Additional First Year Depreciation Deduction, 50152-50171 [2019-20035]

Download as PDF 50152 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG–106808–19] RIN 1545–BP32 Additional First Year Depreciation Deduction Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking; partial withdrawal of a notice of proposed rulemaking. Background 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 and clarify the increase of the benefit and expansion of the universe of qualifying property, particularly to certain classes of used property, made by the Tax Cuts and Jobs Act. These proposed regulations generally affect taxpayers who deduct depreciation for qualified property acquired and placed in service after September 27, 2017. This document also provides notice of a public hearing on these proposed regulations. Finally, this document withdraws a portion of the proposed regulations published on August 8, 2018. DATES: Written or electronic comments must be received by November 25, 2019. Outlines of topics to be discussed at the public hearing scheduled for Wednesday, November 13, 2019, at 10 a.m. must be received by October 23, 2019. If no outlines of topics are received by October 23, 2019, the public hearing will be cancelled. ADDRESSES: Submit electronic submissions via the Federal eRulemaking Portal at https:// www.regulations.gov (indicate IRS and REG–106808–19) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment received to its public docket, whether submitted electronically or in hard copy. Send hard copy submissions to: CC:PA:LPD:PR (REG–106808–19), 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 This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 168(k) of the Code. 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. 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 by the Act. The Treasury Department and the IRS published proposed regulations interpreting section 168(k) on August 8, 2018 (the August Proposed Regulations) (83 FR 39292). This notice of proposed rulemaking withdraws § 1.168(k)– 2(b)(3)(iii)(B)(3)(i) through (iii) and Examples 19 through 22 in § 1.168(k)– 2(b)(3)(vi) of the August Proposed Regulations, and proposes in their place § 1.168(k)–2(b)(3)(v)(A) through (E) and Examples 26 through 30 in § 1.168(k)– 2(b)(3)(vii)(Z) through (DD), respectively. This notice of proposed rulemaking also withdraws § 1.168(k)– 2(b)(3)(iii)(C) and Example 18 in § 1.168(k)–2(b)(3)(vi) of the August Proposed Regulations, and proposes in their place § 1.168(k)–2(b)(3)(iii)(C) and Examples 31 through 34 in § 1.168(k)– AGENCY: SUMMARY: khammond on DSKJM1Z7X2PROD with PROPOSALS2 4 p.m. to CC:PA:LPD:PR (REG–106808– 19), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Elizabeth R. Binder or Kathleen Reed, (202) 317–7005; concerning submissions of comments and outlines of topics, the hearing, or to be placed on the building access list to attend the hearing, Regina L. Johnson, (202) 317–6901 (not toll-free numbers). SUPPLEMENTARY INFORMATION: VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 2(b)(3)(vii)(EE) through (HH), respectively. The August Proposed Regulations, with modifications in response to comments and testimony received, were adopted as final regulations, issued concurrently with these proposed regulations and published elsewhere in this issue of the Federal Register (the Final Regulations). Explanation of Provisions These proposed regulations propose amendments to the Final Regulations to provide taxpayers with guidance that is not addressed in the Final Regulations regarding the application of section 168(k). Specifically, these proposed regulations contain amendments to § 1.168(k)–2(b)(2), (3), and (5) of the Final Regulations, each of which provides rules relevant to the definition of qualified property for purposes of the additional first year depreciation deduction under section 168(k). These proposed regulations also amend § 1.168(k)–2(b)(3)(v) by adding special rules for consolidated groups. Additionally, these proposed regulations amend § 1.168(k)–2(c) by adding rules regarding components acquired or self-constructed after September 27, 2017, for larger selfconstructed property for which manufacture, construction, or production began before September 28, 2017. Further, these proposed regulations amend § 1.168(k)–2(g)(11) by adding rules regarding the application of the mid-quarter convention, as determined under section 168(d). These additional proposed rules respond to comments received on the August Proposed Regulations as well as address certain issues identified after additional study. This Explanation of Provisions section describes each of the proposed rules contained in this document. 1. Property Excluded From the Additional First Year Depreciation Deduction by Section 168(k)(9) Section 1.168(k)–2(b)(2)(ii)(F) of the Final Regulations provides that qualified property does not include any property that is primarily used in a trade or business described in section 163(j)(7)(A)(iv). Section 1.168(k)– 2(b)(2)(ii)(G) of the Final Regulations provides that qualified property does not include 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, as defined in section 163(j)(9), related to such indebtedness is taken into account under section 163(j)(1)(C) for the taxable year. Sections 1.168(k)–2(b)(2)(ii)(F) and (G) of the Final Regulations apply to property E:\FR\FM\24SEP2.SGM 24SEP2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules placed in service by the taxpayer in a taxable year beginning after December 31, 2017. A. Lessor Leasing Property to a Trade or Business Described in Section 168(k)(9) Several commenters to the August Proposed Regulations requested guidance on whether a taxpayer that leases property to a trade or business described in section 168(k)(9) is eligible to claim the additional first year depreciation for the property, and they recommend allowing the additional first year depreciation deduction (assuming all other requirements are met). The Treasury Department and the IRS agree with the commenters’ recommendation, provided the lessor is not described in section 168(k)(9)(A) or (B). Accordingly, these proposed regulations amend § 1.168(k)–2(b)(2)(ii)(F) and (G) to provide that such exclusion from the additional first year depreciation deduction does not apply to lessors of property to a trade or business described in section 168(k)(9) so long as the lessor is not described in such Code section. khammond on DSKJM1Z7X2PROD with PROPOSALS2 B. Property Described in Section 168(k)(9)(A) The Treasury Department and the IRS are aware that taxpayers and practitioners have questioned how to determine whether property is primarily used in a trade or business described in section 168(k)(9)(A). For depreciation purposes, § 1.167(a)–11(b)(4)(iii)(b) and (e)(3)(iii) classify property according to its primary use. The Treasury Department and the IRS believe that the same standard should apply for purposes of section 168(k)(9)(A). Accordingly, these proposed regulations amend § 1.168(k)–2(b)(2)(ii)(F) to provide that for purposes of section 168(k)(9)(A) and § 1.168(k)– 2(b)(2)(ii)(F), the term primarily used has the same meaning as that term is used in § 1.167(a)–11(b)(4)(iii)(b) and (e)(3)(iii) for classifying property. C. Property Described in Section 168(k)(9)(B) A commenter to the August Proposed Regulations requested guidance on when floor plan financing is ‘‘taken into account’’ for purposes of section 168(k)(9)(B). The commenter believed that section 168(k)(9)(B) does not apply when a taxpayer does not deduct interest in excess of the sum of the amounts calculated under section 163(j)(1)(A) and (B). The Treasury Department and the IRS do not believe that section 163(j) is optional. However, the Treasury Department and the IRS agree that, for purposes of section 168(k)(9)(B), floor plan financing VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 interest is not taken into account by a trade or business that has had floor plan financing indebtedness if the sum of the amounts calculated under section 163(j)(1)(A) and (B) for the trade or business for the taxable year equals or exceeds the business interest, as defined in section 163(j)(5) (including carryforwards of disallowed business interest under section 163(j)(2)), which includes floor plan financing interest of the trade or business, for the taxable year. Accordingly, these proposed regulations amend § 1.168(k)– 2(b)(2)(ii)(G) to provide that solely for purposes of section 168(k)(9)(B) and § 1.168(k)–2(b)(2)(ii)(G), floor plan financing interest is not taken into account for the taxable year by a trade or business that has had floor plan financing indebtedness if the sum of the amounts calculated under section 163(j)(1)(A) and (B) for the trade or business for the taxable year equals or exceeds the business interest, as defined in section 163(j)(5), for the taxable year. If floor plan financing interest is taken into account for a taxable year by a trade or business that has had floor plan financing indebtedness, the Treasury Department and the IRS are aware that taxpayers and practitioners have questioned whether the additional first year depreciation deduction is not allowed for property placed in service by that trade or business in any subsequent taxable year. In such a case, the additional first year depreciation deduction for subsequent taxable years would not be allowed, even if the amount of the floor plan financing interest taken into account for the current taxable year is de minimis. For this reason, the Treasury Department and the IRS have decided that, for purposes of section 168(k)(9)(B), the determination of whether a trade or business that has had floor plan financing indebtedness has taken into account floor plan financing interest is made annually. Accordingly, these proposed regulations amend § 1.168(k)– 2(b)(2)(ii)(G) to provide that if the trade or business has taken floor plan financing interest into account pursuant to § 1.168(k)–2(b)(2)(ii)(G) for a taxable year, § 1.168(k)–2(b)(2)(ii)(G) applies to any property placed in service by that trade or business in that taxable year. 2. Used Property A. Depreciable Interest As a result of comments received on the August Proposed Regulations regarding sale-leaseback transactions, the Treasury Department and the IRS have determined that it is appropriate to provide an exception to the depreciable PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 50153 interest rule in the Final Regulations when the taxpayer disposes of property within a short period of time after the taxpayer placed such property in service. Accordingly, these proposed regulations amend § 1.168(k)–2 by adding paragraph (b)(3)(iii)(B)(4) to provide that if (a) a taxpayer acquires and places in service property, (b) the taxpayer or a predecessor did not previously have a depreciable interest in the property, (c) the taxpayer disposes of the property to an unrelated party within 90 calendar days after the date the property was originally placed in service by the taxpayer (without taking into account the applicable convention), and (d) the taxpayer reacquires and again places in service the property, the taxpayer’s depreciable interest in the property during that 90-day period is not taken into account for determining whether the property was used by the taxpayer or a predecessor at any time prior to its reacquisition by the taxpayer. The 90-day period is consistent with the period of time specified in section 168(k)(2)(E)(iii). To prevent the churning of assets, this proposed rule does not apply if the taxpayer reacquires and again places in service the property during the same taxable year the taxpayer disposed of the property. The proposed regulations also define an unrelated party as meaning a person not described in section 179(d)(2)(A) or (B), and § 1.179– 4(c)(1)(ii) or (iii), or (c)(2). B. Application to Partnerships One commenter to the August Proposed Regulations asked for clarification regarding a partner’s depreciable interest in property held by a partnership. The Treasury Department and the IRS clarify in these proposed regulations the extent to which a person is treated as having a depreciable interest in property by virtue of being a partner in a partnership that holds the property. Under the August Proposed Regulations, each partner is treated as having owned and used the partner’s proportionate share of partnership property for purposes of determining whether a section 743(b) basis adjustment meets the used property acquisition requirements of section 168(k)(2)(E)(ii). Consistent with this approach, a person should be considered as having a depreciable interest in a portion of property if the person is a partner in the partnership while the partnership owns the property. The same rule should apply whether a current partner purchases property directly from the partnership or a person acquires property that the E:\FR\FM\24SEP2.SGM 24SEP2 50154 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 partnership previously owned while the person was a partner. These proposed regulations amend § 1.168(k)–2 by adding paragraph (b)(3)(iii)(B)(5) to provide that a partner is considered to have a depreciable interest in a portion of property equal to the partner’s total share of depreciation deductions with respect to the property as a percentage of the total depreciation deductions allocated to all partners with respect to that property during the current calendar year and five calendar years immediately prior to the partnership’s current year. For this purpose, only the portion of the current calendar year and previous 5-year period during which the partnership owned the property and the person was a partner is taken into account. The Treasury Department and the IRS believe that this provides an accurate reflection of the partner’s prior depreciable interest in the property. C. Series of Related Transactions Section 1.168(k)–2(b)(3)(iii)(C) of the August Proposed Regulations provides that, in the case of a series of related transactions, property is treated as directly transferred from the original transferor to the ultimate transferee, and the relationship between the original transferor and the ultimate transferee is tested immediately after the last transaction in the series (related transactions rule). A commenter requested clarification on whether the related transactions rule applies only to test relatedness under section 179(d)(2)(A) or whether this rule applies more broadly for purposes of all of the