s cost of the used 

property does qualify for the 100-percent 

additional first year depreciation deduction 

for LL. 

(c) Property described in section 

168(k)(2)(B) or (C)—(1) In general. 

Property described in section 

168(k)(2)(B) or (C) will meet the 

acquisition requirements of section 

168(k)(2)(B)(i)(III) or (k)(2)(C)(i) if the 

property is acquired by the taxpayer 

before January 1, 2027, or acquired by 

the taxpayer pursuant to a written 

binding contract that is entered into 

before January 1, 2027. Property 

described in section 168(k)(2)(B) or (C) 

also must meet the acquisition 

requirement in section 13201(h)(1)(A) of 

the Act (for further guidance, see 

paragraph (b)(5) of this section). 

(2) Definition of binding contract. For 

purposes of this paragraph (c), the rules 

in paragraph (b)(5)(iii) of this section for 

a binding contract apply. 

(3) Self-constructed property—(i) In 

general. If a taxpayer manufactures, 

constructs, or produces property for use 

by the taxpayer in its trade or business 

or for its production of income, the 

acquisition rules in paragraph (c)(1) of 

this section are treated as met for the 

property if the taxpayer begins 

manufacturing, constructing, or 

producing the property before January 1, 

2027. Property that is manufactured, 

constructed, or produced for the 

taxpayer by another person under a 

written binding contract, as defined in 

paragraph (b)(5)(iii) of this section, that 

is entered into prior to the manufacture, 

construction, or production of the 

property for use by the taxpayer in its 

trade or business or for its production of 

income is considered to be 

manufactured, constructed, or produced 

by the taxpayer. If a taxpayer enters into 

a written binding contract, as defined in 

paragraph (b)(5)(iii) of this section, 

before January 1, 2027, with another 

person to manufacture, construct, or 

produce property described in section 

168(k)(2)(B) or (C) and the manufacture, 

construction, or production of this 

property begins after December 31, 

2026, the acquisition rule in paragraph 

(c)(1) of this section is met. 

(ii) When does manufacture, 

construction, or production begin—(A) 

In general. For purposes of this 

paragraph (c)(3), manufacture, 

construction, or production of property 

begins when physical work of a 

significant nature begins. Physical work 

does not include preliminary activities 

such as planning or designing, securing 

financing, exploring, or researching. The 

determination of when physical work of 

a significant nature begins depends on 

the facts and circumstances. For 

example, if a retail motor fuels outlet is 

to be constructed on-site, construction 

begins when physical work of a 

significant nature commences at the 


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site; that is, when work begins on the 

excavation for footings, pouring the 

pads for the outlet, or the driving of 

foundation pilings into the ground. 

Preliminary work, such as clearing a 

site, test drilling to determine soil 

condition, or excavation to change the 

contour of the land (as distinguished 

from excavation for footings) does not 

constitute the beginning of construction. 

However, if a retail motor fuels outlet is 

to be assembled on-site from modular 

units manufactured off-site and 

delivered to the site where the outlet 

will be used, manufacturing begins 

when physical work of a significant 

nature commences at the off-site 

location. 

(B) Safe harbor. For purposes of 

paragraph (c)(3)(ii)(A) of this section, a 

taxpayer may choose to determine when 

physical work of a significant nature 

begins in accordance with this 

paragraph (c)(3)(ii)(B). Physical work of 

a significant nature will be considered 

to begin at the time the taxpayer incurs 

(in the case of an accrual basis taxpayer) 

or pays (in the case of a cash basis 

taxpayer) more than 10 percent of the 

total cost of the property (excluding the 

cost of any land and preliminary 

activities such as planning or designing, 

securing financing, exploring, or 

researching). When property is 

manufactured, constructed, or produced 

for the taxpayer by another person, this 

safe harbor test must be satisfied by the 

taxpayer. For example, if a retail motor 

fuels outlet is to be constructed for an 

accrual basis taxpayer by another person 

for the total cost of $200,000 (excluding 

the cost of any land and preliminary 

activities such as planning or designing, 

securing financing, exploring, or 

researching), construction is deemed to 

begin for purposes of this paragraph 

(c)(3)(ii)(B) when the taxpayer has 

incurred more than 10 percent (more 

than $20,000) of the total cost of the 

property. A taxpayer chooses to apply 

this paragraph (c)(3)(ii)(B) by filing a 

federal income tax return for the placedin-service year of the property that 

determines when physical work of a 

significant nature begins consistent with 

this paragraph (c)(3)(ii)(B). 

(iii) Components of self-constructed 

property—(A) Acquired components. If 

a binding contract, as defined in 

paragraph (b)(5)(iii) of this section, to 

acquire a component does not satisfy 

the requirements of paragraph (c)(1) of 

this section, the component does not 

qualify for the additional first year 

depreciation deduction. A binding 

contract described in the preceding 

sentence to acquire one or more 

components of a larger self-constructed 

property will not preclude the larger 

self-constructed property from satisfying 

the acquisition rules in paragraph 

(c)(3)(i) of this section. Accordingly, the 

unadjusted depreciable basis of the 

larger self-constructed property that is 

eligible for the additional first year 

depreciation deduction, assuming all 

other requirements are met, must not 

include the unadjusted depreciable 

basis of any component that does not 

satisfy the requirements of paragraph 

(c)(1) of this section. If a binding 

contract to acquire the component is 

entered into before January 1, 2027, but 

the manufacture, construction, or 

production of the larger self-constructed 

property does not begin before January 

1, 2027, the component qualifies for the 

additional first year depreciation 

deduction, assuming all other 

requirements are met, but the larger selfconstructed property does not. 

(B) Self-constructed components. If 

the manufacture, construction, or 

production of a component by the 

taxpayer does not satisfy the 

requirements of paragraph (c)(3)(i) of 

this section, the component does not 

qualify for the additional first year 

depreciation deduction. However, if the 

manufacture, construction, or 

production of a component does not 

satisfy the requirements of paragraph 

(c)(3)(i) of this section, but the 

manufacture, construction, or 

production of the larger self-constructed 

property satisfies the requirements of 

paragraph (c)(3)(i) of this section, the 

larger self-constructed property qualifies 

for the additional first year depreciation 

deduction, assuming all other 

requirements are met, even though the 

component does not qualify for the 

additional first year depreciation 

deduction. Accordingly, the unadjusted 

depreciable basis of the larger selfconstructed property that is eligible for 

the additional first year depreciation 

deduction, assuming all other 

requirements are met, must not include 

the unadjusted depreciable basis of any 

component that does not qualify for the 

additional first year depreciation 

deduction. If the manufacture, 

construction, or production of a 

component begins before January 1, 

2027, but the manufacture, construction, 

or production of the larger selfconstructed property does not begin 

before January 1, 2027, the component 

qualifies for the additional first year 

depreciation deduction, assuming all 

other requirements are met, but the 

larger self-constructed property does 

not. 

(iv) Examples. The application of this 

paragraph (c) is illustrated by the 

following examples: 

Example 1. On June 1, 2017, MM decided 

to construct property described in section 

168(k)(2)(B) for its own use. However, one of 

the component parts of the property had to 

be manufactured by another person for MM. 

On August 15, 2017, MM entered into a 

written binding contract with NN to acquire 

this component part of the property for 

$100,000. The manufacture of the component 

part commenced on September 1, 2018, and 

MM received the completed component part 

on February 1, 2020. The cost of this 

component part is 9 percent of the total cost 

of the property to be constructed by MM. MM 

began constructing the property described in 

section 168(k)(2)(B) on January 15, 2020, and 

placed this property, including all 

component parts, in service on November 1, 

2021. Pursuant to paragraphs (b)(5)(iv)(C)(1) 

and (c)(1) of this section, the component part 

of $100,000 manufactured by NN for MM is 

not eligible for the 100-percent additional 

first year depreciation deduction because the 

written binding contract to acquire such 

component part was entered into before 

September 28, 2017. However, pursuant to 

paragraph (c)(3)(i) of this section, the cost of 

the property described in section 

168(k)(2)(B), excluding the cost of the 

component part of $100,000 manufactured by 

NN for MM, is eligible for the 100-percent 

additional first year depreciation deduction, 

assuming all other requirements are met, 

because construction of the property began 

after September 27, 2017, and before January 

1, 2027, and the property described in 

section 168(k)(2)(B) was placed in service by 

MM before January 1, 2028. 

Example 2. On June 1, 2026, OO decided 

to construct property described in section 

168(k)(2)(B) for its own use. However, one of 

the component parts of the property had to 

be manufactured by another person for OO. 

On August 15, 2026, OO entered into a 

written binding contract with PP to acquire 

this component part of the property for 

$100,000. The manufacture of the component 

part commenced on September 1, 2026, and 

OO received the completed component part 

on February 1, 2027. The cost of this 

component part is 9 percent of the total cost 

of the property to be constructed by OO. OO 

began constructing the property described in 

section 168(k)(2)(B) on January 15, 2027, and 

placed this property, including all 

component parts, in service on November 1, 

2027. Pursuant to paragraph (c)(3)(iii)(B) of 

this section, the self-constructed component 

part of $100,000 manufactured by PP for OO 

is eligible for the additional first year 

depreciation deduction, assuming all other 

requirements are met, because the 

manufacturing of the component part began 

before January 1, 2027, and the property 

described in section 168(k)(2)(B), the larger 

self-constructed property, was placed in 

service by OO before January 1, 2028. 

However, pursuant to paragraph (c)(3)(i) of 

this section, the cost of the property 

described in section 168(k)(2)(B), excluding 

the cost of the self-constructed component 

part of $100,000 manufactured by PP for OO, 

is not eligible for the additional first year 

depreciation deduction because construction 

of the property began after December 31, 

2026. 


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Example 3. On December 1, 2026, QQ 

entered into a written binding contract, as 

defined in paragraph (b)(5)(iii) of this section, 

with RR to manufacture an aircraft described 

in section 168(k)(2)(C) for use in QQ’s trade 

or business. RR begins to manufacture the 

aircraft on February 1, 2027. QQ places the 

aircraft in service on August 1, 2027. 

Pursuant to paragraph (c)(3)(i) of this section, 

the aircraft meets the requirements of 

paragraph (c)(1) of this section because the 

aircraft was acquired by QQ pursuant to a 

written binding contract entered into before 

January 1, 2027. Further, the aircraft was 

placed in service by QQ before January 1, 

2028. Thus, assuming all other requirements 

are met, QQ’s cost of the aircraft is eligible 

for the additional first year depreciation 

deduction. 

(d) Computation of depreciation 

deduction for qualified property—(1) 

Additional first year depreciation 

deduction—(i) Allowable taxable year. 

The additional first year depreciation 

deduction is allowable— 

(A) Except as provided in paragraph 

(d)(1)(i)(B) or (f) of this section, in the 

taxable year in which the qualified 

property is placed in service by the 

taxpayer for use in its trade or business 

or for the production of income; or 

(B) In the taxable year in which the 

specified plant is planted, or grafted to 

a plant that has already been planted, by 

the taxpayer in the ordinary course of 

the taxpayer’s farming business, as 

defined in section 263A(e)(4), if the 

taxpayer properly made the election to 

apply section 168(k)(5) (for further 

guidance, see paragraph (e) of this 

section). 

