New Section 168(k) Bonus Depreciation Regulations...

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New Section 168(k) Bonus Depreciation Regulations: Claiming

100% First-Year Depreciation Deduction Under Tax Reform

TUESDAY, OCTOBER 30, 2018, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

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OCTOBER 30, 2018

New Section 168(k) Bonus Depreciation Regulations

David McGuire, Director

McGuire Sponsel, Indianapolis

[email protected]

Edward Meyette, Partner

Crowe Horwath, Grand Rapids, Mich.

[email protected]



Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

New Section 168(k)

Bonus Depreciation

Regulations

Recent Changes To Depreciation Law

• In recent years there have been a number of changes to tax law affecting depreciation

and cost segregation

• Tangible Property Regulations

• PATH Act

• Tax Cuts and Jobs Act of 2017 (Tax Reform)

• It is important to look at all of these changes together to ensure Depreciation is being

accurately calculated.

6

Proposed Regs: REG-104397-18

• August 8th, 2018

• Proposed Regulations covering 100% Bonus

• What Property Qualifies

• Transition Rules

• Public Comment Period Ended 10/9/18

7

Bonus Depreciation Prior to TCJA

• Section 168(k) prior to the act allowed additional first year depreciation of:

• 50% for property placed-in-service in 2017



• Certain qualifying real property was eligible (QLI & QIP)

• Subject to “First Use” Restrictions

8

Bonus Depreciation Post TCJA

• Bonus Depreciation increased to 100% for property PIS between 9/27/17 and 1/1/23

• 1/1/24 for longer production period property and aircraft described in

168(k)(2)(B) or ©

• Subject to Binding Contract Restrictions

• QIP currently not qualified

• Qualified Used Property Included (elimination of “first use” test)

9

Bonus Eligibility

• Proposed Regulations follow section 168(k)(2), as amended by TCJA, and section

13201(h).

• 4 requirements to be qualified:

1. Depreciable Property Must be of a Specified Type

2. Meet Original Use, or for used property meet acquisition requirements of

168(k)(2)(E)(ii)

3. Placed in Service within specified time period

4. Acquired after 9/27/17

10

Property of a Specified Type

1. MACRS Property with recovery period of 20 years or less;

2. Computer software defined in, and depreciated under, 167(f)(1);

3. Water Utility property as defined in 168(e)(5);

4. Qualified film or television production as defined under 181(d) and for which a

deduction would have been allowable under section 181;

5. Qualified live theatrical production as defined in 181(e) and for which a deduction

would have been allowable under section 181; or

6. A specified plant as defined in section 168(k)(5)(B) for which the taxpayer has made

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

11

Qualified Improvement Property

• Definition of the following categories of Improvements changes as of 12/31/17:

• Qualified Improvement Property

• Qualified Leasehold Improvement Property

• Qualified Restaurant Property

• Qualified Retail Property

• For property PIS prior to 12/31/17 prior bonus treatment and depreciable lives apply

• Bonus amount depends on acquisition date (binding contract rules apply)

12

Restrictions to Bonus

• Election Out of Bonus

• ADS Life

• Election out of Interest Limitations

• Leased to Non-Profit

• Tax Exempt Bond Financed

• Foreign use asset

• Floorplan interest business

13


• Electing Real Property Trade or Business (ERPTB)

• TCJA Sec. 13301 limits deduction for business interest expense to 30% of

adjusted taxable income. Allows ERPTB to elect out of the limitation.

• TCJA Sec. 13204 adds Sec. 168(g)(8) requiring ERPTB to depreciate

nonresidential real, residential real, and qualified improvement property under

the ADS system, eliminating eligibility for bonus.

• Minimal impact unless QIP fix

14


• Floorplan business

• TCJA Sec. 13201 excludes property used in a trade or business with floorplan

financing from bonus depreciation eligibility.

• Unlike the real property trade or business election, the floorplan business

exclusion applies to ALL bonus eligible property, including personal property

and land improvements.

• Uncertainty as to the application of this rule to a related party real estate holding

company.

15


Under the PATH Act a new category of property was formed “Qualified Improvement

Property” or “QIP”. Under the PATH Act this property was subject to bonus

depreciation and a 39-year life.

Due to the wording under the new law QIP was inadvertently eliminated for assets PIS

on or after 1/1/2018. This is widely seen as an error and a technical correction is

expected.