rules under section 168(k)(2)(E)(ii). For example, if, in a series of related transactions, A transfers property to B in exchange for cash and B transfers property to C in a nonrecognition transaction in exchange for stock or other property, the commenter states that it is not clear whether the related transactions rule is intended to test only the relatedness between A and C under section 179(d)(2)(A). If this rule is intended to apply more broadly, the commenter states that it is not clear whether the rule also determines the basis of the property or whether B’s prior use of the property is relevant. The commenter also requested clarification on whether the related transactions rule applies to transactions described in § 1.168(k)–2(f)(1)(iii) of the August Proposed Regulations (qualified property that 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). For example, VerDate Sep<11>2014 19:19 Sep 23, 2019 Jkt 247001 if a person purchased qualified property and contributed it to a partnership in a transaction described in section 721 in the same taxable year, the commenter questioned whether the related transactions rule would treat the transfer as occurring directly between the original seller and the partnership, assuming that the initial acquisition of the property by the person and the person’s transfer of such property to the partnership are part of a series of related transactions. The Treasury Department and the IRS intended to apply the related transactions rule only for purposes of testing the relatedness of the parties under section 179(d)(2)(A) or (B) in a series of related transactions. The related transactions rule was not intended to test relatedness between the parties involved in a transaction described in section 168(i)(7). These proposed regulations amend § 1.168(k)–2 by revising paragraph (b)(3)(iii)(C) to provide rules for a series of related transactions (proposed related transactions rule). The proposed related transactions rule generally provides that the relationship between the parties under section 179(d)(2)(A) or (B) in a series of related transactions is tested immediately after each step in the series, and between the original transferor and the ultimate transferee immediately after the last transaction in the series. The Treasury Department and the IRS believe that the relationship between the parties in a series of related transactions should not be tested in certain cases. Accordingly, the proposed related transactions rule provides that a party in the series that is neither the original transferor nor the ultimate transferee is disregarded in applying the relatedness test if the party placed in service and disposed of the property in the party’s same taxable year or did not place the property in service. The proposed related transactions rule also provides that any step in a series of related transactions that is neither the original step nor the ultimate step is disregarded for purposes of testing relatedness if the step is a transaction described in § 1.168(k)–2(g)(1)(iii) (that is, a transfer of property in a transaction described in section 168(i)(7) in the same taxable year that the property is placed in service by the transferor) (§ 1.168(k)–2(f)(1)(iii) of the August Proposed Regulations). Finally, these proposed regulations provide that the proposed related transactions rule does not apply when all transactions in the series are described in § 1.168(k)– 2(g)(1)(iii) or to a syndication PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 transaction described in § 1.168(k)– 2(b)(3)(vi). The commenter also requested clarification on the application of the related transactions rule in transactions involving sections 179(d)(2)(B) and 1563. For example, if there is a series of related transactions involving a sale of qualified property between two corporations that also become members of the same controlled group, section 179(d)(2)(B) would require testing whether the two corporations are component members of the same controlled group for purposes of section 1563. Under section 1563 and the regulations issued thereunder, a corporation is generally a component member of a controlled group if it is a member of the controlled group for at least one half of the days in the relevant taxable year. See § 1.1563–1(b). If the corporations both become members of the controlled group pursuant to a series of related transactions ending in the first half of the taxable year, the corporations should be component members for purposes of section 179(d)(2)(B). However, if the series of related transactions ends in the second half of the taxable year, the commenter questioned whether the related transactions rule applies to treat the two corporations as non-members prior to the end of the series of related transactions, in which case the purchaser of the qualified property may be eligible for immediate expensing (setting aside the potential application of section 179(d)(2)(A)). The Treasury Department and the IRS also received comments concerning the application of section 179(d)(2)(B) to Example 21 of § 1.168(k)–2(b)(3)(vi) in the August Proposed Regulations. In response, the Treasury Department and the IRS have proposed new rules covering the application of section 179(d)(2)(B) to acquisitions of depreciable property between members of the same consolidated group, as explained in the following section of this Explanation of Provisions. D. Application to Members of a Consolidated Group i. Overview of Used Property Acquisition Requirements Section 1.168(k)–2(b)(3)(iii)(A) of the August Proposed Regulations and the Final Regulations lists the following three requirements that must be satisfied in order for acquisitions of used property to qualify for the additional first year depreciation deduction (used property acquisition requirements). First, the property must not have been used by the taxpayer or E:\FR\FM\24SEP2.SGM 24SEP2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 a predecessor at any time prior to the acquisition (No Prior Use Requirement). Second, the acquisition of the property must satisfy § 1.168(k)–2(b)(3)(iii)(A)(2) of the August Proposed Regulations and the Final Regulations, which requires that (a) the property was not acquired from a related person (within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(1)(ii)) (Related Party Requirement), (b) the property was not acquired by one component member of a controlled group from another component member of the same controlled group (Component Member Requirement), and (c) the basis of the property in the hands of the acquirer is not determined, in whole or in part, by reference to the adjusted basis in the hands of the transferor. Third, the acquisition of the property must meet the requirements of section 179(d)(3) and § 1.179–4(d) (concerning like-kind exchanges and involuntary conversions). ii. Application of the Used Property Acquisition Requirements to Consolidated Groups Section 1.168(k)–2(b)(3)(iii)(B)(3) of the August Proposed Regulations provides special rules applying the No Prior Use Requirement to consolidated groups. Section 1.168(k)– 2(b)(3)(iii)(B)(3)(i) of the August Proposed Regulations treats a member that acquires depreciable property as having a prior depreciable interest in such property if the consolidated group had a depreciable interest at any time prior to the member’s acquisition of the property (Group Prior Use Rule). For these purposes, a consolidated group is treated as having a depreciable interest in property during the period in which any current or previous member of the consolidated group had a depreciable interest in the property while a member of the consolidated group. Section 1.168(k)–2(b)(3)(iii)(B)(3)(ii) of the August Proposed Regulations provides that, for purposes of applying the No Prior Use Requirement, a member is treated as having a depreciable interest in property prior to the time of its acquisition if, as part of a series of related transactions, the property is acquired by a member of a consolidated group and a corporation that had a depreciable interest in the property becomes a member of that consolidated group (Stock and Asset Acquisition Rule). For purposes of applying these two rules, § 1.168(k)–2(b)(3)(iii)(B)(3)(iii) of the August Proposed Regulations provides that, if the acquisition of property is part of a series of related transactions that also includes one or more transactions in which the VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 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. Commenters have asked for clarification regarding the application of the Group Prior Use Rule to situations in which a consolidated group terminates as a result of all of its members joining another consolidated group, including as a result of a reverse acquisition as defined in § 1.1502– 75(d)(3). By its terms, the Group Prior Use Rule applies only to the acquisition of property by a member of a consolidated group. Thus, the Treasury Department and the IRS have determined that this rule should apply only as long as the consolidated group remains in existence, as determined under § 1.1502–75(d) and other applicable law. Several commenters also have requested confirmation that a member of a consolidated group that is treated as having a depreciable interest in property solely as a result of the application of the Group Prior Use Rule does not continue to be treated under that rule as having a depreciable interest in the property after the member leaves the consolidated group (that is, deconsolidates). Commenters have noted that, if a former member continues to be treated as having a depreciable interest in the property after deconsolidation, the Stock and Asset Acquisition Rule could apply whenever one consolidated group acquires from another consolidated group both qualified property and the stock of a member of that second consolidated group (the target member), even if the target member had no actual depreciable interest in the qualified property (as opposed to a depreciable interest arising solely from the application of the Group Prior Use Rule). The Treasury Department and the IRS did not intend the Group Prior Use Rule to continue to apply to a member of a consolidated group after the member leaves that consolidated group. By its terms, the Group Prior Use Rule applies only as long as a corporation remains a member of a consolidated group. Therefore, when a member deconsolidates, it does not continue to be treated under that rule as having a depreciable interest in the property. Accordingly, a departing member does not continue to have a depreciable interest in the property unless it actually owned such property. Further, the Treasury Department and the IRS intended the Stock and Asset Acquisition Rule to apply only when PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 50155 the member whose stock is acquired had an actual depreciable interest in the qualified property that also is acquired as part of the same series of related transactions. Accordingly, these proposed regulations clarify that the phrase ‘‘a corporation that had a depreciable interest in the property’’ in the Stock and Asset Acquisition Rule refers only to a corporation that has such an interest without regard to the application of the Group Prior Use Rule. iii. Sales of Property Between Members of the Same Consolidated Group (Example 21 in § 1.168(k)–2(b)(3)(vi) of the August Proposed Regulations) The Treasury Department and the IRS have received comments regarding the interaction of the August Proposed Regulations for consolidated groups with the statutorily prescribed Related Party Requirement and Component Member Requirement, as illustrated by Example 21 in § 1.168(k)–2(b)(3)(vi) of the August Proposed Regulations (Former Example 21). Generally, a corporation qualifies as a component member of a controlled group if the corporation was a member of such controlled group during the majority of the corporation’s taxable year. See section 1563(b). In addition, the taxable year of a member of a consolidated group ends for all Federal income tax purposes at the end of the day on which its status as a member changes. See § 1.1502–76(b). Therefore, commenters have questioned how the August Proposed Regulations for consolidated groups could apply to treat the Component Member Requirement as satisfied if a member acquires depreciable property from another member of the same consolidated group (selling group) and, as part of an integrated plan that includes the acquisition, the acquiring member deconsolidates from the selling group. In Former Example 21, Parent is the common parent of a consolidated group that includes F Corporation (F) and G Corporation (G). G has a depreciable interest in certain equipment (Equipment #3). As part of a series of related transactions, (1) G sells Equipment #3 to F, and then (2) Parent sells all of its F stock to X Corporation (X), the common parent of an unrelated consolidated group. Based on those facts, Former Example 21 concludes that the Group Prior Use Rule does not apply to treat F as previously having a depreciable interest in Equipment #3 because F’s status as a member of the Parent consolidated group is tested immediately after the last transaction in the related series, at which point F has ceased to be a member of the Parent E:\FR\FM\24SEP2.SGM 24SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 50156 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules consolidated group. Former Example 21 relies on the same analysis to conclude that the Related Party Requirement and Component Member Requirement are also satisfied, and that, assuming all other relevant requirements are satisfied, F would be eligible to claim the additional first year depreciation deduction for Equipment #3. Commenters also have requested guidance concerning the amount, location, and timing of the additional first year depreciation deduction in transactions similar to the transaction described in Former Example 21. In particular, commenters have asked whether the deduction should be reported on the consolidated return of the Parent consolidated group (that is, the selling group) or on the consolidated return of the X consolidated group (that is, the acquiring group), and whether the deduction would be limited by section 168(i)(7). Commenters have noted that, if F were treated as placing Equipment #3 in service while a member of the Parent consolidated group, the deduction might be reported on the consolidated return of the Parent