(ii) Computation. Except as provided 

in paragraph (f)(5) of this section, the 

allowable additional first year 

depreciation deduction for qualified 

property is determined by multiplying 

the unadjusted depreciable basis, as 

defined in § 1.168(b)-1(a)(3), of the 

qualified property by the applicable 

percentage. Except as provided in 

paragraph (f)(1) of this section, the 

additional first year depreciation 

deduction is not affected by a taxable 

year of less than 12 months. See 

paragraph (f)(1) of this section for 

qualified property placed in service or 

planted or grafted, as applicable, and 

disposed of during the same taxable 

year. See paragraph (f)(5) of this section 

for qualified property acquired in a likekind exchange or as a result of an 

involuntary conversion. 

(iii) Property described in section 

168(k)(2)(B). For purposes of paragraph 

(d)(1)(ii) of this section, the unadjusted 

depreciable basis, as defined in 

§ 1.168(b)-1(a)(3), of qualified property 

described in section 168(k)(2)(B) is 

limited to the property’s unadjusted 

depreciable basis attributable to the 

property’s manufacture, construction, or 

production before January 1, 2027. 

(iv) Alternative minimum tax—(A) In 

general. The additional first year 

depreciation deduction is allowable for 

alternative minimum tax purposes— 

(1) Except as provided in paragraph 

(d)(1)(iv)(A)(2) of this section, in the 

taxable year in which the qualified 

property is placed in service by the 

taxpayer; or 

(2) In the taxable year in which a 

specified plant is planted by the 

taxpayer, or grafted by the taxpayer to 

a plant that was previously planted, if 

the taxpayer properly made the election 

to apply section 168(k)(5) (for further 

guidance, see paragraph (e) of this 

section). 

(B) Special rules. In general, the 

additional first year depreciation 

deduction for alternative minimum tax 

purposes is based on the unadjusted 

depreciable basis of the property for 

alternative minimum tax purposes. 

However, see paragraph (f)(5)(iii)(E) of 

this section for qualified property 

acquired in a like-kind exchange or as 

a result of an involuntary conversion. 

(2) Otherwise allowable depreciation 

deduction—(i) In general. Before 

determining the amount otherwise 

allowable as a depreciation deduction 

for the qualified property for the placedin-service year and any subsequent 

taxable year, the taxpayer must 

determine the remaining adjusted 

depreciable basis of the qualified 

property. This remaining adjusted 

depreciable basis is equal to the 

unadjusted depreciable basis, as defined 

in § 1.168(b)-1(a)(3), of the qualified 

property reduced by the amount of the 

additional first year depreciation 

allowed or allowable, whichever is 

greater. The remaining adjusted 

depreciable basis of the qualified 

property is then depreciated using the 

applicable depreciation provisions 

under the Internal Revenue Code for the 

qualified property. The remaining 

adjusted depreciable basis of the 

qualified property that is MACRS 

property is also the basis to which the 

annual depreciation rates in the 

optional depreciation tables apply (for 

further guidance, see section 8 of Rev. 

Proc. 87–57 (1987–2 C.B. 687) and 

§ 601.601(d)(2)(ii)(b) of this chapter). 

The depreciation deduction allowable 

for the remaining adjusted depreciable 

basis of the qualified property is 

affected by a taxable year of less than 12 

months. 

(ii) Alternative minimum tax. For 

alternative minimum tax purposes, the 

depreciation deduction allowable for 

the remaining adjusted depreciable 

basis of the qualified property is based 

on the remaining adjusted depreciable 

basis for alternative minimum tax 

purposes. The remaining adjusted 

depreciable basis of the qualified 

property for alternative minimum tax 

purposes is depreciated using the same 

depreciation method, recovery period 

(or useful life in the case of computer 

software), and convention that apply to 

the qualified property for regular tax 

purposes. 

(3) Examples. This paragraph (d) is 

illustrated by the following examples: 

Example 1. On March 1, 2023, SS, a 

calendar-year taxpayer, purchased and 

placed in service qualified property that costs 

$1 million and is 5-year property under 

section 168(e). SS depreciates its 5-year 

property placed in service in 2023 using the 

optional depreciation table that corresponds 

with the general depreciation system, the 

200-percent declining balance method, a 5- 

year recovery period, and the half-year 

convention. For 2023, SS is allowed an 80- 

percent additional first year depreciation 

deduction of $800,000 (the unadjusted 

depreciable basis of $1 million multiplied by 

0.80). Next, SS must reduce the unadjusted 

depreciable basis of $1 million by the 

additional first year depreciation deduction 

of $800,000 to determine the remaining 

adjusted depreciable basis of $200,000. Then, 

SS’ depreciation deduction allowable in 2023 

for the remaining adjusted depreciable basis 

of $200,000 is $40,000 (the remaining 

adjusted depreciable basis of $200,000 

multiplied by the annual depreciation rate of 

0.20 for recovery year 1). 

Example 2. On June 1, 2023, TT, a 

calendar-year taxpayer, purchased and 

placed in service qualified property that costs 

$1,500,000. The property qualifies for the 

expensing election under section 179 and is 

5-year property under section 168(e). TT did 

not purchase any other section 179 property 

in 2023. TT makes the election under section 

179 for the property and depreciates its 5- 

year property placed in service in 2023 using 

the optional depreciation table that 

corresponds with the general depreciation 

system, the 200-percent declining balance 

method, a 5-year recovery period, and the 

half-year convention. Assume the maximum 

section 179 deduction for 2023 is $1,000,000. 

For 2023, TT is first allowed a $1,000,000 

deduction under section 179. Next, TT must 

reduce the cost of $1,500,000 by the section 

179 deduction of $1,000,000 to determine the 

unadjusted depreciable basis of $500,000. 

Then, for 2023, TT is allowed an 80-percent 

additional first year depreciation deduction 

of $400,000 (the unadjusted depreciable basis 

of $500,000 multiplied by 0.80). Next, TT 

must reduce the unadjusted depreciable basis 

of $500,000 by the additional first year 

depreciation deduction of $400,000 to 

determine the remaining adjusted 

depreciable basis of $100,000. Then, TT’s 

depreciation deduction allowable in 2023 for 

the remaining adjusted depreciable basis of 

$100,000 is $20,000 (the remaining adjusted 

depreciable basis of $100,000 multiplied by 

the annual depreciation rate of 0.20 for 

recovery year 1). 


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(e) Elections under section 168(k)—(1) 

Election not to deduct additional first 

year depreciation—(i) In general. A 

taxpayer may make an election not to 

deduct the additional first year 

depreciation for any class of property 

that is qualified property placed in 

service during the taxable year. If this 

election is made, the election applies to 

all qualified property that is in the same 

class of property and placed in service 

in the same taxable year, and no 

additional first year depreciation 

deduction is allowable for the property 

placed in service during the taxable year 

in the class of property, except as 

provided in § 1.743–1(j)(4)(i)(B)(1). 

(ii) Definition of class of property. For 

purposes of this paragraph (e)(1), the 

term class of property means: 

(A) Except for the property described 

in paragraphs (e)(1)(ii)(B) and (D), and 

(e)(2) of this section, each class of 

property described in section 168(e) (for 

example, 5-year property); 

(B) Water utility property as defined 

in section 168(e)(5) and depreciated 

under section 168; 

(C) Computer software as defined in, 

and depreciated under, section 167(f)(1) 

and the regulations under section 

167(f)(1); 

(D) Qualified improvement property 

as defined in § 1.168(b)–1(a)(5)(i)(C) and 

(a)(5)(ii), and depreciated under section 

168; 

(E) Each separate production, as 

defined in § 1.181–3(b), of a qualified 

film or television production; 

(F) Each separate production, as 

defined in section 181(e)(2), of a 

qualified live theatrical production; or 

(G) A partner’s basis adjustment in 

partnership assets under section 743(b) 

for each class of property described in 

paragraphs (e)(1)(ii)(A) through (F), and 

(e)(2) of this section (for further 

guidance, see § 1.743–1(j)(4)(i)(B)(1)). 

(iii) Time and manner for making 

election—(A) Time for making election. 

Any election specified in paragraph 

(e)(1)(i) of this section must be made by 

the due date, including extensions, of 

the Federal tax return for the taxable 

year in which the qualified property is 

placed in service by the taxpayer. 

(B) Manner of making election. Any 

election specified in paragraph (e)(1)(i) 

of this section must be made in the 

manner prescribed on Form 4562, 

‘‘Depreciation and Amortization,’’ and 

its instructions. The election is made 

separately by each person owning 

qualified property (for example, for each 

member of a consolidated group by the 

common parent of the group, by the 

partnership (including basis 

adjustments in the partnership assets 

under section 743(b)), or by the S 

corporation). If Form 4562 is revised or 

renumbered, any reference in this 

section to that form shall be treated as 

a reference to the revised or renumbered 

form. 

(iv) Failure to make election. If a 

taxpayer does not make the election 

specified in paragraph (e)(1)(i) of this 

section within the time and in the 

manner prescribed in paragraph 

(e)(1)(iii) of this section, the amount of 

depreciation allowable for that property 

under section 167(f)(1) or 168, as 

applicable, must be determined for the 

placed-in-service year and for all 

subsequent taxable years by taking into 

account the additional first year 

depreciation deduction. Thus, any 

election specified in paragraph (e)(1)(i) 

of this section shall not be made by the 

taxpayer in any other manner (for 

example, the election cannot be made 

through a request under section 446(e) 

to change the taxpayer’s method of 

accounting). 

(2) Election to apply section 168(k)(5) 

for specified plants—(i) In general. A 

taxpayer may make an election to apply 

section 168(k)(5) to one or more 

specified plants that are planted, or 

grafted to a plant that has already been 

planted, by the taxpayer in the ordinary 

course of the taxpayer’s farming 

business, as defined in section 

263A(e)(4). If this election is made for 

a specified plant, such plant is not 

treated as qualified property under 

section 168(k) and this section in its 

placed-in-service year. 

(ii) Time and manner for making 

election—(A) Time for making election. 

Any election specified in paragraph 

(e)(2)(i) of this section must be made by 

the due date, including extensions, of 

the Federal tax return for the taxable 

year in which the taxpayer planted or 

grafted the specified plant to which the 

election applies. 

(B) Manner of making election. Any 

election specified in paragraph (e)(2)(i) 

of this section must be made in the 

manner prescribed on Form 4562, 

‘‘Depreciation and Amortization,’’ and 

its instructions. The election is made 

separately by each person owning 

specified plants (for example, for each 

member of a consolidated group by the 

common parent of the group, by the 

partnership, or by the S corporation). If 

Form 4562 is revised or renumbered, 

any reference in this section to that form 

shall be treated as a reference to the 

revised or renumbered form. 