17


Prior to TCJA the following types of property existed:

• Qualified Improvement Property – 39 year – Bonus Eligible

• Qualified Leasehold Property – 15 year – Bonus Eligible

• Qualified Retail Property – 15 year – Bonus Eligible

• Qualified Restaurant Property – 15 year – No Bonus

Combined into one new category of property which is 179 eligible with a 39-year life.

18


Non-structural improvements to the interior of a building if such improvements are PIS

after the building is originally PIS (timeline not defined). Does not include:

• Exterior HVAC Equipment

• Roofs

• Windows

• Stairs

• Elevators

• Etc.

19

Qualified Improvement Property Status

Committee reports after TCJA included QIP as bonus eligible with a 15-year life.

However this was an error in the drafting of the Law.

Requires a technical correction which is slow due to political issues in Washington.

Even if it passes Cost Segregation studies are valuable. Will need to break out non-

eligible assets to ensure the maximum amount is deducted (for example windows, roofs,

HVAC, exterior work are not eligible)

20

179/Bonus Chart

Asset Type Life Bonus Eligible 179 Eligible

New Construction

-Roofs 39-Year No No

-HVAC 39-Year (typically) No No

-Personal Property 5 or 7-Year Yes Yes

-Land Improvements 15-Year Yes Depends

Renovation

-Roofs 39-Year No Yes

-HVAC 39-Year No Yes

-Qualified Improvement

?? ?? Yes

Purchase

-Personal Property 5 or 7-Year Yes Yes

-Land Improvements 15-Year Yes Depends

-Qualified Improvement

39-Year No No

-Roof 39-Year No No

21

Contact Information

David McGuire

317-564-5001 (office)

317-460-9814 (cell)

[email protected]

22


© 2018 Crowe LLP 23

© 2018 Crowe LLP

New Section 168(k) Bonus Depreciation

Regulations Part 2


Bonus Eligibility – Used Property

Proposed Regulations follow section 168(k)(2), as amended by TCJA, and section 13201(h).

• Four requirements to be qualified:

1. must be depreciable property of a specified type

2. Meet Original Use, or for used property meet acquisition requirements of

168(k)(2)(E)(ii)

3. Placed in service within specified time period



Used Property

Pursuant to section 168(k)(2)(A)(ii) and (k)(2)(E)(ii), used property is eligible if it

meets the following requirements

• Property not used by the taxpayer or a predecessor at any time prior to

acquisition;

• Acquisition meets the related party and carryover basis requirements of

section 179(d)(2)(A), (B), and (C) as well as §1.179-4(c)(1)(ii), (iii), and (iv),

or (c)(2); and

• The acquisition meets the cost requirements of section 179(d)(3) and

§1.179-4(d)


Partnership / Corp. Transactions

Partnership transactions

• 100% bonus depreciation generally is available for increases in basis

attributable to Section 743 adjustments

• 100% bonus depreciation is not available for Section 734 adjustments

• 100% bonus depreciation is not available for remedial allocations under

Section 704(c)

• The proposed regulations confirm that 100% bonus depreciation is available for

acquisitions using Sections 338(h)(10) and 336(e)


Bonus Eligibility – Placed in Service Requirement



1. Must be depreciable property of a specified type

2. Meet original use, or for used property meet acquisition requirements of

168(k)(2)(E)(ii)




Placed in Service Requirement

Generally the Regs. retain the principles in the existing placed-in-service rules.

•Property must be placed in service after September 27, 2017 and before

January 1, 2027 (or in the case of aircraft or long production period property

January 1, 2028).

•Note the phase down percentages starting at 80% for property placed in service

in 2023, phasing down 20% per year to 20%-2026.

•Special Rules

•Specified plants must be planted or grafted prior to 2027.

•Qualified film or television production treated as placed in service at the time of

initial release or broadcast.

•Qualified live theatrical performance placed in service at the initial live staged

performance


Bonus Eligibility – Acquisition Date



1. Must be depreciable property of a specified type

2. Meet original use, or for used property meet acquisition requirements of

168(k)(2)(E)(ii)




Acquisition Date - Background

Section 13201 of the TCJA provides that “Property shall not be treated as acquired after the

date on which a written binding contract is entered into for such acquisition”

• TCJA left confusion over transition

• Most taxpayers assumed transition rules similar to those used after Tax Relief,

Unemployment Insurance Reauthorization and Job Creation Act of 2010 would apply

• Different rules may apply for long production property, including Qualified

Improvement Property


Acquisition Date

Old (1.168(k)-1) Regs.