group. In addition, because the transaction between F and G is an intercompany transaction, section 168(i)(7)(B)(ii) might apply to limit the amount of the deduction to an amount equaling G’s gain from the transaction. One commenter further noted that, even if section 168(i)(7)(B)(ii) did not apply to the transaction, any amount of the deduction in excess of G’s gain nevertheless might be disallowed under § 1.1502–13 as a noncapital, nondeductible amount. Commenters have asserted that these potential results regarding the location (the Parent consolidated group) and the amount (an amount not in excess of G’s gain) of the deduction would be improper based on the legislative history of section 168(k), which indicates that Congress intended to stimulate economic activity and promote capital investment. See H. Rept. 115–409, at 232 (2017) (‘‘The Committee believes that providing full expensing for certain business assets lowers the cost of capital for tangible property used in a trade or business. With lower costs of capital, the Committee believes that businesses will be encouraged to purchase equipment and other assets, which will promote capital investment and provide economic growth.’’); H. Rept. 107–251, at 20 (2001) (‘‘The Committee believes that allowing additional first-year depreciation will accelerate purchases of equipment, promote capital investment, modernization, and growth, VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 and will help to spur an economic recovery.’’). The Treasury Department and the IRS agree with commenters that, in situations similar to Former Example 21, the additional first year depreciation deduction should be reported on the consolidated return of the acquiring group rather than the selling group. With respect to Former Example 21, the Treasury Department and the IRS note that F made the economic outlay for Equipment #3, which was included in the amount paid by X for F’s stock. Additionally, F’s acquisition of Equipment #3 and Parent’s sale of the F stock to X occur as part of the same series of related transactions; thus, at the time of F’s acquisition of Equipment #3, the parties expected F to deconsolidate from the Parent consolidated group, and the substance of the transaction is the same as if F first became a member of the X consolidated group and then acquired Equipment #3. Furthermore, F’s purchase of Equipment #3 is the type of activity that section 168(k) was intended to encourage—if F had become a member of the X consolidated group before purchasing Equipment #3, it is clear that F, as a member of the X consolidated group, would be allowed the deduction in its full amount. Moreover, in circumstances similar to Former Example 21, the statute and regulations disregard a transitory acquisition of depreciable property when the property is acquired and disposed of within 90 calendar days. See section 168(k)(2)(E)(iii) and § 1.168(k)–2(b)(3)(vi) and (b)(4)(iv) (concerning syndication transactions) of the Final Regulations; see also § 1.168(k)–2(b)(3)(iii)(B)(4) of these proposed regulations (concerning de minimis uses of property). To ensure that the additional first year depreciation deduction is reported on the acquiring group’s consolidated return in circumstances like those described in Former Example 21, § 1.168(k)–2(b)(3)(v)(C) of these proposed regulations (Proposed Consolidated Acquisition Rule) provides that, if a member of a consolidated group acquires depreciable property from another member of the same consolidated group (that is, the selling group) in a taxable transaction, and if the transferee member ceases to be a member of the selling group in a series of related transactions that includes the property acquisition within 90 calendar days of the date of the property acquisition, then (1) the disposition and acquisition of the property are treated as occurring one day after the date on which the PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 transferee member ceases to be a member of the selling group (Deconsolidation Date) for all Federal income tax purposes, and (2) the transferee member is treated as placing the depreciable property in service not earlier than one day after the Deconsolidation Date for purposes of claiming depreciation or the investment credit. The Proposed Consolidated Acquisition Rule would ensure that the used property acquisition requirements, including the No Prior Use Requirement and the Related Party Requirement, are satisfied in cases similar to Former Example 21. With respect to the No Prior Use Requirement, because the proposed rule treats the transferee member as acquiring the property after it ceases to be a member of the selling group, the transferee member is not attributed the selling group’s usage of the property under the Group Prior Use Rule. The Related Party Requirement and Component Member Requirements would be tested using the same analysis. The Proposed Consolidated Acquisition Rule applies the same treatment for purposes of determining whether the transaction is covered by section 168(i)(7)(B)(ii). Therefore, because the acquisition is not treated as occurring between members of the same consolidated group, if the transferee member is eligible to claim the additional first year depreciation deduction, then section 168(i)(7)(B)(ii) will not apply to limit the amount of the deduction. In order to allow the deduction to the appropriate party, the Proposed Consolidated Acquisition Rule also provides that the transferee member is treated as placing the property in service not earlier than one day after the Deconsolidation Date for purposes of sections 167 and 168 and §§ 1.46–3(d) and 1.167(a)–11(e)(1). In so providing, the Treasury Department and the IRS intend to prohibit the transferee member from claiming the additional first year depreciation deduction on the selling group’s consolidated return. The rule also prevents the transferee member from claiming regular depreciation or the investment credit with respect to the acquired property during the period after the transferee member acquires the property but before it leaves the selling group. Example 28 (that is, revised Former Example 21) in proposed § 1.168(k)–2(b)(3)(vii)(BB) illustrates the application of the Proposed Consolidated Acquisition Rule to the acquisition of depreciable property by one member of a consolidated group from another member of the same consolidated group. E:\FR\FM\24SEP2.SGM 24SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules iv. Deemed Acquisitions of Depreciable Property Between Members of the Same Consolidated Group Commenters have noted that issues similar to those in Former Example 21 also arise in the context of deemed acquisitions of property within a consolidated group resulting from an election under either section 338(h)(10) or section 336(e). The Treasury Department and the IRS have determined that deemed acquisitions of property should be treated the same as actual acquisitions of property. Thus, § 1.168(k)–2(b)(3)(v)(D) of these proposed regulations provides a rule (Proposed Consolidated Deemed Acquisition Rule) that applies if (1) the transferee member acquires the stock of another member of the same group that holds depreciable property (target) in a qualified stock purchase or a qualified stock disposition for which a section 338 election or a section 336(e) election for a disposition described in § 1.336– 2(b)(1), respectively, is made, and (2) the transferee member and target cease to be members of the consolidated group within 90 calendar days of the acquisition date (within the meaning of § 1.338–2(c)(1)) or disposition date (within the meaning of § 1.336–1(b)(8)) as part of the same series of related transactions that includes the acquisition. The Proposed Consolidated Deemed Acquisition Rule does not apply to qualified stock dispositions described in section 355(d)(2) or (e)(2) because the rules applicable to such dispositions do not treat a new target corporation as acquiring assets from an unrelated person. See § 1.336–2(b)(2). If the Proposed Consolidated Deemed Acquisition Rule applies, then (a) the acquisition date or disposition date, as applicable, is treated as the date that is one day after the date on which the transferee member and target cease to be members of the consolidated group (Deconsolidation Date) for all Federal income tax purposes, and (b) new target is treated as placing the depreciable property in service not earlier than one day after the Deconsolidation Date for purposes of sections 167 and 168 and §§ 1.46–3(d) and 1.167(a)–11(e)(1). Without the proposed rule, new target might be treated as having a depreciable interest in the assets new target is deemed to acquire by virtue of the Group Prior Use Rule because old target, a member of the same consolidated group, had a depreciable interest in those assets. If applicable, the proposed rule prevents new target from being treated as having a depreciable interest in the assets by moving the acquisition date or disposition date to the day after VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 the Deconsolidation Date. New target is therefore a member of the acquiring group at the time it is deemed to acquire the assets. Similar to the Proposed Consolidated Acquisition Rule, this deemed acquisition rule also provides that the transferee member is treated as placing the property in service not earlier than one day after the Deconsolidation Date for purposes of sections 167 and 168 and §§ 1.46–3(d) and 1.167(a)–11(e)(1). Example 29 in proposed § 1.168(k)–2(b)(3)(vii)(CC) illustrates the application of the rule to the deemed acquisition of depreciable property by one member of a consolidated group from another member of the same consolidated group pursuant to a section 338(h)(10) election. Neither the Proposed Consolidated Acquisition Rule nor the Proposed Consolidated Deemed Acquisition Rule applies if the property that is acquired (or deemed acquired) is subsequently disposed of by the transferee member or new target, respectively, in a transaction that is part of the same series of related transactions as the actual or deemed acquisition of the property. For special rules governing the transfer of property in a series of related transactions, see § 1.168(k)–2(b)(3)(iii)(C) of these proposed regulations. For special rules governing property placed in service and disposed of in the same taxable year, see § 1.168(k)–2(g)(1). 3. Acquisition of Property A. Definition of Binding Contract for Acquisition of Entity The Treasury Department and the IRS are aware that taxpayers and practitioners are having difficulty applying the binding contract rules in the August Proposed Regulations to transactions involving the acquisition of an entity. Because those rules were written to apply to the purchase of an asset instead of an entity, the Treasury Department and the IRS recognize that a binding contract rule for an acquisition of a trade or business, or an entity, is needed. Accordingly, these proposed regulations amend § 1.168(k)– 2 by adding paragraph (b)(5)(iii)(G) to provide that a contract to acquire all or substantially all of the assets of a trade or business or to acquire an entity (for example, a corporation, a partnership, or a limited liability company) is binding if it is enforceable under State law against the parties to the contract. The presence of a condition outside the control of the parties, including, for example, regulatory agency approval, will not prevent the contract from being a binding contract. Further, the fact that PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 50157 insubstantial terms remain to be negotiated by the parties to the contract, or that customary conditions remain to be satisfied, does not prevent the contract from being a binding contract. This proposed rule also applies to a contract for the sale of the stock of a corporation that is treated as an asset sale as a result of an election under section 338. B. Property Not Acquired Pursuant to a Written Binding Contract The Treasury Department and the IRS also are aware that, in some cases, a taxpayer may acquire property that was not pursuant to a written binding contract. If such property is not selfconstructed property, a qualified film, television, or live theatrical production, or a specified plant, these proposed regulations amend § 1.168(k)–2 by adding paragraph (b)(5)(v) to provide that the acquisition date of property acquired pursuant to a contract that is not a written binding contract is the date on which the taxpayer paid or incurred more than 10 percent of the total cost of the property, excluding the cost of any land and preliminary activities such as planning and designing, securing financing, exploring, or researching. This 10percent proposed rule is the same as the safe harbor provided in § 1.168(k)– 2(b)(5)(iv)(B)(2) of the Final Regulations for determining the acquisition date of self-constructed property. This proposed rule does not apply to the acquisition of a trade or business, or an entity. The Treasury Department and the IRS request comments on this proposed rule. 4. Components Multiple commenters to the August Proposed Regulations requested an election similar to the one provided in section 3.02(2)(b) of Rev. Proc. 2011–26 (2011–16 I.R.B. 664 (April 18, 2011)) for components acquired or selfconstructed after September 27, 2017, of larger self-constructed property for which the manufacture, construction, or production of the larger self-constructed property begins before September 28, 2017. The Treasury Department and the IRS have determined that it is appropriate to allow a taxpayer to elect to treat one or more components acquired or selfconstructed after September 27, 2017, of certain larger self-constructed property as being eligible for the additional first year depreciation deduction under section 168(k). The larger selfconstructed property must be qualified property under section 168(k)(2), as in effect before the enactment of the Act, E:\FR\FM\24SEP2.SGM 24SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 50158 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules for which the manufacture, construction, or production began before September 28, 2017. However, the election is not available for components of larger self-constructed property when such property is not eligible for any additional first year depreciation deduction under section 168(k) (for example, property described in section 168(k)(9) and placed in service by the taxpayer in any taxable year beginning