(iii) Failure to make election. If a 

taxpayer does not make the election 

specified in paragraph (e)(2)(i) of this 

section for a specified plant within the 

time and in the manner prescribed in 

paragraph (e)(2)(ii) of this section, the 

specified plant is treated as qualified 

property under section 168(k), assuming 

all requirements are met, in the taxable 

year in which such plant is placed in 

service by the taxpayer. Thus, any 

election specified in paragraph (e)(2)(i) 

of this section shall not be made by the 

taxpayer in any other manner (for 

example, the election cannot be made 

through a request under section 446(e) 

to change the taxpayer’s method of 

accounting). 

(3) Election for qualified property 

placed in service during the 2017 

taxable year—(i) In general. A taxpayer 

may make an election to deduct 50 

percent, instead of 100 percent, 

additional first year depreciation for all 

qualified property acquired after 

September 27, 2017, by the taxpayer and 

placed in service by the taxpayer during 

its taxable year that includes September 

28, 2017. If a taxpayer makes an election 

to apply section 168(k)(5) for its taxable 

year that includes September 28, 2017, 

the taxpayer also may make an election 

to deduct 50 percent, instead of 100 

percent, additional first year 

depreciation for all specified plants that 

are planted, or grafted to a plant that has 

already been planted, after September 

27, 2017, by the taxpayer in the ordinary 

course of the taxpayer’s farming 

business during such taxable year. 

(ii) Time and manner for making 

election—(A) Time for making election. 

Any election specified in paragraph 

(e)(3)(i) of this section must be made by 

the due date, including extensions, of 

the Federal tax return for the taxpayer’s 

taxable year that includes September 28, 

2017. 

(B) Manner of making election. Any 

election specified in paragraph (e)(3)(i) 

of this section must be made in the 

manner prescribed on the 2017 Form 

4562, ‘‘Depreciation and Amortization,’’ 

and its instructions. The election is 

made separately by each person owning 

qualified property (for example, for each 

member of a consolidated group by the 

common parent of the group, by the 

partnership, or by the S corporation). 

(iii) Failure to make election. If a 

taxpayer does not make the election 

specified in paragraph (e)(3)(i) of this 

section within the time and in the 

manner prescribed in paragraph 

(e)(3)(ii) of this section, the amount of 

depreciation allowable for qualified 

property under section 167(f)(1) or 168, 

as applicable, acquired and placed in 

service, or planted or grafted, as 

applicable, by the taxpayer after 

September 27, 2017, must be 

determined for the taxable year that 

includes September 28, 2017, and for all 

subsequent taxable years by taking into 

account the 100-percent additional first 


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year depreciation deduction, unless the 

taxpayer makes the election specified in 

paragraph (e)(1)(i) of this section within 

the time and in the manner prescribed 

in paragraph (e)(1)(iii) of this section for 

the class of property in which the 

qualified property is included. Thus, 

any election specified in paragraph 

(e)(3)(i) of this section shall not be made 

by the taxpayer in any other manner (for 

example, the election cannot be made 

through a request under section 446(e) 

to change the taxpayer’s method of 

accounting). 

(4) Alternative minimum tax. If a 

taxpayer makes an election specified in 

paragraph (e)(1) of this section for a 

class of property or in paragraph (e)(2) 

of this section for a specified plant, the 

depreciation adjustments under section 

56 and the regulations under section 56 

do not apply to the property or specified 

plant, as applicable, to which that 

election applies for purposes of 

computing the taxpayer’s alternative 

minimum taxable income. If a taxpayer 

makes an election specified in 

paragraph (e)(3) of this section for all 

qualified property, see paragraphs 

(d)(1)(iv) and (d)(2)(ii) of this section. 

(5) Revocation of election—(i) In 

general. Except as provided in 

paragraph (e)(5)(ii) of this section, an 

election specified in this paragraph (e), 

once made, may be revoked only by 

filing a request for a private letter ruling 

and obtaining the Commissioner of 

Internal Revenue’s written consent to 

revoke the election. The Commissioner 

may grant a request to revoke the 

election if the taxpayer acted reasonably 

and in good faith, and the revocation 

will not prejudice the interests of the 

Government. See generally § 301.9100– 

3 of this chapter. An election specified 

in this paragraph (e) may not be revoked 

through a request under section 446(e) 

to change the taxpayer’s method of 

accounting. 

(ii) Automatic 6-month extension. If a 

taxpayer made an election specified in 

this paragraph (e), an automatic 

extension of 6 months from the due date 

of the taxpayer’s Federal tax return, 

excluding extensions, for the placed-inservice year or the taxable year in which 

the specified plant is planted or grafted, 

as applicable, is granted to revoke that 

election, provided the taxpayer timely 

filed the taxpayer’s Federal tax return 

for the placed-in-service year or the 

taxable year in which the specified 

plant is planted or grafted, as 

applicable, and, within this 6-month 

extension period, the taxpayer, and all 

taxpayers whose tax liability would be 

affected by the election, file an amended 

Federal tax return for the placed-inservice year or the taxable year in which 

the specified plant is planted or grafted, 

as applicable, in a manner that is 

consistent with the revocation of the 

election. 

(f) Special rules—(1) Property placed 

in service and disposed of in the same 

taxable year—(i) In general. Except as 

provided in paragraphs (f)(1)(ii) and (iii) 

of this section, the additional first year 

depreciation deduction is not allowed 

for qualified property placed in service 

or planted or grafted, as applicable, and 

disposed of during the same taxable 

year. Also if qualified property is placed 

in service and disposed of during the 

same taxable year and then reacquired 

and again placed in service in a 

subsequent taxable year, the additional 

first year depreciation deduction is not 

allowable for the property in the 

subsequent taxable year. 

(ii) Technical termination of a 

partnership. In the case of a technical 

termination of a partnership under 

section 708(b)(1)(B) in a taxable year 

beginning before January 1, 2018, the 

additional first year depreciation 

deduction is allowable for any qualified 

property placed in service or planted or 

grafted, as applicable, by the terminated 

partnership during the taxable year of 

termination and contributed by the 

terminated partnership to the new 

partnership. The allowable additional 

first year depreciation deduction for the 

qualified property shall not be claimed 

by the terminated partnership but 

instead shall be claimed by the new 

partnership for the new partnership’s 

taxable year in which the qualified 

property was contributed by the 

terminated partnership to the new 

partnership. However, if qualified 

property is both placed in service or 

planted or grafted, as applicable, and 

contributed to a new partnership in a 

transaction described in section 

708(b)(1)(B) by the terminated 

partnership during the taxable year of 

termination, and if such property is 

disposed of by the new partnership in 

the same taxable year the new 

partnership received such property from 

the terminated partnership, then no 

additional first year depreciation 

deduction is allowable to either 

partnership. 

(iii) Section 168(i)(7) transactions. If 

any qualified property is transferred in 

a transaction described in section 

168(i)(7) in the same taxable year that 

the qualified property is placed in 

service or planted or grafted, as 

applicable, by the transferor, the 

additional first year depreciation 

deduction is allowable for the qualified 

property. The allowable additional first 

year depreciation deduction for the 

qualified property for the transferor’s 

taxable year in which the property is 

placed in service or planted or grafted, 

as applicable, is allocated between the 

transferor and the transferee on a 

monthly basis. This allocation shall be 

made in accordance with the rules in 

§ 1.168(d)–1(b)(7)(ii) for allocating the 

depreciation deduction between the 

transferor and the transferee. However, 

solely for purposes of this section, if the 

qualified property is transferred in a 

section 721(a) transaction to a 

partnership that has as a partner a 

person, other than the transferor, who 

previously had a depreciable interest in 

the qualified property, in the same 

taxable year that the qualified property 

is placed in service or planted or 

grafted, as applicable, by the transferor, 

the allowable additional first year 

depreciation deduction is allocated 

entirely to the transferor, and not to the 

partnership. Additionally, if qualified 

property is both placed in service or 

planted or grafted, as applicable, and 

transferred in a transaction described in 

section 168(i)(7) by the transferor during 

the same taxable year, and if such 

property is disposed of by the 

transferee, other than by a transaction 

described in section 168(i)(7), during 

the same taxable year the transferee 

received such property from the 

transferor, then no additional first year 

depreciation deduction is allowable to 

either party. 

(iv) Examples. The application of this 

paragraph (f)(1) is illustrated by the 

following examples: 

Example 1. UU and VV are equal partners 

in Partnership JL, a general partnership. 

Partnership JL is a calendar-year taxpayer. 

On October 1, 2017, Partnership JL 

purchased and placed in service qualified 

property at a cost of $30,000. On November 

1, 2017, UU sells its entire 50 percent interest 

to WW in a transfer that terminates the 

partnership under section 708(b)(1)(B). As a 

result, terminated Partnership JL is deemed 

to have contributed the qualified property to 

new Partnership JL. Pursuant to paragraph 

(f)(1)(ii) of this section, new Partnership JL, 

not terminated Partnership JL, is eligible to 

claim the 100-percent additional first year 

depreciation deduction allowable for the 

qualified property for the taxable year 2017, 

assuming all other requirements are met. 

Example 2. On January 5, 2018, XX 

purchased and placed in service qualified 

property for a total amount of $9,000. On 

August 20, 2018, XX transferred this 

qualified property to Partnership BC in a 

transaction described in section 721(a). No 

other partner of Partnership BC has ever had 

a depreciable interest in the qualified 

property. XX and Partnership BC are 

calendar-year taxpayers. Because the 

transaction between XX and Partnership BC 

is a transaction described in section 168(i)(7), 

pursuant to paragraph (f)(1)(iii) of this 

section, the 100-percent additional first year 


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depreciation deduction allowable for the 

qualified property is allocated between XX 

and Partnership BC in accordance with the 

rules in § 1.168(d)–1(b)(7)(ii) for allocating 

the depreciation deduction between the 

transferor and the transferee. Accordingly, 

the 100-percent additional first year 

depreciation deduction allowable of $9,000 

for the qualified property for 2018 is 

allocated between XX and Partnership BC 

based on the number of months that XX and 

Partnership BC held the qualified property in 

service during 2018. Thus, because the 

qualified property was held in service by XX 

for 7 of 12 months, which includes the 

month in which XX placed the qualified 

property in service but does not include the 

month in which the qualified property was 

transferred, XX is allocated $5,250 (7⁄12 × 

$9,000 additional first year depreciation 

deduction). Partnership BC is allocated 

$3,750, the remaining 5⁄12 of the $9,000 

additional first year depreciation deduction 

allowable for the qualified property. 

(2) Redetermination of basis. If the 

unadjusted depreciable basis, as defined 

in § 1.168(b)–1(a)(3), of qualified 

property is redetermined (for example, 

due to contingent purchase price or 

discharge of indebtedness) before 

January 1, 2027, or in the case of 

property described in section 

168(k)(2)(B) or (C), is redetermined 

before January 1, 2028, the additional 

first year depreciation deduction 

allowable for the qualified property is 

redetermined as follows: 

(i) Increase in basis. For the taxable 

year in which an increase in basis of 

qualified property occurs, the taxpayer 

shall claim an additional first year 

depreciation deduction for qualified 

property by multiplying the amount of 

the increase in basis for this property by 

the applicable percentage for the taxable 

year in which the underlying property 

was placed in service by the taxpayer. 

