[Federal Register Volume 83, Number 153 (Wednesday, August 8, 2018)]
[Proposed Rules]
[Pages 39292-39322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16716]



[[Page 39291]]

Vol. 83

Wednesday,

No. 153

August 8, 2018

Part III





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





Additional First Year Depreciation Deduction; Proposed Rule

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

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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.

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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

[[Page 39293]]

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 Sec.  1.168(k)-1 by 
providing a new section at Sec.  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 Sec.  
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 
Sec.  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 sale-leaseback transactions, the 
proposed regulations also do not retain the original use rules in Sec.  
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 Sec.  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 Sec.  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 
Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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).

[[Page 39296]]

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

[[Page 39297]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 39298]]

manufacturing, constructing, or producing the property after September 
27, 2017. The proposed regulations provide rules similar to those in 
Sec.  1.168(k)-1(b)(4)(iii)(B) for defining when manufacturing, 
construction, or production begins, including the safe harbor, and in 
Sec.  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 
self-constructed 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 self-constructed 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 Sec.  1.168(k)-1(b)(4)(iii)(B) for defining 
when manufacturing, construction, or production begins, including the 
same safe harbor, and in Sec.  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 
Sec.  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 Sec.  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 Sec.  
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 Sec.  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 
Sec.  1.168(k)-1(f) for certain situations. However, the

[[Page 39299]]

special rules in Sec.  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 Sec.  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 Sec.  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 Sec.  1.168(k)-
1(f)(1)(iii) and its cross-reference to Sec.  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 Sec.  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, 
Sec.  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 cross-
reference 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 Sec.  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 Sec.  1.168(k)-1(f)(5) for like-kind 
exchanges and involuntary conversions, but update the definitions to be 
consistent with the definitions in Sec.  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

[[Page 39300]]

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

0
 Paragraph 1. The authority citation for part 1 is amended by adding an 
entry for Sec.  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.
* * * * *
0
 Par. 2. Section 1.48-12 is amended by:
0
 1. In the last sentence in paragraph (a)(2)(i), removing ``The last 
sentence'' and adding ``The next to last sentence'' in its place;
0
 2. Adding two sentences at the end of paragraph (a)(2)(i); and
0
 3. Adding a sentence to the end of paragraph (c)(8)(i).
    The additions read as follows:


Sec.  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 Sec.  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)).
* * * * *
0
Par. 3. Section 1.167(a)-14 is amended by:
0
1. In the third sentence in paragraph (b)(1), removing ``under section 
168(k)(2) or Sec.  1.168(k)-1,'' and adding ``under section 168(k)(2) 
and Sec.  1.168(k)-1 or 1.168(k)-2, as applicable,'' in its place;
0
2. In the last sentence in paragraph (e)(3), removing ``and before 
2010''; and
0
3. Adding two sentences at the end of paragraph (e)(3).
    The addition reads as follows:


Sec.  1.167(a)-14  Treatment of certain intangible property excluded 
from section 197.

* * * * *
    (e) * * *
    (3) * * * The language ``or Sec.  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 Sec.  
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.
0
Par. 4. Section 1.168(b)-1 is amended by adding paragraph (a)(5) and 
revising paragraph (b) to read as follows:


Sec.  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 Sec.  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 Sec.  1.48-12(c)(10), of the 
building;
    (B) Any elevator or escalator, as defined in Sec.  1.48-1(m)(2); or
    (C) The internal structural framework, as defined in Sec.  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.
0
Par. 5. Section 1.168(d)-1 is amended by:
0
1. Adding a sentence at the end of paragraph (b)(3)(ii);
0
2. Adding a sentence at the end of paragraph (b)(7)(ii); and
0
3. Adding two sentences at the end of paragraph (d)(2).
    The additions read as follows:

[[Page 39301]]

Sec.  1.168(d)-1  Applicable conventions--half-year and mid-quarter 
conventions.