after December 31, 2017, or qualified improvement property placed in service by the taxpayer after December 31, 2017). These proposed regulations amend § 1.168(k)–2 by adding paragraph (c) to provide for this election. These proposed regulations also provide rules regarding installation costs and the determination of the basis attributable to the manufacture, construction, or production before January 1, 2020, for longer production period property or certain aircraft property described in section 168(k)(2)(B) or (C). Additionally, these proposed regulations provide the time and manner of making the election, and examples to illustrate the proposed rules. These proposed regulations also amend § 1.168(k)–2(e)(1)(iii) to provide rules regarding the determination of the basis attributable to the manufacture, construction, or production before January 1, 2027, for longer production period property or certain aircraft property described in section 168(k)(2)(B) or (C). Commenters to the August Proposed Regulations requested guidance on whether property acquired before September 28, 2017, by a trade or business described in section 168(k)(9)(A) is eligible for the additional first year depreciation deduction provided by section 168(k) as in effect before the enactment of the Act. Another commenter requested clarification on whether any of the costs of property acquired before September 28, 2017, pursuant to a written binding contract, and placed in service after 2017 are eligible for the additional first year depreciation deduction under section 168(k). Property acquired before September 28, 2017, is eligible for the additional first year depreciation deduction provided by section 168(k) as in effect before the enactment of the Act provided such property is qualified property under section 168(k) as in effect before the enactment of the Act. However, if the taxpayer makes the election in proposed § 1.168(k)–2(c), as described above, for components acquired or self-constructed after September 27, 2017, those components are eligible for the additional first year VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 depreciation deduction under section 168(k). Such election, however, does not apply to, among other things, property described in section 168(k)(9) and placed in service in a taxable year beginning after December 31, 2017. 5. Special Rules: Mid-Quarter Convention The Treasury Department and the IRS are aware that taxpayers and practitioners have questioned whether the unadjusted depreciable basis of qualified property for which the additional first year depreciation deduction is claimed is taken into account in determining whether the mid-quarter convention under section 168(d) and § 1.168(d)–1 applies for the taxable year. The Treasury Department and the IRS agree that a rule is necessary and that it should be consistent with the definition of depreciable basis in § 1.168(d)–1(b)(4). Accordingly, the proposed regulations amend § 1.168(k)–2 by adding paragraph (g)(11) to provide that in determining whether the mid-quarter convention applies for a taxable year under section 168(d)(3) and § 1.168(d)–1, the depreciable basis, as defined in § 1.168(d)–1(b)(4), for the taxable year the qualified property is placed in service by the taxpayer, is not reduced by the allowed or allowable additional first year depreciation deduction for that taxable year. 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. These regulations also are proposed to apply to components acquired or self-constructed after September 27, 2017, of larger selfconstructed property for which the manufacture, construction, or production begins before September 28, 2017, and that is qualified property under section 168(k)(2) as in effect before the enactment of the Act and 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. Pending the issuance of final regulations, a taxpayer may choose to rely on these proposed regulations, in their entirety, to qualified property acquired and placed in service or planted or grafted, as applicable, after September 27, 2017, by the taxpayer PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 during taxable years ending on or after September 28, 2017. Pending the issuance of final regulations, a taxpayer also may choose to rely on these proposed regulations, in their entirety, to components acquired or selfconstructed after September 27, 2017, of larger self-constructed property for which the manufacture, construction, or production begins before September 28, 2017, and that is qualified property under section 168(k)(2) as in effect before the enactment of the Act and placed in service by the taxpayer during taxable years ending on or after September 28, 2017. If a taxpayer chooses to rely on these proposed regulations, the taxpayer must consistently apply all rules of these proposed regulations. Special Analyses I. Regulatory Planning and Review— Economic Analysis Executive Orders 12866 and 13563 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including (i) potential economic, environmental, and public health and safety effects, (ii) potential distributive impacts, and (iii) equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. These proposed regulations have been designated as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) (MOA) between the Treasury Department and the Office of Management and Budget (OMB) regarding review of tax regulations. The Office of Information and Regulatory Affairs has designated these proposed regulations as significant under section 1(b) of the MOA. Accordingly, the OMB has reviewed these proposed regulations. A. Background i. Bonus Depreciation Generally In general, section 168(k) allows taxpayers to immediately deduct some portion of investment in certain types of physical capital, what is colloquially known as bonus depreciation. The Act changed section 168(k) in several ways. Arguably most substantially, the Act increased the bonus percentage as it applies to property generally acquired after September 27, 2017, which accelerates depreciation deductions. The Act also removed the ‘‘original use’’ requirement, meaning that taxpayers E:\FR\FM\24SEP2.SGM 24SEP2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules could claim bonus depreciation on ‘‘used’’ property. The Act made several other modest changes to the operation of section 168(k). First, it excluded from the definition of qualified property any property used by rate-regulated utilities and firms (primarily automobile dealerships) with ‘‘floor plan financing indebtedness’’ as defined under section 163(j). Furthermore, section 168(k)(2)(a)(ii)(IV) and (V) allowed qualified film, television, and live theatrical productions (as defined under Section 181) to qualify for bonus depreciation. The regulations under § 1.168(k)–2 generally provide structure and clarity for the implementation of section 168(k). However, Treasury and the IRS determined that there remained several outstanding issues requiring clarification that should be subject to notice and comment. First, these proposed regulations address some ambiguities related to the operation of section 168(k)(9), which describes some property that is ineligible for bonus depreciation. Second, these proposed regulations create a de minimis rule which provides that a taxpayer will not be deemed to have had a prior depreciable interest in a property—and thus that property will be eligible for bonus depreciation in that taxpayer’s hands—if the taxpayer previously disposed of that property within 90 days of the date on which that property was placed in service. Third, these proposed regulations clarify the interpretation of an example in the August Proposed Regulations regarding an asset acquisition as part of a sale of a member of a controlled group from one group to another. Fourth, these proposed regulations modify the treatment of series of related transactions. Finally, these proposed regulations provide that certain components of larger selfconstructed property can be eligible for the increased bonus depreciation percentage even if the construction of such larger self-constructed property began before September 28, 2017. khammond on DSKJM1Z7X2PROD with PROPOSALS2 B. No-Action Baseline The Treasury Department and the IRS have assessed the benefits and costs of the proposed regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these proposed regulations. C. Economic Analysis of NPRM This section describes the main provisions of these proposed regulations and provides a qualitative economic analysis of each one. VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 i. Property Excluded From Bonus Depreciation by Section 168(k)(9) As discussed above, section 168(k)(9) provides that property used by certain businesses is not eligible for bonus depreciation. These businesses include certain rate-regulated utilities and motor vehicle dealerships with floor plan financing indebtedness. These proposed regulations first clarify that those taxpayers that lease property to such businesses described by section 168(k)(9) may claim bonus depreciation, so long as other requirements of section 168(k) are met. This approach broadly follows the existing normalization rules (which provide generally for the reconciliation of tax income and book income for regulatory purposes for utilities), which provides that lessors to public utilities are not bound by such rules so long as they themselves are not a public utility. The Treasury Department and the IRS project that this guidance will be easy for taxpayers to interpret and comply with. Additionally, this decision allows businesses to receive some share of the economic benefit of section 168(k). To the extent that lessors can claim bonus depreciation, it is plausible that the market-clearing lease price for such assets will fall, potentially enabling some expansions of output and contributing to economic growth. These proposed regulations next clarify which businesses fall under the umbrella of section 168(k)(9)(A) (utilities) and section 168(k)(9)(B) (dealerships with floor plan financing indebtedness). For utilities, these proposed regulations clarify that the ‘‘primary use’’ of an item described in the Code is consistent with how primary use is determined in existing regulations under section 167. This application should be familiar to taxpayers, and thus relatively easy to comply with. The statutory language of section 168(k)(9)(B) is somewhat more ambiguous, and thus more substantive clarifications were necessary. First, section 168(k)(9)(B) provides that dealerships with floor plan financing indebtedness are ineligible for bonus depreciation ‘‘if the floor plan financing interest was taken into account under [section 163(j)(1)(C)].’’ These proposed regulations clarify that such interest is in fact ‘‘taken into account’’ only if the firm in fact received a benefit from section 163(j)(1)(C)—i.e., if total business interest expense (including floor plan financing interest) exceeds business interest income plus 30 percent of adjusted taxable income. This decision allows more firms to claim bonus depreciation than if the Treasury PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 50159 Department and the IRS had made the opposite interpretation (deeming all dealerships with floor plan financing interest to be ineligible for bonus depreciation, regardless of whether the firm received a benefit from section 163(j)(1)(C)). The Treasury Department and the IRS have undertaken an analysis of the investment effects of this provision, under the assumption that 10 to 50 percent of affected taxpayers would have come to the opposite interpretation in the absence of the proposed regulations. Using tax return data and parameters from the literature on the effect of bonus depreciation on investment, this analysis has found that this provision would increase investment by an annual maximum of $20 to $90 million, although this range would likely decrease over time as uncertainty over the interpretation of the statute is resolved. Additionally, these proposed regulations will resolve a substantial compliance uncertainty facing these taxpayers. An additional ambiguity in section 168(k)(9)(B) pertains to the length of time that the section applies to a given firm. The section refers to a ‘‘trade or business that has had floor plan financing indebtedness . . . if the floor plan financing interest related to such indebtedness was taken into account under [section 163(j)(1)(C)]’’. Consider a firm (Example A) that received a benefit from section 163(j)(C)(1) in tax year 2018 (meaning that its interest deduction would have been smaller if not for section 163(j)(C)(1)) but not in tax year 2019 or any other later year. One interpretation of the statute would deem that firm forever ineligible for bonus depreciation, in 2019 and later. The Treasury Department and the IRS came to the opposite conclusion and deemed that section 168(k)(9)(B) is determined on an annual basis: For example, the firm in Example A of this part of the Special Analysis section would not be eligible for bonus depreciation in 2018, but so long as the other requirements were met, it would be eligible for bonus depreciation in 2019. As with the interpretation of ‘‘taken into account,’’ this interpretation enables more firms to be eligible for bonus depreciation in more years, potentially increasing investment by such firms. The Treasury Department and the IRS expect that some taxpayers would have come to a different conclusion regarding the interpretation of this timing in the absence of these proposed regulations. Therefore, this provision could also have some economic effects. The Treasury Department and the IRS engaged in an E:\FR\FM\24SEP2.SGM 24SEP2 50160 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 analysis on these effects based on historical tax data, parameter values from the economic literature for the effect of bonus depreciation on investment, and assumptions regarding taxpayer interpretations in the absence of these proposed regulations. The result of this analysis projects that this provision will cause investment to increase in this industry by no greater than $55 million in any year, and approximately $25 million per year on average over the period from 2019 to 2028. The Treasury Department and the IRS additionally project that some share of this increased investment will reduce investment in other industries through crowd-out effects. Importantly, the estimated effect of this provision interacts substantially