For purposes of this paragraph (f)(2)(i), 

the additional first year depreciation 

deduction applies to the increase in 

basis only if the underlying property is 

qualified property. To determine the 

amount otherwise allowable as a 

depreciation deduction for the increase 

in basis of qualified property, the 

amount of the increase in basis of the 

qualified property must be reduced by 

the additional first year depreciation 

deduction allowed or allowable, 

whichever is greater, for the increase in 

basis and the remaining increase in 

basis of— 

(A) Qualified property, except for 

computer software described in 

paragraph (b)(2)(i)(B) of this section, is 

depreciated over the recovery period of 

the qualified property remaining as of 

the beginning of the taxable year in 

which the increase in basis occurs, and 

using the same depreciation method and 

convention applicable to the qualified 

property that applies for the taxable year 

in which the increase in basis occurs; 

and 

(B) Computer software, as defined in 

paragraph (b)(2)(i)(B) of this section, 

that is qualified property is depreciated 

ratably over the remainder of the 36- 

month period, the useful life under 

section 167(f)(1), as of the beginning of 

the first day of the month in which the 

increase in basis occurs. 

(ii) Decrease in basis. For the taxable 

year in which a decrease in basis of 

qualified property occurs, the taxpayer 

shall reduce the total amount otherwise 

allowable as a depreciation deduction 

for all of the taxpayer’s depreciable 

property by the excess additional first 

year depreciation deduction previously 

claimed for the qualified property. If, for 

such taxable year, the excess additional 

first year depreciation deduction 

exceeds the total amount otherwise 

allowable as a depreciation deduction 

for all of the taxpayer’s depreciable 

property, the taxpayer shall take into 

account a negative depreciation 

deduction in computing taxable income. 

The excess additional first year 

depreciation deduction for qualified 

property is determined by multiplying 

the amount of the decrease in basis for 

this property by the applicable 

percentage for the taxable year in which 

the underlying property was placed in 

service by the taxpayer. For purposes of 

this paragraph (f)(2)(ii), the additional 

first year depreciation deduction applies 

to the decrease in basis only if the 

underlying property is qualified 

property. Also, if the taxpayer 

establishes by adequate records or other 

sufficient evidence that the taxpayer 

claimed less than the additional first 

year depreciation deduction allowable 

for the qualified property before the 

decrease in basis, or if the taxpayer 

claimed more than the additional first 

year depreciation deduction allowable 

for the qualified property before the 

decrease in basis, the excess additional 

first year depreciation deduction is 

determined by multiplying the amount 

of the decrease in basis by the 

additional first year depreciation 

deduction percentage actually claimed 

by the taxpayer for the qualified 

property before the decrease in basis. To 

determine the amount to reduce the 

total amount otherwise allowable as a 

depreciation deduction for all of the 

taxpayer’s depreciable property for the 

excess depreciation previously claimed, 

other than the additional first year 

depreciation deduction, resulting from 

the decrease in basis of the qualified 

property, the amount of the decrease in 

basis of the qualified property must be 

adjusted by the excess additional first 

year depreciation deduction that 

reduced the total amount otherwise 

allowable as a depreciation deduction, 

as determined under this paragraph 

(f)(2)(ii), and the remaining decrease in 

basis of— 

(A) Qualified property, except for 

computer software described in 

paragraph (b)(2)(i)(B) of this section, 

reduces the amount otherwise allowable 

as a depreciation deduction over the 

recovery period of the qualified 

property remaining as of the beginning 

of the taxable year in which the 

decrease in basis occurs, and using the 

same depreciation method and 

convention of the qualified property 

that applies in the taxable year in which 

the decrease in basis occurs. If, for any 

taxable year, the reduction to the 

amount otherwise allowable as a 

depreciation deduction, as determined 

under this paragraph (f)(2)(ii)(A), 

exceeds the total amount otherwise 

allowable as a depreciation deduction 

for all of the taxpayer’s depreciable 

property, the taxpayer shall take into 

account a negative depreciation 

deduction in computing taxable income; 

and 

(B) Computer software, as defined in 

paragraph (b)(2)(i)(B) of this section, 

that is qualified property reduces the 

amount otherwise allowable as a 

depreciation deduction over the 

remainder of the 36-month period, the 

useful life under section 167(f)(1), as of 

the beginning of the first day of the 

month in which the decrease in basis 

occurs. If, for any taxable year, the 

reduction to the amount otherwise 

allowable as a depreciation deduction, 

as determined under this paragraph 

(f)(2)(ii)(B), exceeds the total amount 

otherwise allowable as a depreciation 

deduction for all of the taxpayer’s 

depreciable property, the taxpayer shall 

take into account a negative 

depreciation deduction in computing 

taxable income. 

(iii) Definitions. Except as otherwise 

expressly provided by the Internal 

Revenue Code (for example, section 

1017(a)), the regulations under the 

Internal Revenue Code, or other 

guidance published in the Internal 

Revenue Bulletin for purposes of this 

paragraph (f)(2)— 

(A) An increase in basis occurs in the 

taxable year an amount is taken into 

account under section 461; and 

(B) A decrease in basis occurs in the 

taxable year an amount would be taken 

into account under section 451. 

(iv) Examples. The application of this 

paragraph (f)(2) is illustrated by the 

following examples: 

Example 1. (i) On May 15, 2023, YY, a 

cash-basis taxpayer, purchased and placed in 


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service qualified property that is 5-year 

property at a cost of $200,000. In addition to 

the $200,000, YY agrees to pay the seller 25 

percent of the gross profits from the 

operation of the property in 2023. On May 

15, 2024, YY paid to the seller an additional 

$10,000. YY depreciates the 5-year property 

placed in service in 2023 using the optional 

depreciation table that corresponds with the 

general depreciation system, the 200-percent 

declining balance method, a 5-year recovery 

period, and the half-year convention. 

(ii) For 2023, YY is allowed an 80-percent 

additional first year depreciation deduction 

of $160,000 (the unadjusted depreciable basis 

of $200,000 multiplied by 0.80). In addition, 

YY’s depreciation deduction for 2023 for the 

remaining adjusted depreciable basis of 

$40,000 (the unadjusted depreciable basis of 

$200,000 reduced by the additional first year 

depreciation deduction of $160,000) is 

$8,000 (the remaining adjusted depreciable 

basis of $40,000 multiplied by the annual 

depreciation rate of 0.20 for recovery year 1). 

(iii) For 2024, YY’s depreciation deduction 

for the remaining adjusted depreciable basis 

of $40,000 is $12,800 (the remaining adjusted 

depreciable basis of $40,000 multiplied by 

the annual depreciation rate of 0.32 for 

recovery year 2). In addition, pursuant to 

paragraph (f)(2)(i) of this section, YY is 

allowed an additional first year depreciation 

deduction for 2024 for the $10,000 increase 

in basis of the qualified property. 

Consequently, YY is allowed an additional 

first year depreciation deduction of $8,000 

(the increase in basis of $10,000 multiplied 

by 0.80, the applicable percentage for 2023). 

Also, YY is allowed a depreciation deduction 

for 2024 attributable to the remaining 

increase in basis of $2,000 (the increase in 

basis of $10,000 reduced by the additional 

first year depreciation deduction of $8,000). 

The depreciation deduction allowable for 

2024 attributable to the remaining increase in 

basis of $2,000 is $889 (the remaining 

increase in basis of $2,000 multiplied by 

0.4444, which is equal to 1/remaining 

recovery period of 4.5 years at January 1, 

2024, multiplied by 2). Accordingly, for 

2024, YY’s total depreciation deduction 

allowable for the qualified property is 

$21,689 ($12,800 plus $8,000 plus $889). 

Example 2. (i) On May 15, 2023, ZZ, a 

calendar-year taxpayer, purchased and 

placed in service qualified property that is 5- 

year property at a cost of $400,000. To 

purchase the property, ZZ borrowed 

$250,000 from Bank1. On May 15, 2024, 

Bank1 forgives $50,000 of the indebtedness. 

ZZ makes the election provided in section 

108(b)(5) to apply any portion of the 

reduction under section 1017 to the basis of 

the depreciable property of the taxpayer. ZZ 

depreciates the 5-year property placed in 

service in 2023 using the optional 

depreciation table that corresponds with the 

general depreciation system, the 200-percent 

declining balance method, a 5-year recovery 

period, and the half-year convention. 

(ii) For 2023, ZZ is allowed an 80-percent 

additional first year depreciation deduction 

of $320,000 (the unadjusted depreciable basis 

of $400,000 multiplied by 0.80). In addition, 

ZZ’s depreciation deduction allowable for 

2023 for the remaining adjusted depreciable 

basis of $80,000 (the unadjusted depreciable 

basis of $400,000 reduced by the additional 

first year depreciation deduction of $320,000) 

is $16,000 (the remaining adjusted 

depreciable basis of $80,000 multiplied by 

the annual depreciation rate of 0.20 for 

recovery year 1). 

(iii) For 2024, ZZ’s deduction for the 

remaining adjusted depreciable basis of 

$80,000 is $25,600 (the remaining adjusted 

depreciable basis of $80,000 multiplied by 

the annual depreciation rate 0.32 for recovery 

year 2). Although Bank1 forgave the 

indebtedness in 2024, the basis of the 

property is reduced on January 1, 2025, 

pursuant to sections 108(b)(5) and 1017(a) 

under which basis is reduced at the 

beginning of the taxable year following the 

taxable year in which the discharge of 

indebtedness occurs. 

(iv) For 2025, ZZ’s deduction for the 

remaining adjusted depreciable basis of 

$80,000 is $15,360 (the remaining adjusted 

depreciable basis of $80,000 multiplied by 

the annual depreciation rate 0.192 for 

recovery year 3). However, pursuant to 

paragraph (f)(2)(ii) of this section, ZZ must 

reduce the amount otherwise allowable as a 

depreciation deduction for 2025 by the 

excess depreciation previously claimed for 

the $50,000 decrease in basis of the qualified 

property. Consequently, ZZ must reduce the 

amount of depreciation otherwise allowable 

for 2025 by the excess additional first year 

depreciation of $40,000 (the decrease in basis 

of $50,000 multiplied by 0.80, the applicable 

percentage for 2023). Also, ZZ must reduce 

the amount of depreciation otherwise 

allowable for 2025 by the excess depreciation 

attributable to the remaining decrease in 

basis of $10,000 (the decrease in basis of 

$50,000 reduced by the excess additional 

first year depreciation of $40,000). The 

reduction in the amount of depreciation 

otherwise allowable for 2025 for the 

remaining decrease in basis of $10,000 is 

$5,714 (the remaining decrease in basis of 

$10,000 multiplied by 0.5714, which is equal 

to (1/remaining recovery period of 3.5 years 

at January 1, 2025) multiplied by 2). 