* * * * *
    (b) * * *
    (3) * * *
    (ii) * * * Further, see Sec.  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 Sec.  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.
* * * * *
0
Par. 6. Section 1.168(i)-4 is amended by:
0
1. In the penultimate sentence in paragraph (b)(1), removing 
``Sec. Sec.  1.168(k)-1T(f)(6)(iii) and 1.1400L(b)-1T(f)(6)'' and 
adding ``Sec.  1.168(k)-1(f)(6)(iii) or 1.168(k)-2(f)(6)(iii), as 
applicable, and Sec.  1.1400L(b)-1(f)(6)'' in its place;
0
2. In the fifth sentence in paragraph (c), removing ``Sec. Sec.  
1.168(k)-1T(f)(6)(ii) and 1.1400L(b)-1T(f)(6)'' and adding ``Sec.  
1.168(k)-1(f)(6)(ii) or 1.168(k)-2(f)(6)(ii), as applicable, and Sec.  
1.1400L(b)-1(f)(6)'' in its place;
0
3. In the second sentence in paragraph (d)(3)(i)(C), removing 
``Sec. Sec.  1.168(k)-1T(f)(6)(iv) and 1.400L(b)-1T(f)(6)'' and adding 
``Sec.  1.168(k)-1(f)(6)(iv) or 1.168(k)-2(f)(6)(iv), as applicable, 
and Sec.  1.400L(b)-1(f)(6)'' in its place;
0
4. In the last sentence in paragraph (d)(4)(i), removing ``Sec. Sec.  
1.168(k)-1T(f)(6)(iv) and 1.1400L(b)-1T(f)(6)'' and adding ``Sec.  
1.168(k)-1(f)(6)(iv) or 1.168(k)-2(f)(6)(iv), as applicable, and Sec.  
1.400L(b)-1(f)(6)'' in its place;
0
5. Revising the first sentence in paragraph (g)(1); and
0
6. Redesignating paragraph (g)(2) as paragraph (g)(3) and adding new 
paragraph (g)(2).
    The addition and revision read as follows:


Sec.  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 Sec.  1.168(k)-
2(f)(6)(iii), as applicable'' in paragraph (b)(1) of this section, the 
language ``or Sec.  1.168(k)-2(f)(6)(ii), as applicable'' in paragraph 
(c) of this section, and the language ``or Sec.  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 
Sec.  1.168(k)-2(f)(6)(iii), as applicable'' in paragraph (b)(1) of 
this section, the language ``or Sec.  1.168(k)-2(f)(6)(ii), as 
applicable'' in paragraph (c) of this section, and the language ``or 
Sec.  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.
* * * * *
0
Par. 7. Section 1.168(i)-6 is amended by:
0
1. In paragraph (d)(3)(ii)(B), removing ``1.168(k)-1(f)(5) or Sec.  
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;
0
2. In paragraph (d)(3)(ii)(E), removing ``1.168(k)-1(f)(5) or Sec.  
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;
0
3. Adding a sentence at the end of paragraph (d)(4);
0
4. Adding a sentence at the end of paragraph (h); and
0
5. Adding paragraph (k)(4).
    The additions read as follows:


Sec.  1.168(i)-6  Like-kind exchanges and involuntary conversions.

* * * * *
    (d) * * *
    (4) * * * Further, see Sec.  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 Sec.  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 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 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.
0
Par. 8. Section 1.168(k)-0 is amended by revising the introductory text 
and adding an entry for Sec.  1.168(k)-2 in numerical order to the 
table of contents to read as follows:

[[Page 39302]]

Sec.  1.168(k)-0  Table of contents.

    This section lists the major paragraphs contained in Sec. Sec.  
1.168(k)-1 and 1.168(k)-2.
* * * * *


Sec.  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 income-producing 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 Sec.  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.
0
Par. 9. Section 1.168(k)-2 is added to read as follows:


Sec.  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

[[Page 39303]]

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 Sec.  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 Sec.  1.168(k)-2(b)(2) (description of 
qualified property);
    (ii) The requirements in Sec.  1.168(k)-2(b)(3) (original use or 
used property acquisition requirements);
    (iii) The requirements in Sec.  1.168(k)-2(b)(4) (placed-in-service 
date); and
    (iv) The requirements in Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  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 income-producing 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 income-producing 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

[[Page 39304]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 39305]]

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 Sec.  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 Sec.  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 Sec.  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

[[Page 39306]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  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 Sec.  
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 Sec.  
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 Sec.  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

[[Page 39307]]

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 
Sec.  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 
Sec.  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 
Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 39308]]

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 Sec.  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 self-constructed 
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.

[[Page 39309]]

    (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 placed-in-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 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 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 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 self-constructed property and any self-constructed 
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 Sec.  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

[[Page 39310]]

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 sale-
leaseback 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

[[Page 39311]]

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 placed-in-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 
self-constructed 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 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 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 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 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.

[[Page 39312]]

    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 Sec.  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 like-kind 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 Sec.  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 placed-in-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 Sec.  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 Sec.  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).


[[Page 39313]]


    (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 Sec.  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 Sec.  1.168(b)-
1(a)(5)(i)(C) and (a)(5)(ii), and depreciated under section 168;
    (E) Each separate production, as defined in Sec.  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 Sec.  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

[[Page 39314]]

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 Sec.  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-in-service 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-in-service 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 
Sec.  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

[[Page 39315]]

depreciation deduction allowable for the qualified property is 
allocated between XX and Partnership BC in accordance with the rules 
in Sec.  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\ x $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 Sec.  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

[[Page 39316]]

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-in-service year of a 
certified pollution control facility, as defined in Sec.  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 Sec.  1.168(i)-6(b)(1).
    (B) Relinquished MACRS property has the same meaning as that term 
is defined in Sec.  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 Sec.  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 Sec.  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 
Sec.  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 Sec.  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 
Sec.  1.168(i)-6(b)(7) for MACRS property, as defined in Sec.  
1.168(b)-1(a)(2). For computer software, the exchanged basis

