Source: http://www.tax-lawexperts.com/news-publication/proposed-bonus-depreciation-regulations-clarify-impact-on-certain-transactions/
Timestamp: 2018-10-20 15:17:30
Document Index: 85288015

Matched Legal Cases: ['§1', '§1', '§1', '§1', '§1', '§1', '§1']

Tax Law Experts – Proposed Bonus Depreciation Regulations Clarify Impact On Certain Transactions
The Internal Revenue Service (IRS) and Department of the Treasury recently proposed regulations that shed light on how the new, expanded bonus depreciation regime may work in the context of many common acquisitions involving corporations and partnerships. Pending the release of final regulations, a taxpayer may rely on the proposed rules with respect to property acquired and placed in service after September 27, 2017.1As such, these proposed regulations should be of interest to businesses that may be contemplating a reorganization, or a sale or acquisition of either individual assets or an entire business.
As background, prior to the enactment of the Tax Cuts and Jobs Act (TCJA), Section 168(k) of the Internal Revenue Code2 provided an immediate write-off of 50 percent of the cost of certain qualifying property for the tax year in which the property was placed in service by the taxpayer, but only if no one else had ever used the property before in a trade or business. TCJA expands on former Section 168(k)’s definition of “qualifying property,”3 increases the amount of the immediate deduction to 100 percent of such property’s cost and for the first time allows taxpayers to claim bonus depreciation for “used” property.4
It seemed clear that otherwise qualifying “used” property that is treated as acquired by the fictional newly formed corporation (New Target) in a Section 338(h)(10) election would be eligible for bonus depreciation under amended Section 168(k). It was unclear, though, whether the same result applies for property that is treated as acquired by New Target in a Section 336(e) election. A Section 336(e) election shares many of the same characteristics of a Section 338 election, an observation that the IRS made in the preamble to the proposed regulations. The proposed regulations would modify the Section 179 regulations to permit Section 179 to apply to property deemed to have been acquired by New Target as a result of a Section 336(e) election, meaning that such property (if otherwise qualifying) would be eligible for bonus depreciation.5
It also seemed clear that bonus depreciation would be permitted for otherwise qualifying used property acquired by a subsidiary from an unrelated seller, where the parent of the subsidiary first contributes cash to the subsidiary and the subsidiary then uses the cash to purchase the property. On the other hand, there was concern that the subsidiary would not be entitled to bonus depreciation if the parent instead first purchased the property directly and then contributed the property to the subsidiary, because the subsidiary technically would acquire a carryover basis in the property in the second leg of the transaction. The proposed regulations provide that the ordering won’t matter. In the case of a series of related transactions, the transfer of property would be treated as made from the original transferor to the ultimate transferee, and the relationship between the original transferor and the ultimate transferee would be tested immediately after the last transaction in the related series of transactions.6 As a result, in the above scenario, the subsidiary would be viewed as directly purchasing the property from the unrelated seller, and thus the property would be eligible for bonus depreciation.
Likewise, if the basis of qualifying property is reduced in a subsequent year, the taxpayer is required to decrease the total amount of depreciation allowed for all of the taxpayer’s depreciable property by the excess of bonus depreciation that the taxpayer previously claimed. If the excess additional depreciation deduction exceeds the total amount of depreciation otherwise allowed to the taxpayer, the taxpayer is required to take into account a “negative depreciation deduction” (i.e., the taxpayer would essentially recognize additional income). The excess additional bonus deduction that the taxpayer claimed is determined by multiplying the decrease in basis by the applicable percentage for the taxable year the property was placed in service by the taxpayer. In addition, the amount of depreciation otherwise allowed to the taxpayer with respect to the qualifying property is also reduced over the remaining recovery period of the property.9
The proposed regulations also provide guidance with respect to transactions involving partnerships. Most notably, the proposed regulations take an aggregate view in determining whether a Section 743(b) basis adjustment meets the used property acquisition requirement. Pursuant to this view, each partner is treated as having owned and used only that partner’s proportionate share of the partnership property. As a result, provided the transferring partner and the transferee partner are not otherwise related, the transferee partner may claim bonus depreciation with respect to the resulting Section 743(b) adjustment to the extent such adjustment relates to property that otherwise qualifies for bonus depreciation. This result applies irrespective of whether the transferee partner is a new partner or an existing partner purchasing an additional partnership interest from an existing partner.10 Similarly, the proposed regulations provide that in a situation where a tax partnership is created as a result of a third party acquiring a partial interest in an entity previously treated as disregarded as separate from its owner (such as a wholly owned limited liability company),11 bonus depreciation with respect to the undivided interest in any qualified property that the transferee is deemed to purchase is generally available, but it is allocated exclusively to the transferee (and not to the transferor).
1 Prop. Reg. §§1.168(k)-2(g)(2) and 1.179-6(b)(2).
4 The bonus depreciation applicable rate is phased out 20 percentage points a year over five years beginning in 2023. Thus, 100 percent bonus depreciation is available only for the next five years. Certain other property (sometimes called “longer production period property”) also can be qualified property. For that type of property, the placed-in-service deadlines and the phase-outs of the bonus depreciation percentage are different.
5 Prop. Reg. §1.179-4(c)(2).
6 Prop. Reg. §1.168(k)-2(b)(3)(iii)(C).
7 Prop. Reg. §1.168(k)-2(f)(2)(i).
9 Prop. Reg. §1.168(k)-2(f)(2).
10 Prop. Reg. §1.168(k)-2(b)(3)(iv)(D).
12 Prop. Reg. §1.168(k)-2(b)(3)(iv)(A) and (C).
By lawexperts|2018-09-04T04:37:09+00:00August 29th, 2018|