Accordingly, assuming the qualified property 

is the only depreciable property owned by 

ZZ, for 2025, ZZ has a negative depreciation 

deduction for the qualified property of 

$30,354 ($15,360 minus $40,000 minus 

$5,714). 

(3) Sections 1245 and 1250 

depreciation recapture. For purposes of 

section 1245 and the regulations under 

section 1245, the additional first year 

depreciation deduction is an amount 

allowed or allowable for depreciation. 

Further, for purposes of section 1250(b) 

and the regulations under section 

1250(b), the additional first year 

depreciation deduction is not a straight 

line method. 

(4) Coordination with section 169. The 

additional first year depreciation 

deduction is allowable in the placed-inservice year of a certified pollution 

control facility, as defined in § 1.169– 

2(a), that is qualified property even if 

the taxpayer makes the election to 

amortize the certified pollution control 

facility under section 169 and the 

regulations under section 169 in the 

certified pollution control facility’s 

placed-in-service year. 

(5) Like-kind exchanges and 

involuntary conversions—(i) Scope. The 

rules of this paragraph (f)(5) apply to 

replacement MACRS property or 

replacement computer software that is 

qualified property at the time of 

replacement provided the time of 

replacement is after September 27, 2017, 

and before January 1, 2027; or, in the 

case of replacement MACRS property or 

replacement computer software that is 

qualified property described in section 

168(k)(2)(B) or (C), the time of 

replacement is after September 27, 2017, 

and before January 1, 2028. 

(ii) Definitions. For purposes of this 

paragraph (f)(5), the following 

definitions apply: 

(A) Replacement MACRS property has 

the same meaning as that term is 

defined in § 1.168(i)–6(b)(1). 

(B) Relinquished MACRS property has 

the same meaning as that term is 

defined in § 1.168(i)–6(b)(2). 

(C) Replacement computer software is 

computer software, as defined in 

paragraph (b)(2)(i)(B) of this section, in 

the hands of the acquiring taxpayer that 

is acquired for other computer software 

in a like-kind exchange or in an 

involuntary conversion. 

(D) Relinquished computer software is 

computer software that is transferred by 

the taxpayer in a like-kind exchange or 

in an involuntary conversion. 

(E) Time of disposition has the same 

meaning as that term is defined in 

§ 1.168(i)–6(b)(3) for relinquished 

MACRS property. For relinquished 

computer software, time of disposition 

is when the disposition of the 

relinquished computer software takes 

place under the convention determined 

under § 1.167(a)–14(b). 

(F) Except as provided in paragraph 

(f)(5)(iv) of this section, the time of 

replacement has the same meaning as 

that term is defined in § 1.168(i)–6(b)(4) 

for replacement MACRS property. For 

replacement computer software, the 

time of replacement is, except as 

provided in paragraph (f)(5)(iv) of this 

section, the later of— 

(1) When the replacement computer 

software is placed in service under the 

convention determined under 

§ 1.167(a)–14(b); or 

(2) The time of disposition of the 

relinquished property. 

(G) Exchanged basis has the same 

meaning as that term is defined in 

§ 1.168(i)–6(b)(7) for MACRS property, 

as defined in § 1.168(b)–1(a)(2). For 

computer software, the exchanged basis 


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is determined after the amortization 

deductions for the year of disposition 

are determined under § 1.167(a)–14(b) 

and is the lesser of— 

(1) The basis in the replacement 

computer software, as determined under 

section 1031(d) and the regulations 

under section 1031(d), or section 

1033(b) and the regulations under 

section 1033(b); or 

(2) The adjusted depreciable basis of 

the relinquished computer software. 

(H) Excess basis has the same 

meaning as that term is defined in 

§ 1.168(i)–6(b)(8) for replacement 

MACRS property. For replacement 

computer software, the excess basis is 

any excess of the basis in the 

replacement computer software, as 

determined under section 1031(d) and 

the regulations under section 1031(d), or 

section 1033(b) and the regulations 

under section 1033(b), over the 

exchanged basis as determined under 

paragraph (f)(5)(ii)(G) of this section. 

(I) Remaining exchanged basis is the 

exchanged basis as determined under 

paragraph (f)(5)(ii)(G) of this section 

reduced by— 

(1) The percentage of such basis 

attributable to the taxpayer’s use of 

property for the taxable year other than 

in the taxpayer’s trade or business or for 

the production of income; and 

(2) Any adjustments to basis provided 

by other provisions of the Code and the 

regulations under the Code (including 

section 1016(a)(2) and (3)) for periods 

prior to the disposition of the 

relinquished property. 

(J) Remaining excess basis is the 

excess basis as determined under 

paragraph (f)(5)(ii)(H) of this section 

reduced by— 

(1) The percentage of such basis 

attributable to the taxpayer’s use of 

property for the taxable year other than 

in the taxpayer’s trade or business or for 

the production of income; 

(2) Any portion of the basis the 

taxpayer properly elects to treat as an 

expense under section 179 or 179C; and 

(3) Any adjustments to basis provided 

by other provisions of the Code and the 

regulations under the Code. 

(K) Year of disposition has the same 

meaning as that term is defined in 

§ 1.168(i)–6(b)(5). 

(L) Year of replacement has the same 

meaning as that term is defined in 

§ 1.168(i)–6(b)(6). 

(M) Like-kind exchange has the same 

meaning as that term is defined in 

§ 1.168(i)–6(b)(11). 

(N) Involuntary conversion has the 

same meaning as that term is defined in 

§ 1.168(i)–6(b)(12). 

(iii) Computation—(A) In general. If 

the replacement MACRS property or the 

replacement computer software, as 

applicable, meets the original use 

requirement in paragraph (b)(3)(ii) of 

this section and all other requirements 

of section 168(k) and this section, the 

remaining exchanged basis for the year 

of replacement and the remaining 

excess basis, if any, for the year of 

replacement for the replacement 

MACRS property or the replacement 

computer software, as applicable, are 

eligible for the additional first year 

depreciation deduction. If the 

replacement MACRS property or the 

replacement computer software, as 

applicable, meets the used property 

acquisition requirements in paragraph 

(b)(3)(iii) of this section and all other 

requirements of section 168(k) and this 

section, only the remaining excess basis 

for the year of replacement for the 

replacement MACRS property or the 

replacement computer software, as 

applicable, is eligible for the additional 

first year depreciation deduction. See 

paragraph (b)(3)(iii)(A)(3) of this section. 

The additional first year depreciation 

deduction applies to the remaining 

exchanged basis and any remaining 

excess basis, as applicable, of the 

replacement MACRS property or the 

replacement computer software, as 

applicable, if the time of replacement is 

after September 27, 2017, and before 

January 1, 2027; or, in the case of 

replacement MACRS property or 

replacement computer software, as 

applicable, described in section 

168(k)(2)(B) or (C), the time of 

replacement is after September 27, 2017, 

and before January 1, 2028. The 

additional first year depreciation 

deduction is computed separately for 

the remaining exchanged basis and any 

remaining excess basis, as applicable. 

(B) Year of disposition and year of 

replacement. The additional first year 

depreciation deduction is allowable for 

the replacement MACRS property or 

replacement computer software in the 

year of replacement. However, the 

additional first year depreciation 

deduction is not allowable for the 

relinquished MACRS property or the 

relinquished computer software, as 

applicable, if the relinquished MACRS 

property or the relinquished computer 

software, as applicable, is placed in 

service and disposed of in a like-kind 

exchange or in an involuntary 

conversion in the same taxable year. 

(C) Property described in section 

168(k)(2)(B). For purposes of paragraph 

(f)(5)(iii)(A) of this section, the total of 

the remaining exchanged basis and the 

remaining excess basis, if any, of the 

replacement MACRS property that is 

qualified property described in section 

168(k)(2)(B) and meets the original use 

requirement in paragraph (b)(3)(ii) of 

this section is limited to the total of the 

property’s remaining exchanged basis 

and remaining excess basis, if any, 

attributable to the property’s 

manufacture, construction, or 

production after September 27, 2017, 

and before January 1, 2027. For 

purposes of paragraph (f)(5)(iii)(A) of 

this section, the remaining excess basis, 

if any, of the replacement MACRS 

property that is qualified property 

described in section 168(k)(2)(B) and 

meets the used property acquisition 

requirements in paragraph (b)(3)(iii) of 

this section is limited to the property’s 

remaining excess basis, if any, 

attributable to the property’s 

manufacture, construction, or 

production after September 27, 2017, 

and before January 1, 2027. 

(D) Effect of § 1.168(i)–6(i)(1) election. 

If a taxpayer properly makes the 

election under § 1.168(i)–6(i)(1) not to 

apply § 1.168(i)–6 for any MACRS 

property, as defined in § 1.168(b)– 

1(a)(2), involved in a like-kind exchange 

or involuntary conversion and either of 

the following: 

(1) The replacement MACRS property 

meets the original use requirement in 

paragraph (b)(3)(ii) of this section and 

all other requirements of section 168(k) 

and this section, the total of the 

exchanged basis, as defined in 

§ 1.168(i)–6(b)(7), and the excess basis, 

as defined in § 1.168(i)–6(b)(8), if any, in 

the replacement MACRS property is 

eligible for the additional first year 

depreciation deduction; or 

(2) The replacement MACRS property 

meets the used property acquisition 

requirements in paragraph (b)(3)(iii) of 

this section and all other requirements 

of section 168(k) and this section, only 

the excess basis, as defined in 

§ 1.168(i)–6(b)(8), if any, in the 

replacement MACRS property is eligible 

for the additional first year depreciation 

deduction. 

(E) Alternative minimum tax. The 

additional first year depreciation 

deduction is allowed for alternative 

minimum tax purposes for the year of 

replacement of replacement MACRS 

property or replacement computer 

software, as applicable, that is qualified 

property. If the replacement MACRS 

property or the replacement computer 

software, as applicable, meets the 

original use requirement in paragraph 

(b)(3)(ii) of this section and all other 

requirements of section 168(k) and this 

section, the additional first year 

depreciation deduction for alternative 

minimum tax purposes is based on the 

remaining exchanged basis and the 

remaining excess basis, if any, of the 

replacement MACRS property or the 


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replacement computer software, as 

applicable, for alternative minimum tax 

purposes. If the replacement MACRS 

property or the replacement computer 

software, as applicable, meets the used 

property acquisition requirements in 

paragraph (b)(3)(iii) of this section and 

all other requirements of section 168(k) 

and this section, the additional first year 

depreciation deduction for alternative 

minimum tax purposes is based on the 

remaining excess basis, if any, of the 

replacement MACRS property or the 

replacement computer software, as 

applicable, for alternative minimum tax 

purposes. 