with the rule that floor plan financing is ‘‘taken into account’’ only if the firm in fact received a benefit from section 163(j)(1)(C). In the absence of the proposed regulations, the Treasury Department and the IRS project that some share of taxpayers in this industry would have interpreted section 168(k)(9)(B) as rendering them ineligible for bonus depreciation in substantially all circumstances. Therefore, the effect of both provisions together is less than the sum of each of the provisions considered independently. In total, the Treasury Department and the IRS have determined that the effect of both rules related to section 168(k)(9)(B), when considered together, would have a maximum annual effect on investment in the range of $65 million to $90 million and declining over time as uncertainty over the interpretation of the statute is resolved. ii. Prior Depreciable Interest In general, to be eligible for bonus depreciation, a given property may not have been owned by the same firm in the past. This requirement was instituted by Congress in order to prevent ‘‘churning’’ of assets, whereby a firm could sell and soon thereafter repurchase the same asset in order to claim the 100 percent deduction. The August Proposed Regulations defined ‘‘ownership’’ for this purpose as having a prior depreciable interest. Section 1.168(k)–2 finalizes this interpretation. These proposed regulations introduce an exception, providing that a taxpayer does not have a depreciable interest in a given property if the taxpayer disposed of the property within 90 days of the initial date when the property was placed in service (so long as the asset is not repurchased and placed in service again within the same taxable year). The Treasury Department and the IRS primarily instituted this rule in VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 order to coordinate with the syndication transaction rules of section 168(k)(E)(2)(iii). The Treasury Department and the IRS do not anticipate substantial economic effects of this provision. Nevertheless, it will generally have the effect of causing more property to be eligible for bonus depreciation (increasing incentives to invest), while minimizing incentives for wasteful churning of assets. Furthermore, these proposed regulations clarify that partners in a partnership hold a depreciable interest in the property held by that partnership, and that the share of the property to which this applies equals the partner’s share of the depreciation deductions of the partnership over a certain period. The Treasury Department and the IRS have determined that this provides an accurate reflection of the partner’s prior depreciable interest in the property, and therefore aligns tax consequences and economic consequences, which is generally favorable for economic efficiency. However, as is the case with the ‘‘prior use’’ rules generally, the Treasury Department and the IRS do not project this provision to substantially affect behavior. iii. Group Prior Use Rule These proposed regulations clarify several aspects of the ‘‘Group Prior Use Rule.’’ Under that rule, all members of a consolidated group are treated as having had a depreciable interest in a property if any member of the consolidated group had such a depreciable interest. First, these proposed regulations clarify that the rule ceases to be in effect once the consolidated group terminates as a result of joining another consolidated group. Second, these proposed regulations clarify that the Group Prior Use Rule does not apply to a corporation after it deconsolidates from the consolidated group, so long as that corporation did not in fact own that property. As is the case with the prior use rules generally, the Treasury Department and the IRS do not anticipate large economic effects as a result of this section of these proposed regulations. iv. Purchases of Assets as Part of Acquisition of Entire Business Additionally, these proposed regulations clarify the proper procedure for certain purchases of assets by a given corporation from a related party that are a part of an integrated plan involving the selling of that corporation from one group to another. Specifically, these proposed regulations provide that the deduction for bonus depreciation is PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 allowed in such circumstances, and should be claimed by the acquiring group. These proposed regulations provide for a similar treatment in the case of deemed acquisitions in the case of an election under section 338(h)(10) or section 336(e). These rules cause the tax treatment to reflect the economic reality, in which the acquiring group is bearing the economic outlay of the asset purchase, and that acquiring group had no economic prior depreciable interest. By aligning the tax consequences with the economic allocations, this treatment minimizes potential distortions caused by the anti-churning rules. v. Component Rule Election In 2010, Congress increased the bonus percentage from 50 percent to 100 percent for property placed in service between September 9, 2010 and December 31, 2011. In 2011, the IRS issued Revenue Procedure 2011–26 to allow taxpayers to elect to have the 100 percent bonus rate apply to components of larger self-constructed property whose construction began before September 9, 2010, so long as (1) the components were acquired (or selfconstructed) after than that date and (2) the larger self-constructed property itself qualifies for bonus depreciation generally. These proposed regulations provide an analogous rule, replacing September 9, 2010 with September 27, 2017. This provision will allow more property to qualify for 100 percent bonus depreciation. Furthermore, this provision provides neutrality between taxpayers who acquire distinct, smaller pieces of depreciable property and those taxpayers that invest a similar amount in fewer, larger pieces of depreciable property whose construction takes place over a longer period of time. By treating similar taxpayers (and similar choices) similarly, this rule enhances economic efficiency by minimizing tax-related distortions. However, the Treasury Department and the IRS project these rules to have only a modest effect on future economic decisions. These rules affect only taxpayers (1) that acquire (or self-construct) components after the date of enactment of these proposed regulations and (2) for whom the construction of the larger selfconstructed property began prior to September 28, 2017 (approximately 21 months ago). The Treasury Department and the IRS expect relatively few taxpayers to be affected by this provision going forward. vi. Series of Related Transactions The August Proposed Regulations provided that, in a series of related transactions, the relationship between E:\FR\FM\24SEP2.SGM 24SEP2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules the transferor and transferee of an asset was determined only after the final transaction in the series (the ‘‘Series of Related Transaction Rule’’). Commenters had expressed confusion regarding whether this applies to testing whether parties are related under section 179(d)(2), or whether it applies more broadly (e.g., in determining whether the taxpayer had a prior depreciable interest). These proposed regulations clarify that this Series of Related Transaction Rule is intended only to test the relatedness of two parties. These proposed regulations further revise the Series of Related Transaction Rule to address its application in various situations. Under these proposed regulations, the relatedness is tested after each step of the series of related transactions, with the substantial exception that any intermediary (i.e., a taxpayer other than the original transferor or ultimate transferee) is disregarded so long as that intermediary (1) never places the property in service or (2) disposes of the property in the same taxable year in which it was placed in service. This would tend to eliminate the benefit of the Series of Related Transaction Rule in cases where intermediate transferees maintained use of the property for a non-trivial length of time. The Treasury Department and the IRS project that this interpretation will prevent abuse. The Treasury Department and the IRS do not predict substantial economic effects of this provision. vii. Miscellaneous Lastly, these proposed regulations put forward rules to the extent existing regulations apply in slightly new contexts. In particular, these proposed regulations clarify when a binding contract is in force to acquire all or substantially all the assets of a trade or business. Additionally, consistent with the rules of § 1.168(d)–1(b)(4), these proposed regulations provide that, for the purpose of determining whether the mid-quarter convention applies, depreciable basis is not reduced by the amount of bonus depreciation. The Treasury Department and the IRS do not anticipate large economic effects of these clarifications, though the additional clarity of these regulations will likely reduce compliance burdens. II. Paperwork Reduction Act The collection of information in these proposed regulations are in proposed § 1.168(k)–2(c). The collection of information in proposed § 1.168(k)–2(c) is an election that a taxpayer may make to treat one or more components acquired or self-constructed after September 27, 2017, of certain larger self-constructed property as being eligible for the 100-percent additional first year depreciation deduction under section 168(k). The larger selfconstructed property must be qualified property under section 168(k)(2) as in 50161 effect before the enactment of the Act and for which the manufacture, construction, or production began before September 28, 2017. The election is made by attaching a statement to a Federal income tax return indicating that the taxpayer is making the election under proposed § 1.168(k)–2(c) and whether the taxpayer is making the election for all or some of the components described in proposed § 1.168(k)–2(c). For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) (PRA), the reporting burden associated with proposed § 1.168(k)–2(c) will be reflected in the PRA submission associated with income tax returns in the Form 1120 series, Form 1040 series, Form 1041 series, and Form 1065 series (for OMB control numbers, see chart at the end of this part II of this Special Analysis section). The estimate for the number of impacted filers with respect to the collection of information described in this part is 0 to 137,000 respondents. Historical data was not available to directly estimate the number of impacted filers. This estimate assumes that no more than 10 percent of income tax return filers with a nonzero entry on Form 4562 Line 14 (additional first year depreciation deduction) will make this election (5 percent in the case of filers of Form 1040 series). The IRS estimates the number of affected filers to be the following: TAX FORMS IMPACTED Number of respondents (estimated) Collection of information Section 1.168(k)–2(c) Election for components of larger self-constructed property for which the manufacture, construction, or production begins before September 28, 2017. 0–137,000 Forms to which the information may be attached Form 1120 series, Form 1040 series, Form 1041 series, and Form 1065 series. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Source: IRS:RAAS:KDA (CDW 6–1–19). The current status of the PRA submissions related to the tax forms that will be revised as a result of the information collections in the section 168(k) regulations is provided in the accompanying table. As described above, the reporting burdens associated with the information collections in the regulations are included in the aggregated burden estimates for OMB control numbers 1545–0123 (which represents a total estimated burden time for all forms and schedules for corporations of 3.157 billion hours and total estimated monetized costs of $58.148 billion ($2017)), 1545–0074 (which represents a total estimated burden time, including all other related VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 forms and schedules for individuals, of 1.784 billion hours and total estimated monetized costs of $31.764 billion ($2017)), and 1545–0092 (which represents a total estimated burden time, including all other related forms and schedules for trusts and estates, of 307,844,800 hours and total estimated monetized costs of $9.950 billion ($2016)). The overall burden estimates provided for the OMB control numbers below are aggregate amounts that relate to the entire package of forms associated with the applicable OMB control number and will in the future include, but not isolate, the estimated burden of the tax forms that will be created or revised as a result of the information PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 collections in the regulations. These numbers are therefore unrelated to the future calculations needed to assess the burden imposed by the regulations. These burdens have been reported for other regulations that rely on the same OMB control numbers to conduct information collections under the PRA, and the Treasury Department and the IRS urge readers to recognize that these numbers are duplicates and to guard against over counting the burden that the regulations that cite these OMB control numbers imposed prior to the Act. No burden estimates specific to the forms affected by the regulations are currently available. The Treasury Department and the IRS have not E:\FR\FM\24SEP2.SGM 24SEP2 50162 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules estimated the burden, including that of any new information collections, related to the requirements under the regulations. For the OMB control numbers discussed in above, the Treasury Department and the IRS estimate PRA burdens on a taxpayertype basis rather than a provisionspecific basis. Those estimates would capture changes made by the Act, the final regulations under section 168(k), and those that arise out of discretionary authority exercised in these proposed regulations and other regulations that affect the compliance burden for those forms. The Treasury Department and the IRS request comments on all aspects of information collection burdens related to the proposed regulations, including estimates for how much time it would take to comply with the paperwork Form Type of filer Form 1040 ............................... Individual (NEW Model) .......... burdens described above for each relevant form and ways for the IRS to minimize the paperwork burden. In addition, when available, drafts of IRS forms are posted for comment at https:// apps.irs.gov/app/picklist/list/ draftTaxForms.htm. IRS forms are available at https://www.irs.gov/formsinstructions. Forms will not be finalized until after they have been approved by OMB under the PRA. OMB No.