[[Page 39317]]

is determined after the amortization deductions for the year of 
disposition are determined under Sec.  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 
Sec.  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 Sec.  1.168(i)-6(b)(5).
    (L) Year of replacement has the same meaning as that term is 
defined in Sec.  1.168(i)-6(b)(6).
    (M) Like-kind exchange has the same meaning as that term is defined 
in Sec.  1.168(i)-6(b)(11).
    (N) Involuntary conversion has the same meaning as that term is 
defined in Sec.  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 Sec.  1.168(i)-6(i)(1) election. If a taxpayer 
properly makes the election under Sec.  1.168(i)-6(i)(1) not to apply 
Sec.  1.168(i)-6 for any MACRS property, as defined in Sec.  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 Sec.  1.168(i)-6(b)(7), and the excess 
basis, as defined in Sec.  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 Sec.  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

[[Page 39318]]

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 Sec.  1.168(i)-6(b)(7), and the excess 
basis, as defined in Sec.  1.168(i)-6(b)(8), of the replacement MACRS 
property and begins to depreciate the depreciable exchanged basis, as 
defined in Sec.  1.168(i)-6(b)(9), of the replacement MACRS property in 
accordance with Sec.  1.168(i)-6(c). The depreciable excess basis, as 
defined in Sec.  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 Sec.  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 x \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 x \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

[[Page 39319]]

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 Sec.  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 x \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 calendar-year 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 
Sec.  1.168(i)-6(i)(1).
    (ii) Pursuant to Sec.  1.168(k)-1(f)(5)(iii)(B), no additional 
first year depreciation deduction is allowable for Equipment X3 and, 
pursuant to Sec.  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 
Sec.  1.168(i)-6(i)(1) not to apply Sec.  1.168(i)-6 to Equipment X3 
and Equipment Y3.
    (ii) Pursuant to Sec.  1.168(k)-1(f)(5)(iii)(B), no additional 
first year depreciation deduction is allowable for Equipment X3 and, 
pursuant to Sec.  1.168(d)-1(b)(3)(ii), no regular depreciation 
deduction is allowable for Equipment X3, for 2017.
    (iii) Pursuant to Sec.  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 Sec.  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 income-producing 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 income-producing 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 Sec.  
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

[[Page 39320]]

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 Sec.  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 Sec.  
1.48-12(c), incurred by a taxpayer with respect to a qualified 
rehabilitated building, as defined in section 47(c)(1) and Sec.  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 Sec.  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 Sec.  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 Sec.  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.
0
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:


Sec.  1.169-3  Amortizable basis.

    (a) * * * Further, before computing the amortization deduction 
allowable

[[Page 39321]]

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 Sec.  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.
0
Par. 11. Section 1.179-4 is amended by revising paragraph (c)(2) to 
read as follows:


Sec.  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.
* * * * *
0
Par. 12. Section 1.179-6 is amended by revising the first sentence in 
paragraph (a) and adding paragraph (e) to read as follows:


Sec.  1.179-6  Effective/applicability dates.

    (a) * * * Except as provided in paragraphs (b), (c), (d), and (e) 
of this section, the provisions of Sec. Sec.  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 Sec.  1.179-4(c)(2)--(1) In general. Except as 
provided in paragraph (e)(2) of this section, the provisions of Sec.  
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 
Sec.  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.
0
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:


Sec.  1.312-15   Effect of depreciation on earnings and profits.

    (a) * * *
    (1) * * * Further, see Sec.  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.
0
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:


Sec.  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.
* * * * *
0
Par. 15. Section 1.704-3 is amended by:
0
1. Adding a sentence at the end of paragraph (d)(2);
0
2. Revising the first sentence in paragraph (f); and
0
3. Adding two sentences at the end of paragraph (f).
    The additions and revision read as follows:


Sec.  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 Sec.  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 Sec.  
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,

[[Page 39322]]

2017, and ending before the date of publication of a Treasury decision 
adopting these rules as final regulations in the Federal Register.
* * * * *
0
Par. 16. Section 1.743-1 is amended by:
0
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:


Sec.  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 
Sec.  1.168(k)-2 for an increase in the basis of qualified property, as 
defined in section 168(k) and Sec.  1.168(k)-2, under section 743(b) in 
a class of property, as defined in Sec.  1.168(k)-2(e)(1)(ii)(A) 
through (F), even if the partnership made the election under section 
168(k)(7) and Sec.  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 Sec.  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 Sec.  1.168(k)-2. Further, the 
partnership may make an election under section 168(k)(7) and Sec.  
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 Sec.  1.168(k)-2, under section 743(b) in a class of 
property, as defined in Sec.  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 Sec.  
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