(iv) Replacement MACRS property or 

replacement computer software that is 

acquired and placed in service before 

disposition of relinquished MACRS 

property or relinquished computer 

software. If, in an involuntary 

conversion, a taxpayer acquires and 

places in service the replacement 

MACRS property or the replacement 

computer software, as applicable, before 

the time of disposition of the 

involuntarily converted MACRS 

property or the involuntarily converted 

computer software, as applicable; and 

the time of disposition of the 

involuntarily converted MACRS 

property or the involuntarily converted 

computer software, as applicable, is 

after December 31, 2026, or, in the case 

of property described in service 

168(k)(2)(B) or (C), after December 31, 

2027, then— 

(A) The time of replacement for 

purposes of this paragraph (f)(5) is when 

the replacement MACRS property or 

replacement computer software, as 

applicable, is placed in service by the 

taxpayer, provided the threat or 

imminence of requisition or 

condemnation of the involuntarily 

converted MACRS property or 

involuntarily converted computer 

software, as applicable, existed before 

January 1, 2027, or, in the case of 

property described in section 

168(k)(2)(B) or (C), existed before 

January 1, 2028; and 

(B) The taxpayer depreciates the 

replacement MACRS property or 

replacement computer software, as 

applicable, in accordance with 

paragraph (d) of this section. However, 

at the time of disposition of the 

involuntarily converted MACRS 

property, the taxpayer determines the 

exchanged basis, as defined in 

§ 1.168(i)–6(b)(7), and the excess basis, 

as defined in § 1.168(i)–6(b)(8), of the 

replacement MACRS property and 

begins to depreciate the depreciable 

exchanged basis, as defined in 

§ 1.168(i)–6(b)(9), of the replacement 

MACRS property in accordance with 

§ 1.168(i)–6(c). The depreciable excess 

basis, as defined in § 1.168(i)–6(b)(10), 

of the replacement MACRS property 

continues to be depreciated by the 

taxpayer in accordance with the first 

sentence of this paragraph (f)(5)(iv)(B). 

Further, in the year of disposition of the 

involuntarily converted MACRS 

property, the taxpayer must include in 

taxable income the excess of the 

depreciation deductions allowable, 

including the additional first year 

depreciation deduction allowable, on 

the unadjusted depreciable basis of the 

replacement MACRS property over the 

additional first year depreciation 

deduction that would have been 

allowable to the taxpayer on the 

remaining exchanged basis of the 

replacement MACRS property at the 

time of replacement, as defined in 

paragraph (f)(5)(v)(A) of this section, 

plus the depreciation deductions that 

would have been allowable, including 

the additional first year depreciation 

deduction allowable, to the taxpayer on 

the depreciable excess basis of the 

replacement MACRS property from the 

date the replacement MACRS property 

was placed in service by the taxpayer, 

taking into account the applicable 

convention, to the time of disposition of 

the involuntarily converted MACRS 

property. Similar rules apply to 

replacement computer software. 

(v) Examples. The application of this 

paragraph (f)(5) is illustrated by the 

following examples: 

Example 1. (i) In April 2016, CSK, a 

calendar-year corporation, acquired for 

$200,000 and placed in service Canopy V1, 

a gas station canopy. Canopy V1 is qualified 

property under section 168(k)(2), as in effect 

on the day before amendment by the Act, and 

is 5-year property under section 168(e). CSK 

depreciated Canopy V1 under the general 

depreciation system of section 168(a) by 

using the 200-percent declining balance 

method of depreciation, a 5-year recovery 

period, and the half-year convention. CSK 

elected to use the optional depreciation 

tables to compute the depreciation allowance 

for Canopy V1. In November 2017, Canopy 

V1 was destroyed in a fire and was no longer 

usable in CSK’s business. In December 2017, 

in an involuntary conversion, CSK acquired 

and placed in service Canopy W1 with all of 

the $160,000 of insurance proceeds CSK 

received due to the loss of Canopy V1. 

Canopy W1 is qualified property under 

section 168(k)(2) and this section, and is 5- 

year property under section 168(e). Canopy 

W1 also meets the original use requirement 

in paragraph (b)(3)(ii) of this section. CSK did 

not make the election under § 1.168(i)–6(i)(1). 

(ii) For 2016, CSK is allowed a 50-percent 

additional first year depreciation deduction 

of $100,000 for Canopy V1 (the unadjusted 

depreciable basis of $200,000 multiplied by 

0.50), and a regular MACRS depreciation 

deduction of $20,000 for Canopy V1 (the 

remaining adjusted depreciable basis of 

$100,000 multiplied by the annual 

depreciation rate of 0.20 for recovery year 1). 

(iii) For 2017, CSK is allowed a regular 

MACRS depreciation deduction of $16,000 

for Canopy V1 (the remaining adjusted 

depreciable basis of $100,000 multiplied by 

the annual depreciation rate of 0.32 for 

recovery year 2 × 1⁄2 year). 

(iv) Pursuant to paragraph (f)(5)(iii)(A) of 

this section, the additional first year 

depreciation deduction allowable for Canopy 

W1 for 2017 equals $64,000 (100 percent of 

Canopy W1’s remaining exchanged basis at 

the time of replacement of $64,000 (Canopy 

V1’s remaining adjusted depreciable basis of 

$100,000 minus 2016 regular MACRS 

depreciation deduction of $20,000 minus 

2017 regular MACRS depreciation deduction 

of $16,000)). 

Example 2. (i) The facts are the same as in 

Example 1 of this paragraph (f)(5)(v), except 

CSK elected not to deduct the additional first 

year depreciation for 5-year property placed 

in service in 2016. CSK deducted the 

additional first year depreciation for 5-year 

property placed in service in 2017. 

(ii) For 2016, CSK is allowed a regular 

MACRS depreciation deduction of $40,000 

for Canopy V1 (the unadjusted depreciable 

basis of $200,000 multiplied by the annual 

depreciation rate of 0.20 for recovery year 1). 

(iii) For 2017, CSK is allowed a regular 

MACRS depreciation deduction of $32,000 

for Canopy V1 (the unadjusted depreciable 

basis of $200,000 multiplied by the annual 

depreciation rate of 0.32 for recovery year 2 

× 1⁄2 year). 

(iv) Pursuant to paragraph (f)(5)(iii)(A) of 

this section, the additional first year 

depreciation deduction allowable for Canopy 

W1 for 2017 equals $128,000 (100 percent of 

Canopy W1’s remaining exchanged basis at 

the time of replacement of $128,000 (Canopy 

V1’s unadjusted depreciable basis of 

$200,000 minus 2016 regular MACRS 

depreciation deduction of $40,000 minus 

2017 regular MACRS depreciation deduction 

of $32,000)). 

Example 3. The facts are the same as in 

Example 1 of this paragraph (f)(5)(v), except 

Canopy W1 meets the used property 

acquisition requirements in paragraph 

(b)(3)(iii) of this section. Because the 

remaining excess basis of Canopy W1 is zero, 

CSK is not allowed any additional first year 

depreciation for Canopy W1 pursuant to 

paragraph (f)(5)(iii)(A) of this section. 

Example 4. (i) In December 2016, AB, a 

calendar-year corporation, acquired for 

$10,000 and placed in service Computer X2. 

Computer X2 is qualified property under 

section 168(k)(2), as in effect on the day 

before amendment by the Act, and is 5-year 

property under section 168(e). AB 

depreciated Computer X2 under the general 

depreciation system of section 168(a) by 

using the 200-percent declining balance 

method of depreciation, a 5-year recovery 

period, and the half-year convention. AB 

elected to use the optional depreciation 

tables to compute the depreciation allowance 

for Computer X2. In November 2017, AB 

acquired Computer Y2 by exchanging 

Computer X2 and $1,000 cash in a like-kind 

exchange. Computer Y2 is qualified property 

under section 168(k)(2) and this section, and 


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is 5-year property under section 168(e). 

Computer Y2 also meets the original use 

requirement in paragraph (b)(3)(ii) of this 

section. AB did not make the election under 

§ 1.168(i)–6(i)(1). 

(ii) For 2016, AB is allowed a 50-percent 

additional first year depreciation deduction 

of $5,000 for Computer X2 (unadjusted basis 

of $10,000 multiplied by 0.50), and a regular 

MACRS depreciation deduction of $1,000 for 

Computer X2 (the remaining adjusted 

depreciable basis of $5,000 multiplied by the 

annual depreciation rate of 0.20 for recovery 

year 1). 

(iii) For 2017, AB is allowed a regular 

MACRS depreciation deduction of $800 for 

Computer X2 (the remaining adjusted 

depreciable basis of $5,000 multiplied by the 

annual depreciation rate of 0.32 for recovery 

year 2 × 1⁄2 year). 

(iv) Pursuant to paragraph (f)(5)(iii)(A) of 

this section, the 100-percent additional first 

year depreciation deduction for Computer Y2 

for 2017 is allowable for the remaining 

exchanged basis at the time of replacement 

of $3,200 (Computer X2’s unadjusted 

depreciable basis of $10,000 minus 

additional first year depreciation deduction 

allowable of $5,000 minus the 2016 regular 

MACRS depreciation deduction of $1,000 

minus the 2017 regular MACRS depreciation 

deduction of $800) and for the remaining 

excess basis at the time of replacement of 

$1,000 (cash paid for Computer Y2). Thus, 

the 100-percent additional first year 

depreciation deduction allowable for 

Computer Y2 totals $4,200 for 2017. 

Example 5. (i) In July 2017, BC, a calendaryear corporation, acquired for $20,000 and 

placed in service Equipment X3. Equipment 

X3 is qualified property under section 

168(k)(2), as in effect on the day before 

amendment by the Act, and is 5-year 

property under section 168(e). BC 

depreciated Equipment X3 under the general 

depreciation system of section 168(a) by 

using the 200-percent declining balance 

method of depreciation, a 5-year recovery 

period, and the half-year convention. BC 

elected to use the optional depreciation 

tables to compute the depreciation allowance 

for Equipment X3. In December 2017, BC 

acquired Equipment Y3 by exchanging 

Equipment X3 and $5,000 cash in a like-kind 

exchange. Equipment Y3 is qualified 

property under section 168(k)(2) and this 

section, and is 5-year property under section 

168(e). Equipment Y3 also meets the used 

property acquisition requirements in 

paragraph (b)(3)(iii) of this section. BC did 

not make the election under § 1.168(i)–6(i)(1). 

(ii) Pursuant to § 1.168(k)–1(f)(5)(iii)(B), no 

additional first year depreciation deduction 

is allowable for Equipment X3 and, pursuant 

to § 1.168(d)–1(b)(3)(ii), no regular 

depreciation deduction is allowable for 

Equipment X3, for 2017. 

(iii) Pursuant to paragraph (f)(5)(iii)(A) of 

this section, no additional first year 

depreciation deduction is allowable for 

Equipment Y3’s remaining exchanged basis 

at the time of replacement of $20,000 

(Equipment X3’s unadjusted depreciable 

basis of $20,000). However, pursuant to 

paragraph (f)(5)(iii)(A) of this section, the 

100-percent additional first year depreciation 

deduction is allowable for Equipment Y3’s 

remaining excess basis at the time of 

replacement of $5,000 (cash paid for 

Equipment Y3). Thus, the 100-percent 

additional first year depreciation deduction 

allowable for Equipment Y3 is $5,000 for 

2017. 

