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First-Year Bonus Depreciation Temp. Regs. Temporary regulations issued in September 2003 clarify the Sec. 168(k) additional first-year depreciation rules. The Job Creation and Worker Assistance Act of 2002, Section 101(a), enacted Sec. 168(k) as 30% bonus depreciation for qualifying property placed in service after Sept. 10, 2001; the Jobs and Growth Tax Relief Reconciliation Act of 2003, Section 201(a), expanded the provision to 50% bonus depreciation for qualifying property placed in service after May 5, 2003. The temporary regulations provide guidance in a number of areas and retract a previous Service position on the applicability of bonus depreciation to property acquired via a Sec. 1031 or 1033 exchange.
Qualifying Property According to Temp. Regs. Sec. 1.168(k)-1T(b)(2)(i)(A), eligible property includes modified accelerated cost recovery system (MACRS) property with a recovery period of 20 years or less. Such property is eligible for bonus depreciation even if the taxpayer elects to depreciate it over an alternative depreciation system life that exceeds 20 years.
Original Use Sec. 168(k)(2)(A)(ii) requires that original use begin with the taxpayer. Under Temp. Regs. Sec. 1.168(k)-1T(b)(3)(i), original use refers to the first use to which the property is put, regardless of how the taxpayer uses it (i.e., new property carries its common meaning). Temp. Regs. Sec. 1.168(k)-1T(b)(3)(v), Example 2, provides guidance for purchasers of demonstrator automobiles. The first purchaser in the ordinary course of business is deemed the original user. Rebuilt/reconditioned property: Un-der a plain reading of Sec. 168(k), the acquisition of rebuilt or reconditioned property does not meet the original-use requirement. However, when the taxpayer acquires used property, then incurs additional costs to recondition or rebuild it, Temp. Regs. Sec. 1.168(k)-1T(b)(3)(i) allows the reconditioning/ rebuilding costs (but not the used propertys cost) to meet this requirement. This rule leads to the potential determination that a self-constructed asset employing some used parts is a rebuilt property partially eligible for bonus depreciation, rather than a completely eligible self-constructed asset under Sec. 168(k)(2)(D)(i). Temp. Regs. Sec. 1.168(k)-1T(b)(3)(i) provides a safe harborif the used parts costs do not exceed 20% of the propertys total cost, the asset is not reconditioned or rebuilt. Conversion to business use: According to Temp. Regs. Sec. 1.168(k)-1T(b)(3)(ii), if a taxpayer acquires new property for personal use, but later converts it to use in a trade or business, the property meets the original-use requirement.
Computations Under Temp. Regs. Sec. 1.168(k)-1T(d)(1)(i), bonus depreciation is not affected by a short tax year of less than 12 months. However, as with all MACRS property, bonus depreciation is not available if the property is acquired and disposed of in the same tax year, under Temp. Regs. Sec. 1.168(k)-1T(f)(1). A propertys basis for bonus depreciation purposes is first reduced for the percentage of personal use, Sec. 179 expensing and other basis adjustments (including under the investment tax, disabled access or enhanced oil recovery credit), according to Temp. Regs. Sec. 1.168(k)-1T(a)(2)(iii). Temp. Regs. Sec. 1.168(k)-1T(f)(7) disallows bonus depreciation when computing corporate earnings and profits. AMT: Sec. 168(k)(2)(F) provides that bonus depreciation is allowed for both regular and alternative minimum tax (AMT). However, Temp. Regs. Sec. 1.168(k)-1T(d)(1)(i) notes that AMT bonus depreciation is based on the propertys AMT basis; this can differ from regular tax basis if, for example, the property is acquired in a Sec. 1031 or 1033 exchange in which the property relinquished has a different net basis for AMT than for regular tax purposes. The original legislation led many tax advisers to conclude that a Sec. 56(a)(1) AMT depreciation adjustment would not apply to property for which the taxpayer had claimed first-year bonus depreciation. However, Temp. Regs. Sec. 1.168(k)-1T(d)(2)(i) states that when bonus depreciation is taken, the remaining depreciable basis for AMT is depreciated using the same method, recovery period and convention that applies for regular tax purposes. This statement allows a MACRS depreciation adjustment for the calculation of AMT for bonus depreciation assets, when the original basis for AMT differs from that used for regular tax. Although the calculation method for regular tax and AMT would be the same, the basis would differ.
Sec. 1031 or 1033 Exchange Under Temp. Regs. Sec. 1.168(k)-1T(f)(5), property acquired by ex-change is eligible for bonus depreciation, for both the basis allocable to the boot paid and the carryover basis from the asset relinquished. The Services previous position, in Pub. 946, How to Depreciate Property, stated that only the basis allocable to the boot paid qualified for new depreciation methods and conventions, including bonus depreciation. However, Congressional opposition encouraged the IRS to adopt a more taxpayer-friendly rule in the temporary regulations. Temp. Regs. Sec. 1.168(k)-1T(f)(5)(iii) provides that all basis in otherwise eligible property acquired by exchange is eligible for bonus depreciation. Taxpayers who based previous bonus depreciation calculations on only the basis from boot paid can apply for relief by: 1. Filing an amended return for the period of acquisition of replacement property and all subsequent tax periods (Temp. Regs. Sec. 1.168(k)-1T(g)(4)(ii)). 2. Treating its depreciation method as a permissible accounting method, provided it did not elect out of bonus depreciation for the asset class in question. 3. Obtaining automatic IRS consent to change accounting method (Temp. Regs. Sec. 1.168(k)-1T(g)(4)(ii)(B)).
Miscellaneous Issues The temporary regulations also offer guidance on:
Effective Dates Under Temp. Regs. Sec. 1.168(k)-1T(g)(1), acquisitions are eligible for 30% bonus depreciation if acquired after Sept. 10, 2001, and for 50% bonus depreciation if acquired after May 5, 2003. However, according to Temp. Regs. Sec. 1.168(k)-1T(b)(4), otherwise-eligible acquisitions cannot use bonus depreciation if acquired under a binding written contract in effect on an effective date. Temp. Regs. Sec. 1.168(k)-1T(b)(4)(ii) defines binding contract.
Unanswered Question The temporary regulations do not address one point seemingly ripe for guidance. Under Sec. 168(k)(3)(A)(i), leasehold improvement property may qualify for bonus depreciation if the improvement is made or pursuant to a lease. The temporary regulations do not clarify this phrase. From R. Milton Howell, III, CPA, Davenport, Marvin, Joyce & Co., LLP, Greensboro, NC |