(s) 1545–0074 Status Published in the Federal Register on 7/20/18. Public Comment period closed on 9/18/18. Link: https://www.federalregister.gov/documents/2018/07/20/2018-15627/proposed-collection-comment-requestfor-regulation-project. Form 1041 ............................... Trusts and estates .................. 1545–0092 Published in the Federal Register on 4/4/18. Public Comment period closed on 6/4/18. Link: https://www.federalregister.gov/documents/2018/04/04/2018-06892/proposed-collection-comment-requestfor-form-1041. Forms 1065 and 1120 ............. Business (NEW Model) .......... 1545–0123 Published in the Federal Register on 10/8/18. Public Comment period closed on 12/10/18. Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-requestfor-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd. III. Regulatory Flexibility Act It is hereby certified that these proposed regulations will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act (5 U.S.C. chapter 6). Section 168(k) generally affects taxpayers that own and use depreciable property in their trades or businesses or for their production of income. The reporting burden in proposed § 1.168(k)–2(c) generally affects taxpayers that elect to have the 100 Form Form Form Form Form percent additional first year depreciation deduction apply to components that are acquired or selfconstructed after September 27, 2017, of depreciable property for which the manufacture, construction, or production began before September 28, 2017, and was completed generally before January 1, 2020. The election is made by attaching a statement to a Federal income tax return indicating that the taxpayer is making the election under proposed § 1.168(k)–2(c) and whether the taxpayer is making this election for all or some of the components described in § 1.168(k)– 2(c). For purposes of the PRA, the Treasury Department and the IRS estimate that there are 0 to 181,500 respondents of all sizes that are likely to be impacted by this collection of information. Only a small proportion of these filers are likely to be small entities (business entities with gross receipts of $25 million or less pursuant to section 448(c)(1)). The Treasury Department and the IRS estimate the number of filers affected by proposed § 1.168(k)– 2(c) to be the following: Gross receipts of $25 million or less Gross receipts over $25 million 1040 ............................ 1065 ............................ 1120 ............................ 1120S ......................... 0–12,000 Respondents (estimated) ................................ 0–1,250 Respondents (estimated) .................................. 0–1,750 Respondents (estimated) .................................. 0–2,500 Respondents (estimated) .................................. 0–32,500 0–35,000 0–11,000 0–41,000 Respondents Respondents Respondents Respondents (estimated). (estimated). (estimated). (estimated). Total .............................. 0–29,500 Respondents (estimated) ................................ 0–152,000 Respondents (estimated). khammond on DSKJM1Z7X2PROD with PROPOSALS2 Source: IRS:RAAS:KDA (CDW 6–1–19). Regardless of the number of small entities potentially affected by these proposed regulations, the Treasury Department and the IRS have concluded that proposed § 1.168(k)–2(c) will not have a significant economic impact on a substantial number of small entities. As a result of all changes in these proposed regulations, the Treasury Department and the IRS estimate that VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 individual taxpayers who have gross receipts of $25 million or less and experience an increase in burden will incur an average increase of 0 to 3 hours, and business taxpayers that have gross receipts of $25 million or less and experience an increase in burden will incur an average increase of 0 to 2 hours (Source: IRS:RAAS (8–28–2019)). Because the election in proposed PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 § 1.168(k)–2(c) is one of several changes in these proposed regulations, the Treasury Department and the IRS expect the average increase in burden to be less for the collection of information in proposed § 1.168(k)–2(c) than the average increase in burden in the preceding sentence. The Treasury Department and the IRS also note that many taxpayers with gross receipts of E:\FR\FM\24SEP2.SGM 24SEP2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules $25 million or less may experience a reduction in burden as a result of all changes in these proposed regulations. Additionally: (1) Many small businesses are not required to capitalize under section 263(a) the amount paid or incurred for the acquisition of depreciable tangible property that costs $5,000 or less if the business has an applicable financial statement or costs $500 or less if the business does not have an applicable financial statement, pursuant to § 1.263(a)–1(f)(1); (2) many small businesses are no longer required to capitalize under section 263A the costs to construct, build, manufacture, install, improve, raise, or grow depreciable property if their average annual gross receipts are $25,000,000 or less; and (3) a small business that capitalizes costs of depreciable tangible property may deduct under section 179 up to $1,020,000 (2019 inflation adjusted amount) of the cost of such property placed in service during the taxable year if the total cost of depreciable tangible property placed in service during the taxable year does not exceed $2,550,000 (2019 inflation adjusted amount). Therefore, the Treasury Department and the IRS have determined that a substantial number of small entities will not be subject to these proposed regulations. Finally, proposed § 1.168(k)–2(c) applies only if the taxpayer chooses to make an election to a more favorable rule. Consequently, the Treasury Department and the IRS hereby certify that these proposed regulations will not have a significant economic impact on a substantial number of small entities. 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. khammond on DSKJM1Z7X2PROD with PROPOSALS2 IV. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. In 2019, that threshold is approximately $154 million. These proposed regulations do not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold. VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 V. Executive Order 13132: Federalism Executive Order 13132 (entitled ‘‘Federalism’’) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. These proposed regulations do not have federalism implications and do not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order. Comments and 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 https://www.regulations.gov or upon request. A public hearing is scheduled on November 13, 2019, beginning at 10 a.m. in the Auditorium of the Internal Revenue Building, 1111 Constitution Avenue NW, Washington, DC 20224. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For more information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble. The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit an outline of the topics to be discussed and the time to be devoted to each topic by October 23, 2019. Submit a signed paper or electronic copy of the outline as prescribed in this preamble under the ADDRESSES heading. A period of 10 minutes will be allotted to each person making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. If no outline of the topics to be discussed at the hearing is received by October 23, 2019, the public hearing PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 50163 will be cancelled. If the public hearing is cancelled, a notice of cancellation of 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. Partial Withdrawal of Proposed Regulations Under the authority of 26 U.S.C. 7805 and 26 U.S.C. 1502, § 1.168(k)– 2(b)(3)(iii)(B)(3)(i) through (iii), § 1.168(k)–2(b)(3)(iii)(C), and § 1.168(k)– 2(b)(3)(vi) Examples 18 through 22 of the notice of proposed rulemaking (REG–104397–18) published in the Federal Register on August 8, 2018 (83 FR 39292) are withdrawn. Statement of Availability IRS Revenue Procedures and Notices cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding an entry for § 1.168(k)–2 in numerical order to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * * * * * * Section 1.168(k)-2 also issued under 26 U.S.C. 1502. * * * * * ■ Par. 2. Section 1.168(k)–0 is amended by adding entries for § 1.168(k)– 2(b)(3)(iii)(C), (b)(3)(v), (b)(5)(iii)(G), (b)(5)(v), (c), and (g)(11); and adding an entry for § 1.168(k)–2(h)(4) to read as follows: § 1.168(k)–0 * E:\FR\FM\24SEP2.SGM * Table of contents. * 24SEP2 * * 50164 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules § 1.168(k)–2 Additional first year depreciation deduction for property acquired and placed in service after September 27, 2017. * * * * * (b) * * * (3) * * * (iii) * * * (C) Special rules for a series of related transactions. * * * * * (v) Application to members of a consolidated group. * * * * * (5) * * * (iii) * * * (G) Acquisition of a trade or business or an entity. * * * * * (v) Determination of acquisition date for property not acquired pursuant to a written binding contract. * * * * * (c) Election for components of larger selfconstructed property for which the manufacture, construction, or production begins before September 28, 2017. (1) In general. (2) Eligible larger self-constructed property. (i) In general. (ii) Exceptions. (3) Eligible components. (i) In general. (ii) Acquired components. (iii) Self-constructed components. (4) Special rules. (i) Installation costs. (ii) Property described in section 168(k)(2)(B). (5) Computation of additional first year depreciation deduction. (i) Election is made. (ii) Election is not made. (6) Time and manner for making election. (i) Time for making election. (ii) Manner of making election. (7) Examples. * * * * * khammond on DSKJM1Z7X2PROD with PROPOSALS2 (g) * * * (11) Mid-quarter convention. (h) * * * (4) Regulation project REG–106808– 19. ■ Par. 3. Section 1.168(k)–2 is amended by: ■ 1. At the end of paragraph (a)(1), adding ‘‘, except as provided in paragraph (c) of this section’’; ■ 2. Revising paragraph (b)(2)(ii)(F); ■ 3. Adding three sentences at the end of paragraph (b)(2)(ii)(G); ■ 4. Adding paragraphs (b)(2)(iii)(F), (G), and (H); ■ 5. Adding paragraphs (b)(3)(iii)(B)(4) and (5), (b)(3)(iii)(C), (b)(3)(v), and (b)(3)(vii)(Y) through (HH); ■ 6. Revising the last sentence in paragraph (b)(5)(ii)(A); ■ 7. In the first sentence in paragraph (b)(5)(iii)(A), removing the word ‘‘A’’ at the beginning of the sentence and adding ‘‘Except as provided in VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 paragraph (b)(5)(iii)(G) of this section, a’’ in its place; ■ 8. In the first sentence in paragraph (b)(5)(iii)(B), removing the word ‘‘A’’ at the beginning of the sentence and adding ‘‘Except as provided in paragraph (b)(5)(iii)(G) of this section, a’’ in its place; ■ 9. Adding paragraph (b)(5)(iii)(G); ■ 10. In the penultimate sentence in paragraph (b)(5)(iv)(C)(1), removing the period at the end of the sentence and adding ‘‘, except as provided in paragraph (c) of this section.’’ in its place; ■ 11. In the penultimate sentence in paragraph (b)(5)(iv)(C)(2), removing the period at the end of the sentence and adding ‘‘, except as provided in paragraph (c) of this section.’’ in its place; ■ 12. Adding paragraph (b)(5)(v); ■ 13. Revising the second sentence in paragraph (b)(5)(viii) introductory text; ■ 14. Adding paragraph (c); ■ 15. Adding two sentences at the end of paragraph (e)(1)(iii); ■ 16. Adding paragraph (g)(11); ■ 17. In introductory paragraph (h)(1), removing ‘‘paragraphs (h)(2) and (3)’’ and adding ‘‘paragraphs (h)(2), (3), and (4)’’ in its place; and ■ 18. Adding paragraph (h)(4). The additions and revisions read as follows: § 1.168(k)–2 Additional first year depreciation deduction for property acquired and placed in service after September 27, 2017. * * * * * (b) * * * (2) * * * (ii) * * * (F) Primarily used in a trade or business described in section 163(j)(7)(A)(iv), and placed in service by the taxpayer in any taxable year beginning after December 31, 2017. For purposes of section 168(k)(9)(A) and this paragraph (b)(2)(ii)(F), the term primarily used has the same meaning as that term is used in § 1.167(a)– 11(b)(4)(iii)(b) and (e)(3)(iii) for classifying property. This paragraph (b)(2)(ii)(F) does not apply to property that is leased to a trade or business described in section 163(j)(7)(A)(iv) by a lessor’s trade or business that is not described in section 163(j)(7)(A)(iv) for the taxable year; or (G) * * * Solely for purposes of section 168(k)(9)(B) and this paragraph (b)(2)(ii)(G), floor plan financing interest is not taken into account for the taxable year by a trade or business that has had floor plan financing indebtedness if the sum of the amounts calculated under section 163(j)(1)(A) and (B) for the trade PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 or business for the taxable year equals or exceeds the business interest, as defined in section 163(j)(5), of the trade or business for the taxable year (which includes floor plan financing interest). If the trade or business has taken floor plan financing interest into account pursuant to this paragraph (b)(2)(ii)(G) for a taxable year, this paragraph (b)(2)(ii)(G) applies to any property placed in service by that trade or business in that taxable year. This paragraph (b)(2)(ii)(G) does not apply to property that is leased to a trade or business that has had floor plan financing indebtedness by a lessor’s trade or business that has not had floor plan financing indebtedness during the taxable year or that has had floor plan financing indebtedness but did not take into account floor plan financing interest for the taxable year pursuant to this paragraph (b)(2)(ii)(G). (iii) * * * (F) Example 6. In 2019, a financial institution buys new equipment for $1 million and then leases this equipment to a lessee that primarily uses the equipment in a trade or business described in section 163(j)(7)(A)(iv). The financial institution is not described in section 163(j)(7)(A)(iv). As a result, paragraph (b)(2)(ii)(F) of this section does not apply to this new equipment. Assuming