Example 6. (i) The facts are the same as in 

Example 5 of this paragraph (f)(5)(v), except 

BC properly makes the election under 

§ 1.168(i)–6(i)(1) not to apply § 1.168(i)–6 to 

Equipment X3 and Equipment Y3. 

(ii) Pursuant to § 1.168(k)–1(f)(5)(iii)(B), no 

additional first year depreciation deduction 

is allowable for Equipment X3 and, pursuant 

to § 1.168(d)–1(b)(3)(ii), no regular 

depreciation deduction is allowable for 

Equipment X3, for 2017. 

(iii) Pursuant to § 1.168(i)–6(i)(1), BC is 

treated as placing Equipment Y3 in service in 

December 2017 with a basis of $25,000 (the 

total of the exchanged basis of $20,000 and 

the excess basis of $5,000). However, 

pursuant to paragraph (f)(5)(iii)(D)(2) of this 

section, the 100-percent additional first year 

depreciation deduction is allowable only for 

Equipment Y3’s excess basis at the time of 

replacement of $5,000 (cash paid for 

Equipment Y3). Thus, the 100-percent 

additional first year depreciation deduction 

allowable for Equipment Y3 is $5,000 for 

2017. 

(6) Change in use—(i) Change in use 

of depreciable property. The 

determination of whether the use of 

depreciable property changes is made in 

accordance with section 168(i)(5) and 

§ 1.168(i)–4. 

(ii) Conversion to personal use. If 

qualified property is converted from 

business or income-producing use to 

personal use in the same taxable year in 

which the property is placed in service 

by a taxpayer, the additional first year 

depreciation deduction is not allowable 

for the property. 

(iii) Conversion to business or incomeproducing use—(A) During the same 

taxable year. If, during the same taxable 

year, property is acquired by a taxpayer 

for personal use and is converted by the 

taxpayer from personal use to business 

or income-producing use, the additional 

first year depreciation deduction is 

allowable for the property in the taxable 

year the property is converted to 

business or income-producing use, 

assuming all of the requirements in 

paragraph (b) of this section are met. See 

paragraph (b)(3)(ii) of this section 

relating to the original use rules for a 

conversion of property to business or 

income-producing use. 

(B) Subsequent to the acquisition 

year. If property is acquired by a 

taxpayer for personal use and, during a 

subsequent taxable year, is converted by 

the taxpayer from personal use to 

business or income-producing use, the 

additional first year depreciation 

deduction is allowable for the property 

in the taxable year the property is 

converted to business or incomeproducing use, assuming all of the 

requirements in paragraph (b) of this 

section are met. For purposes of 

paragraphs (b)(4) and (5) of this section, 

the property must be acquired by the 

taxpayer for personal use after 

September 27, 2017, and converted by 

the taxpayer from personal use to 

business or income-producing use by 

January 1, 2027. See paragraph (b)(3)(ii) 

of this section relating to the original 

use rules for a conversion of property to 

business or income-producing use. 

(iv) Depreciable property changes use 

subsequent to the placed-in-service 

year—(A) If the use of qualified property 

changes in the hands of the same 

taxpayer subsequent to the taxable year 

the qualified property is placed in 

service and, as a result of the change in 

use, the property is no longer qualified 

property, the additional first year 

depreciation deduction allowable for 

the qualified property is not 

redetermined. 

(B) If depreciable property is not 

qualified property in the taxable year 

the property is placed in service by the 

taxpayer, the additional first year 

depreciation deduction is not allowable 

for the property even if a change in the 

use of the property subsequent to the 

taxable year the property is placed in 

service results in the property being 

qualified property in the taxable year of 

the change in use. 

(v) Examples. The application of this 

paragraph (f)(6) is illustrated by the 

following examples: 

Example 1. (i) On January 1, 2019, FFF, a 

calendar year corporation, purchased and 

placed in service several new computers at 

a total cost of $100,000. FFF used these 

computers within the United States for 3 

months in 2019 and then moved and used 

the computers outside the United States for 

the remainder of 2019. On January 1, 2020, 

FFF permanently returns the computers to 

the United States for use in its business. 

(ii) For 2019, the computers are considered 

as used predominantly outside the United 

States in 2019 pursuant to § 1.48–1(g)(1)(i). 

As a result, the computers are required to be 

depreciated under the alternative 

depreciation system of section 168(g). 

Pursuant to paragraph (b)(2)(ii)(B) of this 

section, the computers are not qualified 

property in 2019, the placed-in-service year. 

Thus, pursuant to paragraph (f)(6)(iv)(B) of 

this section, no additional first year 

depreciation deduction is allowed for these 

computers, regardless of the fact that the 

computers are permanently returned to the 

United States in 2020. 

Example 2. (i) On February 8, 2023, GGG, 

a calendar year corporation, purchased and 

placed in service new equipment at a cost of 

$1,000,000 for use in its California plant. The 

equipment is 5-year property under section 


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168(e) and is qualified property under 

section 168(k). GGG depreciates its 5-year 

property placed in service in 2023 using the 

optional depreciation table that corresponds 

with the general depreciation system, the 

200-percent declining balance method, a 5- 

year recovery period, and the half-year 

convention. On June 4, 2024, due to changes 

in GGG’s business circumstances, GGG 

permanently moves the equipment to its 

plant in Mexico. 

(ii) For 2023, GGG is allowed an 80-percent 

additional first year depreciation deduction 

of $800,000 (the adjusted depreciable basis of 

$1,000,000 multiplied by 0.80). In addition, 

GGG’s depreciation deduction allowable in 

2023 for the remaining adjusted depreciable 

basis of $200,000 (the unadjusted depreciable 

basis of $1,000,000 reduced by the additional 

first year depreciation deduction of $800,000) 

is $40,000 (the remaining adjusted 

depreciable basis of $200,000 multiplied by 

the annual depreciation rate of 0.20 for 

recovery year 1). 

(iii) For 2024, the equipment is considered 

as used predominantly outside the United 

States pursuant to § 1.48–1(g)(1)(i). As a 

result of this change in use, the adjusted 

depreciable basis of $160,000 for the 

equipment is required to be depreciated 

under the alternative depreciation system of 

section 168(g) beginning in 2024. However, 

the additional first year depreciation 

deduction of $800,000 allowed for the 

equipment in 2023 is not redetermined. 

(7) Earnings and profits. The 

additional first year depreciation 

deduction is not allowable for purposes 

of computing earnings and profits. 

(8) Limitation of amount of 

depreciation for certain passenger 

automobiles. For a passenger 

automobile as defined in section 

280F(d)(5), the limitation under section 

280F(a)(1)(A)(i) is increased by $8,000 

for qualified property acquired and 

placed in service by a taxpayer after 

September 27, 2017. 

(9) Coordination with section 47—(i) 

In general. If qualified rehabilitation 

expenditures, as defined in section 

47(c)(2) and § 1.48–12(c), incurred by a 

taxpayer with respect to a qualified 

rehabilitated building, as defined in 

section 47(c)(1) and § 1.48–12(b), are 

qualified property, the taxpayer may 

claim the rehabilitation credit provided 

by section 47(a), provided the 

requirements of section 47 are met— 

(A) With respect to the portion of the 

basis of the qualified rehabilitated 

building that is attributable to the 

qualified rehabilitation expenditures if 

the taxpayer makes the applicable 

election under paragraph (e)(1)(i) of this 

section not to deduct any additional 

first year depreciation for the class of 

property that includes the qualified 

rehabilitation expenditures; or 

(B) With respect to the portion of the 

remaining rehabilitated basis of the 

qualified rehabilitated building that is 

attributable to the qualified 

rehabilitation expenditures if the 

taxpayer claims the additional first year 

depreciation deduction on the 

unadjusted depreciable basis, as defined 

in § 1.168(b)–1(a)(3) but before the 

reduction in basis for the amount of the 

rehabilitation credit, of the qualified 

rehabilitation expenditures; and the 

taxpayer depreciates the remaining 

adjusted depreciable basis, as defined in 

paragraph (d)(2)(i) of this section, of 

such expenditures using straight line 

cost recovery in accordance with section 

47(c)(2)(B)(i) and § 1.48–12(c)(7)(i). For 

purposes of this paragraph (f)(9)(i)(B), 

the remaining rehabilitated basis is 

equal to the unadjusted depreciable 

basis, as defined in § 1.168(b)–1(a)(3) 

but before the reduction in basis for the 

amount of the rehabilitation credit, of 

the qualified rehabilitation expenditures 

that are qualified property reduced by 

the additional first year depreciation 

allowed or allowable, whichever is 

greater. 

(ii) Example. The application of this 

paragraph (f)(9) is illustrated by the 

following example: 

Example. (i) Between February 8, 2023, 

and June 4, 2023, JM, a calendar-year 

taxpayer, incurred qualified rehabilitation 

expenditures of $200,000 with respect to a 

qualified rehabilitated building that is 

nonresidential real property under section 

168(e). These qualified rehabilitation 

expenditures are qualified property and 

qualify for the 20-percent rehabilitation 

credit under section 47(a)(1). JM’s basis in the 

qualified rehabilitated building is zero before 

incurring the qualified rehabilitation 

expenditures and JM placed the qualified 

rehabilitated building in service in July 2023. 

JM depreciates its nonresidential real 

property placed in service in 2023 under the 

general depreciation system of section 168(a) 

by using the straight line method of 

depreciation, a 39-year recovery period, and 

the mid-month convention. JM elected to use 

the optional depreciation tables to compute 

the depreciation allowance for its depreciable 

property placed in service in 2023. Further, 

for 2023, JM did not make any election under 

paragraph (e) of this section. 

(ii) Because JM did not make any election 

under paragraph (e) of this section, JM is 

allowed an 80-percent additional first year 

depreciation deduction of $160,000 for the 

qualified rehabilitation expenditures for 2023 

(the unadjusted depreciable basis of $200,000 

(before reduction in basis for the 

rehabilitation credit) multiplied by 0.80). JM 

also is allowed to claim a rehabilitation 

credit of $8,000 for the remaining 

rehabilitated basis of $40,000 (the unadjusted 

depreciable basis (before reduction in basis 

for the rehabilitation credit) of $200,000 less 

the additional first year depreciation 

deduction of $160,000, multiplied by 0.20 to 

calculate the rehabilitation credit). For 2023, 

the ratable share of the rehabilitation credit 

of $8,000 is $1,600. Further, JM’s 

depreciation deduction for 2023 for the 

remaining adjusted depreciable basis of 

$32,000 (the unadjusted depreciable basis 

(before reduction in basis for the 

rehabilitation credit) of $200,000 less the 

additional first year depreciation deduction 

of $160,000 less the rehabilitation credit of 

$8,000) is $376.64 (the remaining adjusted 

depreciable basis of $32,000 multiplied by 

the depreciation rate of 0.01177 for recovery 

year 1, placed in service in month 7). 