• Written binding contract rule.

• Self-constructed asset rule applies to third party construction contracts.

• Safe harbor (10%) for when construction begins

New (1.168(k)-2) Regs.

• Written binding contract rule.

• Self-constructed asset rule DOES NOT apply to 3rd party const. contracts.

• Safe harbor (10%) for when construction begins, but not for 3rd party contracts


Acquisition Date

Example:

New Facility

Capex $100 million, 20% ($20M) personal property.

General contract signed September 1, 2017

Placed into service May 2019

Old Regs - 2019 depreciation = $20M (100% * $20M) + $2M (2.5% * $80M) =

$22M

New Regs - 2019 Depreciation = $6M (30% * $20M) + $2.8M (20% * $14M) + $2M

(2.5% * $80M) = $10.8M


Acquisition Date

Written Binding Contract §1.168(k)-2(b)(5)(iii)

• Property manufactured, constructed, or produced for the taxpayer under written binding

contract is considered acquired on date written contract entered into, taxpayer may not

apply self-construction asset rules.

• 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. Limitation to > 5% of

contract price is not considered limiting.

• An option to acquire or sell a property is not binding contract.

• A letter of intent for an acquisition is not a binding contract.


Supply Agreements

Supply or Similar Agreements - §1.168(k)-2(b)(5)(iii)(E)

• Not considered binding if the amount and design specifications of the property have not

been specified

• Once the quantity and the design specifications are specified contract becomes binding

• Example: if the provisions of a supply agreement state the specifications but not the

quantity, the contract becomes binding once a purchase order stating the quantity is

created.


Binding Contract Components

Components of larger properties - §1.168(k)-2(b)(5)(iii)(F)

• A binding contract to acquire one or more components of a larger property will not be

considered binding to acquire the larger property

• If the binding contract to acquire the component does not meet the requirements the

component does not meet qualify for 100% Bonus

• Tangible Property Regulations help determine if an acquisition is a “component” or an

independent asset


Self-Constructed Property

Self-Constructed Property – §1.168(k)-2(b)(5)(iv)

If a taxpayer manufactures, constructs, or produces property for use by the taxpayer in its

trade or business acquisition rules are different:

• Acquisition rules considered met if the taxpayer begins manufacturing, constructing, or

producing the property after 9/27/17.

• Does not apply to property that is manufactured, constructed, or produced by another

person under a written or binding contract.


Self-Constructed – When Production

Begins

Self-Constructed Property - §1.168(k)-2(b)(5)(iv)(B)

• Construction begins when physical work of a significant nature begins:

• Does not include preliminary activities (planning, designing, etc.)

• Land preparation costs are provided as an example of preliminary work (clearing a site,

excavation, etc)

• Safe Harbor – Physical work of significant nature begins when 10% of the cost paid or

incurred


Components of Self-Constructed Property

• If a binding contract to acquire a component of a larger self-constructed property does not

meet the requirements, the component is not eligible for bonus, but the the larger self-

constructed asset, net of the ineligible component, may be eligible.

• If the larger self-constructed asset begins work prior to 9/28/17, then the larger self-

constructed asset and all related components are not eligible for the 100% bonus

• Tangible property regulations can be referenced for when determining if an acquisition is

a component, or an independent asset


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 §1.168(k)-2(b)(5)(iii)(E).


Example 2

The facts are the same as in Example 1. 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 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 §1.168(k)-

2(b)(5)(iii)(E). 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, 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 §1.168(k)-2(b)(5)(iii)(E).

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 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 IIacquired the equipment prior to September 28, 2017. However, JJacquired 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.


Thank you

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those of any other Crowe Global network firm or other party. Visit www.crowe.com/disclosure for more information about Crowe LLP, its subsidiaries, and Crowe Global.

The information in this document is not – and is not intended to be – audit, tax, accounting, advisory, risk, performance, consulting, business, financial, investment, legal, or other professional advice. Some firm services may not be available to attest clients. The information is general in

nature, based on existing authorities, and is subject to change. The information is not a substitute for professional advice or services, and you should consult a qualified professional adviser before taking any action based on the information. Crowe is not responsible for any loss incurred

by any person who relies on the information discussed in this document. © 2018 Crowe LLP.

Edward Meyette

616.752.4234 (office)

616.406.9544(cell)

[email protected]

http://www.crowe.com/disclosure

New Section 168(k) Bonus Depreciation Regulations...

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