all other requirements are met, the financial institution’s purchase price of $1 million for the new equipment qualifies for the additional first year depreciation deduction under this section. (G) Example 7. In 2019, F, an automobile dealer, buys new computers for $50,000 for use in its trade or business of selling automobiles. For purposes of section 163(j), F has the following for 2019: $1,000 of adjusted taxable income, $40 of business interest income, $400 of business interest (which includes $100 of floor plan financing interest). The sum of the amounts calculated under section 163(j)(1)(A) and (B) for F for 2019 is $340 ($40 + ($1,000 × 30 percent)). F’s business interest, which includes floor plan financing interest, for 2019 is $400. As a result, F’s floor plan financing interest is taken into account by F for 2019 pursuant to paragraph (b)(2)(ii)(G) of this section. Accordingly, F’s purchase price of $50,000 for the computers does not qualify for the additional first year depreciation deduction under this section. (H) Example 8. The facts are the same as in Example 7 in paragraph (b)(2)(iii)(G) of this section. In 2020, F buys new copiers for $30,000 for use in its trade or business of selling automobiles. For purposes of section 163(j), F has the following for 2020: $1,300 of adjusted taxable income, $40 of business interest income, $400 of business interest (which includes $100 of floor plan financing interest). The sum of the amounts calculated under section 163(j)(1)(A) and (B) for F for 2020 is $430 ($40 + ($1,300 × 30 percent)). F’s business interest, which includes floor plan financing interest, for 2020 is $400. As a result, F’s floor plan financing interest is E:\FR\FM\24SEP2.SGM 24SEP2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 not taken into account by F for 2020 pursuant to paragraph (b)(2)(ii)(G) of this section. Assuming all other requirements are met, F’s purchase price of $30,000 for the copiers qualifies for the additional first year depreciation deduction under this section. (3) * * * (iii) * * * (B) * * * (4) De minimis use of property. If a taxpayer acquires and places in service property, the taxpayer or a predecessor did not previously have a depreciable interest in the property, the taxpayer disposes of the property to an unrelated party within 90 calendar days after the date the property was originally placed in service by the taxpayer, without taking into account the applicable convention, and the taxpayer reacquires and again places in service the property, the taxpayer’s depreciable interest in the property during that 90-day period is not taken into account for determining whether the property was used by the taxpayer or a predecessor at any time prior to its reacquisition by the taxpayer under paragraphs (b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of this section. This paragraph (b)(3)(iii)(B)(4) does not apply if the taxpayer reacquires and again places in service the property during the same taxable year the taxpayer disposed of the property. For purposes of this paragraph (b)(3)(iii)(B)(4), an unrelated party is a person not described in section 179(d)(2)(A) or (B), and § 1.179– 4(c)(1)(ii) or (iii), or (c)(2). (5) Partner’s prior depreciable interest in property held by partnership. Solely for purposes of applying paragraphs (b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) and (2) of this section, a person is treated as having a depreciable interest in a portion of property prior to the person’s acquisition of the property if the person was a partner in a partnership at any time the partnership owned the property. For purposes of the preceding sentence, the portion of property that a partner is treated as having a depreciable interest in is equal to the total share of depreciation deductions with respect to the property allocated to the partner as a percentage of the total depreciation deductions with respect to that property allocated to all partners during the current calendar year and five calendar years immediately prior to the partnership’s current year. If the person was not a partner in the partnership for this entire period, or if the partnership did not own the property for the entire period, only the period during which the person was a partner and the partnership owned the property is taken into account for purposes of determining a partner’s share of depreciation deductions. VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 (C) Special rules for a series of related transactions—(1) In general. Solely for purposes of paragraph (b)(3)(iii) of this section, the relationship between parties under section 179(d)(2)(A) or (B) in a series of related transactions is tested immediately after each step in the series, and between the original transferor and the ultimate transferee immediately after the last transaction in the series. A series of related transactions may include, for example, a transfer of partnership assets followed by a transfer of an interest in the partnership that owned the assets; or a disposition of property and disposition, directly or indirectly, of the transferor or transferee of the property. (2) Special rules—(i) Property placed in service and disposed of in same taxable year or property not placed in service. Any party in a series of related transactions that is neither the original transferor nor the ultimate transferee is disregarded (disregarded party) for purposes of testing the relationships under paragraph (b)(3)(iii)(C)(1) of this section if the party places in service and disposes of the depreciable property subject to the series, other than in a transaction described in paragraph (g)(1)(iii) of this section, during the party’s same taxable year or if the party does not place in service the depreciable property subject to the series for use in the party’s trade or business or production of income. In this case, the relationship is tested between the party from which the disregarded party acquired the depreciable property and the party to which the disregarded party disposed of the depreciable property. If the series has consecutive disregarded parties, the relationship is tested between the party from which the first disregarded party acquired the depreciable property and the party to which the last disregarded party disposed of the depreciable property. The rules for testing the relationships in paragraph (b)(3)(iii)(C)(1) of this section continue to apply for the other transactions in the series and for the last transaction in the series. (ii) All section 168(i)(7) transactions. This paragraph (b)(3)(iii)(C) does not apply if all transactions in a series of related transactions are described in paragraph (g)(1)(iii) of this section (section 168(i)(7) transactions in which property is transferred in the same taxable year that the property is placed in service by the transferor). (iii) One or more section 168(i)(7) transactions. Any step in a series of related transactions that is neither the original step nor the ultimate step is disregarded (disregarded step) for purposes of testing the relationships PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 50165 under paragraph (b)(3)(iii)(C)(1) of this section if the step is a transaction described in paragraph (g)(1)(iii) of this section. In this case, the relationship is not tested between the transferor and transferee of that transaction. Instead, the relationship is tested between the transferor in the disregarded step and the party to which the transferee in the disregarded step disposed of the depreciable property, and the transferee in the disregarded step and the party to which the transferee in the disregarded step disposed of the depreciable property. If the series has consecutive disregarded steps, the relationship is tested between the transferor in the first disregarded step and the party to which the transferee in the last disregarded step disposed of the depreciable property, and the transferee in the last disregarded step and the party to which the transferee in the last disregarded step disposed of the depreciable property. The rules for testing the relationships in paragraph (b)(3)(iii)(C)(1) of this section continue to apply for the other transactions in the series and for the last transaction in the series. (iv) Syndication transaction. This paragraph (b)(3)(iii)(C) does not apply to a syndication transaction described in paragraph (b)(3)(vi) of this section. (v) Application of paragraph (g)(1) of this section. Paragraph (g)(1) of this section applies to each step in a series of related transactions. * * * * * (v) Application to members of a consolidated group—(A) In general. Solely for purposes of applying paragraph (b)(3)(iii)(A)(1) of this section, if a member of a consolidated group, as defined in § 1.1502–1(h), acquires depreciable property in which the group had a depreciable interest at any time prior to the member’s acquisition of the property, the member is treated as having a depreciable interest in the property prior to the acquisition. For purposes of this paragraph (b)(3)(v)(A), a consolidated group is 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. (B) Certain acquisitions pursuant to a series of related transactions. Solely for purposes of applying paragraph (b)(3)(v)(A) 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, E:\FR\FM\24SEP2.SGM 24SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 50166 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules determined without regard to the application of paragraph (b)(3)(v)(A) of this section, becomes a member of the group, the member that acquires the property is treated as having a depreciable interest in the property prior to the time of its acquisition. (C) Sale of depreciable property to a member that leaves the group. Except as otherwise provided in paragraph (b)(3)(v)(E) of this section, if a member of a consolidated group (transferee member) acquires from another member of the same group (transferor member) depreciable property in an acquisition meeting the requirements of paragraph (b)(3)(iii)(A) of this section without regard to section 179(d)(2)(A) or (B) or paragraph (b)(3)(v)(A) of this section, and if, as part of the same series of related transactions that includes the acquisition, the transferee member ceases to be a member of the consolidated group within 90 calendar days of the date of the acquisition, then— (1) The transferor member is treated as disposing of, and the transferee member is treated as acquiring, the depreciable property one day after the date on which the transferee member ceases to be a member of the consolidated group (Deconsolidation Date) for all Federal income tax purposes; and (2) The transferee member is treated as placing the depreciable property in service not earlier than one day after the Deconsolidation Date for purposes of sections 167 and 168 and §§ 1.46–3(d) and 1.167(a)–11(e)(1). (D) Deemed sales of depreciable property under section 338 or 336(e) to a member that leaves the group. This paragraph (b)(3)(v)(D) applies only if a member of a consolidated group (transferee member) acquires the stock of another member of the same group that holds depreciable property (target) in either a qualified stock purchase for which a section 338 election is made or a qualified stock disposition described in § 1.336–2(b)(1) for which a section 336(e) election is made. Except as otherwise provided in paragraph (b)(3)(v)(E) of this section, if the target would be eligible for the additional first year depreciation deduction under this section with respect to the depreciable property without regard to paragraph (b)(3)(v)(A) of this section, and if the transferee member and the target cease to be members of the group within 90 calendar days of the acquisition date, within the meaning of § 1.338–2(c)(1), or disposition date, within the meaning of § 1.336–1(b)(8), as part of the same series of related transactions that includes the acquisition, then— VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 (1) The acquisition date or disposition date, as applicable, is treated as the date that is one day after the Deconsolidation Date for all Federal income tax purposes; and (2) New target is treated as placing the depreciable property in service not earlier than one day after the Deconsolidation Date for purposes of sections 167 and 168 and §§ 1.46–3(d) and 1.167(a)–11(e)(1). (E) Disposition of depreciable property pursuant to the same series of related transactions. Paragraph (b)(3)(v)(C) of this section does not apply if, following the acquisition of depreciable property, the transferee member disposes of such property pursuant to the same series of related transactions that includes the property acquisition. Paragraph (b)(3)(v)(D) of this section does not apply if, following the deemed acquisition of depreciable property, the target disposes of such property pursuant to the same series of related transactions that includes the deemed acquisition. See paragraph (b)(3)(iii)(C) of this section for rules regarding the transfer of property in a series of related transactions. See also paragraph (g)(1) of this section for rules regarding property placed in service and disposed of in the same taxable year. * * * * * (vii) * * * (Y) Example 25. (1) On September 5, 2017, Y, a calendar-year taxpayer, acquires and places in service a new machine (Machine #1), and begins using Machine #1 in its manufacturing trade or business. On November 1, 2017, Y sells Machine #1 to Z, then Z leases Machine #1 back to Y for 4 years, and Y continues to use Machine #1 in its manufacturing trade or business. The lease agreement contains a purchase option provision allowing Y to buy Machine #1 at the end of the lease term. On November 1, 2021, Y exercises the purchase option in the lease agreement and buys Machine #1 from Z. The lease between Y and Z for Machine #1 is a true lease for Federal tax purposes. (2) Because Y, a calendar-year taxpayer, placed in service and disposed of Machine #1 during 2017, Machine #1 is not eligible for the additional first year depreciation deduction for Y pursuant to § 1.168(k)– 1(g)(1)(i). (3) The use of Machine #1 by Y prevents Z from satisfying the original use requirement of paragraph (b)(3)(ii) of this section. However, Z’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, Z’s purchase price of Machine #1 qualifies for the additional first year depreciation deduction for Z under this section. (4) During 2017, Y sold Machine #1 within 90 calendar days of placing in service