(10) Coordination with section 

514(a)(3). The additional first year 

depreciation deduction is not allowable 

for purposes of section 514(a)(3). 

(g) Applicability dates—(1) In general. 

Except as provided in paragraph (g)(2) 

of this section, the rules of this section 

apply to— 

(i) Qualified property under section 

168(k)(2) that is placed in service by the 

taxpayer during or after the taxpayer’s 

taxable year that includes the date of 

publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register; and 

(ii) A specified plant for which the 

taxpayer properly made an election to 

apply section 168(k)(5) and that is 

planted, or grafted to a plant that was 

previously planted, by the taxpayer 

during or after the taxpayer’s taxable 

year that includes the date of 

publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register. 

(2) Early application. A taxpayer may 

rely on the provisions of this section in 

these proposed regulations for— 

(i) Qualified property under section 

168(k)(2) acquired and placed in service 

after September 27, 2017, by the 

taxpayer during taxable years ending on 

or after September 28, 2017, and ending 

before the taxpayer’s taxable year that 

includes the date of publication of a 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register; and 

(ii) A specified plant for which the 

taxpayer properly made an election to 

apply section 168(k)(5) and that is 

planted, or grafted to a plant that was 

previously planted, after September 27, 

2017, by the taxpayer during taxable 

years ending on or after September 28, 

2017, and ending before the taxpayer’s 

taxable year that includes the date of 

publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register. 

■ Par. 10. Section 1.169–3 is amended 

by adding a sentence at the end of 

paragraph (a) and adding two sentences 

at the end of paragraph (g) to read as 

follows: 

§ 1.169–3 Amortizable basis. 

(a) * * * Further, before computing 

the amortization deduction allowable 


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under section 169, the adjusted basis for 

purposes of determining gain for a 

facility that is acquired and placed in 

service after September 27, 2017, and 

that is qualified property under section 

168(k), as amended by the Tax Cuts and 

Jobs Act, Public Law 115–97 (131 Stat. 

2054 (December 22, 2017)) (the ‘‘Act’’), 

or § 1.168(k)–2, must be reduced by the 

amount of the additional first year 

depreciation deduction allowed or 

allowable, whichever is greater, under 

section 168(k), as amended by the Act. 

* * * * * 

(g) * * * The last sentence of 

paragraph (a) of this section applies to 

a certified pollution control facility that 

is qualified property under section 

168(k)(2) and placed in service by a 

taxpayer during or after the taxpayer’s 

taxable year that includes the date of 

publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register. However, a 

taxpayer may rely on the last sentence 

in paragraph (a) of this section in these 

proposed regulations for a certified 

pollution control facility that is 

qualified property under section 

168(k)(2) and acquired and placed in 

service after September 27, 2017, by the 

taxpayer during taxable years ending on 

or after September 28, 2017, and ending 

before the taxpayer’s taxable year that 

includes the date of publication of a 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register. 

■ Par. 11. Section 1.179–4 is amended 

by revising paragraph (c)(2) to read as 

follows: 

§ 1.179–4 Definitions. 

* * * * * 

(c) * * * 

(2) Property deemed to have been 

acquired by a new target corporation as 

a result of a section 338 election 

(relating to certain stock purchases 

treated as asset acquisitions) or a section 

336(e) election (relating to certain stock 

dispositions treated as asset transfers) 

will be considered acquired by 

purchase. 

* * * * * 

■ Par. 12. Section 1.179–6 is amended 

by revising the first sentence in 

paragraph (a) and adding paragraph (e) 

to read as follows: 

§ 1.179–6 Effective/applicability dates. 

(a) * * * Except as provided in 

paragraphs (b), (c), (d), and (e) of this 

section, the provisions of §§ 1.179–1 

through 1.179–5 apply for property 

placed in service by the taxpayer in 

taxable years ending after January 25, 

1993. * * * 

* * * * * 

(e) Application of § 1.179–4(c)(2)—(1) 

In general. Except as provided in 

paragraph (e)(2) of this section, the 

provisions of § 1.179–4(c)(2) relating to 

section 336(e) are applicable on or after 

the date of publication of a Treasury 

decision adopting these rules as final 

regulations in the Federal Register. 

(2) Early application. A taxpayer may 

rely on the provisions of § 1.179–4(c)(2) 

relating to section 336(e) in these 

proposed regulations for the taxpayer’s 

taxable years ending on or after 

September 28, 2017, and ending before 

the date of publication of a Treasury 

decision adopting these rules as final 

regulations in the Federal Register. 

■ Par. 13. Section 1.312–15 is amended 

by adding a sentence at the end of 

paragraph (a)(1) and adding paragraph 

(e) to read as follows: 

§ 1.312–15 Effect of depreciation on 

earnings and profits. 

(a) * * * 

(1) * * * Further, see § 1.168(k)– 

2(f)(7) with respect to the treatment of 

the additional first year depreciation 

deduction allowable under section 

168(k), as amended by the Tax Cuts and 

Jobs Act, Public Law 115–97 (131 Stat. 

2054 (December 22, 2017)), for purposes 

of computing the earnings and profits of 

a corporation. 

* * * * * 

(e) Applicability date of qualified 

property. The last sentence of paragraph 

(a) of this section applies to the 

taxpayer’s taxable years ending on or 

after the date of publication of a 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register. However, a taxpayer may rely 

on the last sentence in paragraph (a) of 

this section in these proposed 

regulations for the taxpayer’s taxable 

years ending on or after September 28, 

2017, and ending before the taxpayer’s 

taxable year that includes the date of 

publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register. 

■ Par. 14. Section 1.704–1 is amended 

by adding two sentences at the end of 

paragraph (b)(1)(ii)(a) and adding a 

sentence at the end of paragraph 

(b)(2)(iv)(g)(3) to read as follows: 

§ 1.704–1 Partner’s distributive share. 

* * * * * 

(b) * * * 

(1) * * * 

(ii) * * * 

(a) * * * The last sentence of 

paragraph (b)(2)(iv)(g)(3) of this section 

is applicable for partnership taxable 

years ending on or after the date of 

publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register. However, a 

partnership may rely on the last 

sentence in paragraph (b)(2)(iv)(g)(3) of 

this section in these proposed 

regulations for the partnership’s taxable 

years ending on or after September 28, 

2017, and ending before the 

partnership’s taxable year that includes 

the date of publication of a Treasury 

decision adopting these rules as final 

regulations in the Federal Register. 

* * * * * 

(2) * * * 

(iv) * * * 

(g) * * * 

(3) * * * For purposes of the 

preceding sentence, additional first year 

depreciation deduction under section 

168(k) is not a reasonable method. 

* * * * * 

■ Par. 15. Section 1.704–3 is amended 

by: 

■ 1. Adding a sentence at the end of 

paragraph (d)(2); 

■ 2. Revising the first sentence in 

paragraph (f); and 

■ 3. Adding two sentences at the end of 

paragraph (f). 

The additions and revision read as 

follows: 

§ 1.704–3 Contributed property. 

* * * * * 

(d) * * * 

(2) * * * However, the additional 

first year depreciation deduction under 

section 168(k) is not a permissible 

method for purposes of the preceding 

sentence and, if a partnership has 

acquired property in a taxable year for 

which the additional first year 

depreciation deduction under section 

168(k) has been used of the same type 

as the contributed property, the portion 

of the contributed property’s book basis 

that exceeds its adjusted tax basis must 

be recovered under a reasonable 

method. See § 1.168(k)–2(b)(3)(iv)(B). 

* * * * * 

(f) * * * With the exception of 

paragraphs (a)(1), (a)(8)(ii) and (iii), and 

(a)(10) and (11) of this section, and of 

the last sentence in paragraph (d)(2) of 

this section, this section applies to 

properties contributed to a partnership 

and to restatements pursuant to § 1.704– 

1(b)(2)(iv)(f) on or after December 21, 

1993. * * * The last sentence of 

paragraph (d)(2) of this section applies 

to property contributed to a partnership 

on or after the date of publication of a 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register. However, a taxpayer may rely 

on the last sentence in paragraph (d)(2) 

of this section in these proposed 

regulations for property contributed to a 

partnership on or after September 28, 


amozie on DSK3GDR082PROD with PROPOSALS2
39322 Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules 

2017, and ending before the date of 

publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register. 

* * * * * 

■ Par. 16. Section 1.743–1 is amended 

by: 

■ 1. Adding three sentences to the end 

of paragraph (j)(4)(i)(B)(1) and adding 

two sentences at the end of paragraph (l) 

to read as follows: 

§ 1.743–1 Optional adjustment to basis of 

partnership property. 

* * * * * 

(j) * * * 

(4) * * * 

(i) * * * 

(B) * * * 

(1) * * * Notwithstanding the above, 

the partnership is allowed to deduct the 

additional first year depreciation under 

section 168(k) and § 1.168(k)–2 for an 

increase in the basis of qualified 

property, as defined in section 168(k) 

and § 1.168(k)–2, under section 743(b) 

in a class of property, as defined in 

§ 1.168(k)–2(e)(1)(ii)(A) through (F), 

even if the partnership made the 

election under section 168(k)(7) and 

§ 1.168(k)–2(e)(1) not to deduct the 

additional first year depreciation for all 

other qualified property of the 

partnership in the same class of 

property, as defined in § 1.168(k)– 

2(e)(1)(ii)(A) through (F), and placed in 

service in the same taxable year, 

provided the section 743(b) basis 

adjustment meets all requirements of 

section 168(k) and § 1.168(k)–2. Further, 

the partnership may make an election 

under section 168(k)(7) and § 1.168(k)– 

2(e)(1) not to deduct the additional first 

year depreciation for an increase in the 

basis of qualified property, as defined in 

section 168(k) and § 1.168(k)–2, under 

section 743(b) in a class of property, as 

defined in § 1.168(k)–2(e)(1)(ii)(A) 

through (F), and placed in service in the 

same taxable year, even if the 

partnership does not make that election 

for all other qualified property of the 

partnership in the same class of 

property, as defined in § 1.168(k)– 

2(e)(1)(ii)(A) through (F), and placed in 

service in the same taxable year. In this 

case, the section 743(b) basis adjustment 

must be recovered under a reasonable 

method. 

* * * * * 

(l) * * * The last three sentences of 

paragraph (j)(4)(i)(B)(1) of this section 

apply to transfers of partnership 

interests that occur on or after the date 

of publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register. However, a 

partnership may rely on the last three 

sentences in paragraph (j)(4)(i)(B)(1) of 

this section in these proposed 

regulations for transfers of partnership 

interests that occur on or after 

September 28, 2017, and ending before 

the date of publication of a Treasury 

decision adopting these rules as final 

regulations in the Federal Register. 

Kirsten Wielobob, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. 2018–16716 Filed 8–3–18; 4:15 pm] 

BILLING CODE 4830–01–P 


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