Machine #1. Pursuant to paragraph (b)(3)(iii)(B)(4) of this section, Y’s depreciable PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 interest in Machine #1 during that 90-day period is not taken into account for determining whether Machine #1 was used by Y or a predecessor at any time prior to its reacquisition by Y on November 1, 2021. Accordingly, assuming all other requirements are met, Y’s purchase price of Machine #1 on November 1, 2021, qualifies for the additional first year depreciation deduction for Y under this section. (Z) Example 26. Parent owns all of the stock of B and C, which are members of the Parent consolidated group. C has a depreciable interest in Equipment #1. During 2018, C sells Equipment #1 to B. Prior to this acquisition, B never had a depreciable interest in Equipment #1. B’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 and C are related parties within the meaning of section 179(d)(2)(B) and § 1.179–4(c)(2)(iii). Second, pursuant to paragraph (b)(3)(v)(A) of this section, B is treated as previously having a depreciable interest in Equipment #1 because B is a member of the Parent consolidated group and C, while a member of the Parent consolidated group, had a depreciable interest in Equipment #1. Accordingly, B’s acquisition of Equipment #1 is not eligible for the additional first year depreciation deduction. (AA) Example 27—(1) Facts. Parent owns all of the stock of D and E, which are members of the Parent consolidated group. D has a depreciable interest in Equipment #2. No other current or previous member of the Parent consolidated group has ever had a depreciable interest in Equipment #2 while a member of the Parent consolidated group. During 2018, D sells Equipment #2 to BA, a person not related, within the meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c), to any member of the Parent consolidated group. In an unrelated transaction during 2019, E acquires Equipment #2 from BA or another person not related to any member of the Parent consolidated group within the meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c). (2) Analysis. Pursuant to paragraph (b)(3)(v)(A) of this section, E is treated as previously having a depreciable interest in Equipment #2 because E is a member of the Parent consolidated group and D, while a member of the Parent consolidated group, had a depreciable interest in Equipment #2. As a result, E’s acquisition of Equipment #2 does not satisfy the used property acquisition requirements of paragraph (b)(3)(iii) of this section. Thus, E’s acquisition of Equipment #2 is not eligible for the additional first year depreciation deduction. The results would be the same if, after selling Equipment #2 to BA, D had ceased to be a member of the Parent consolidated group prior to E’s acquisition of Equipment #2. (BB) Example 28—(1) Facts. Parent owns all of the stock of B and S, which are members of the Parent consolidated group. S has a depreciable interest in Equipment #3. No other current or previous member of the Parent consolidated group has ever had a depreciable interest in Equipment #3 while a member of the Parent consolidated group. X is the common parent of a consolidated E:\FR\FM\24SEP2.SGM 24SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules group and is not related, within the meaning of section 179(d)(2)(A) or (B) and § 1.179– 4(c), to any member of the Parent consolidated group. No member of the X consolidated group has ever had a depreciable interest in Equipment #3 while a member of the X consolidated group. On January 1, 2019, B purchases Equipment #3 from S. On February 15, 2019, as part of the same series of related transactions that includes B’s purchase of Equipment #3, Parent sells all of the stock of B to X. Thus, B leaves the Parent consolidated group at the end of the day on February 15, 2019, and joins the X consolidated group on February 16, 2019. See § 1.1502–76(b). (2) Application of paragraph (b)(3)(v)(C) of this section. B was a member of the Parent consolidated group when B acquired Equipment #3 from S, another member of the same group. Paragraph (b)(3)(v)(A) 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. However, B acquired Equipment #3 in a transaction meeting the requirements of paragraph (b)(3)(iii)(A) of this section, without regard to section 179(d)(2)(A) or (B) or paragraph (b)(3)(v)(A) of this section, and Parent sold all of the stock of B to X within 90 calendar days of B’s acquisition of Equipment #3 as part of the same series of related transactions that included B’s acquisition of Equipment #3. Thus, under paragraph (b)(3)(v)(C) of this section, B’s acquisition of Equipment #3 is treated as occurring on February 16, 2019, for all Federal income tax purposes. (3) Eligibility for the additional first year depreciation deduction. B’s acquisition of Equipment #3 on February 16, 2019, under paragraph (b)(3)(v)(C) of this section satisfies the requirement in paragraph (b)(3)(iii)(A)(1) of this section because B does not have a prior depreciable interest in Equipment #3. In addition, because no member of the X consolidated group previously had a depreciable interest in Equipment #3 while a member of the X consolidated group, B is not treated as previously having a depreciable interest in Equipment #3 under paragraph (b)(3)(v)(A) of this section. Further, because the relation between S and B is tested as if B acquired Equipment #3 while a member of the X consolidated group, S and B are neither members nor component members of the same controlled group on February 16, 2019. Therefore, section 179(d)(2)(A) and (B) and § 1.179–4(c)(1)(ii) and (iii) are satisfied. If the other requirements of paragraph (b)(3)(iii)(A) of this section are satisfied, B is treated as placing Equipment #3 in service on a date not earlier than February 16, 2019, while a member of the X consolidated group. Accordingly, assuming all other requirements of this section are satisfied, B is eligible to claim the additional first year depreciation deduction for Equipment #3 on that date. In addition, because the sale of Equipment #3 is deemed to occur between S, a member of the Parent consolidated group, and B, a member of the X consolidated group, the transaction is not between members of the same consolidated group and thus is not VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 covered by section 168(i)(7)(B)(ii). Therefore, B’s deduction is not limited by section 168(i)(7)(A) when B is treated, under paragraph (b)(3)(v)(C) of this section, as placing Equipment #3 in service on a date not earlier than February 16, 2019. (CC) Example 29—(1) Facts. The facts are the same as Example 28 in paragraph (b)(3)(viii)(BB)(1) of this section, except that S owns all of the stock of T (rather than a depreciable interest in Equipment #3), which is a member of the Parent consolidated group; T has a depreciable interest in Equipment #3; B acquires all of the stock of T (instead of a depreciable interest in Equipment #3) on January 1, 2019; and S and B make a section 338(h)(10) election for B’s qualified stock purchase. (2) Application of paragraph (b)(3)(v)(D) of this section. As a result of the section 338(h)(10) election, Old T is treated as transferring all of its assets, including Equipment #3, to an unrelated person in a single transaction in exchange for consideration at the close of the acquisition date and then transferring the consideration received to S in liquidation. In turn, New T is treated as acquiring all of its assets, including Equipment #3, from an unrelated person in exchange for consideration on the following day. See § 1.338–1(a)(1). New T was a member of the Parent consolidated group on January 1, 2019, the date that New T acquired Equipment #3. Paragraph (b)(3)(v)(A) 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. However, New T would be eligible for the additional first year depreciation deduction under this section without regard to paragraph (b)(3)(v)(A) of this section, and Parent sold all of its B stock to X within 90 calendar days of New T’s acquisition of Equipment #3 as part of the same series of related transactions that included the acquisition, thereby causing B and New T to cease to be members of the Parent consolidated group at the end of the day on February 15, 2019. Thus, paragraph (b)(3)(v)(D) applies to treat the acquisition date as February 16, 2019, for all Federal income tax purposes. (3) Eligibility for the additional first year depreciation deduction. Pursuant to paragraph (b)(3)(v)(D), Old T is treated as selling its assets to an unrelated person on February 16, 2019, and New T is treated as acquiring those assets on the following day, February 17, 2019. If the other requirements of paragraph (b)(3)(iii)(A) of this section are satisfied, New T is treated as placing Equipment #3 in service on a date not earlier than February 17, 2019, while a member of the X consolidated group. Accordingly, assuming all other requirements of this section are satisfied, New T is eligible to claim the additional first year depreciation deduction for Equipment #3 when New T places Equipment #3 in service. In addition, the amount of the deduction is not limited by section 168(i)(7)(A). (DD) Example 30—(1) Facts. G, which is not a member of a consolidated group, has a depreciable interest in Equipment #4. Parent PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 50167 owns all the stock of H, which is a member of the Parent consolidated group. No member of the Parent consolidated group has ever had a depreciable interest in Equipment #4 while a member of the Parent consolidated group, and neither Parent nor H is related to G within the meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c). During 2018, G sells Equipment #4 to a person not related to G, Parent, or H within the meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c). In a series of related transactions, during 2019, Parent acquires all of the stock of G, and H purchases Equipment #4 from an unrelated person. (2) Analysis. In a series of related transactions, G became a member of the Parent consolidated group, and H, also a member of the Parent consolidated group, acquired Equipment #4. Because G previously had a depreciable interest in Equipment #4, pursuant to paragraph (b)(3)(v)(B) of this section, H is treated as having a depreciable interest in Equipment #4. As a result, H’s acquisition of Equipment #4 does not satisfy the used property acquisition requirements of paragraph (b)(3)(iii) of this section. Accordingly, H’s acquisition of Equipment #4 is not eligible for the additional first year depreciation deduction. (EE) Example 31. (1) In a series of related transactions, a father sells a machine to an unrelated individual in December 2019 who sells the machine to the father’s daughter in January 2020 for use in the daughter’s trade or business. Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, the time to test whether the parties are related is immediately after each step in the series, and between the original transferor and the ultimate transferee immediately after the last transaction in the series. As a result, the following relationships are tested under section 179(d)(2)(A): The father and the unrelated individual, the unrelated individual and the father’s daughter, and the father and his daughter. (2) Because the individual is not related to the father within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(ii), the individual’s acquisition of the machine satisfies the used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming all other requirements of this section are satisfied, the individual’s purchase price of the machine qualifies for the additional first year depreciation deduction under this section. (3) The individual and the daughter are not related parties within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(ii). However, the father and his daughter are related parties within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(ii). Accordingly, the daughter’s acquisition of the machine does not satisfy the used property acquisition requirements of paragraph (b)(3)(iii) of this section and is not eligible for the additional first year depreciation deduction. (FF) Example 32. (1) The facts are the same as in Example 31 of paragraph (b)(3)(viii)(EE)(1) of this section, except that instead of selling to an unrelated individual, the father sells the machine to his son in December 2019 who sells the machine to his E:\FR\FM\24SEP2.SGM 24SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 50168 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules sister (the father’s daughter) in January 2020. Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, the time to test whether the parties are related is immediately after each step in the series, and between the original transferor and the ultimate transferee immediately after the last transaction in the series. As a result, the following relationships are tested under section 179(d)(2)(A): The father and his son, the father’s son and his sister, and the father and the father’s daughter. (2) Because the father and his son are related parties within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(ii), the son’s acquisition of the machine does not satisfy the used property acquisition requirements of paragraph (b)(3)(iii) of this section. Accordingly, the son’s acquisition of the machine is not eligible for the additional first year depreciation deduction. (3) The son and his sister are not related parties within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(ii). However, the father and his daughter are related parties within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(ii). Accordingly, the daughter’s acquisition of the machine does not satisfy the used property acquisition requirements of paragraph (b)(3)(iii) of this section and is not eligible for the additional first year depreciation deduction. (GG) Example 33. (1) In June 2018, DA, an individual, bought and placed in service a new machine from an unrelated party for use in its trade or business. In a series of related transactions, DA sells the machine to DB and DB places it in service in October 2019, DB sells the machine to DC and DC places it in service in December 2019, and DC sells the machine to DD and DD places it in service in January 2020. DA and DB are related parties within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(ii). DB and DC are related parties within the meaning of section 179(d)(2)(B) and § 1.179–4(c)(iii). DC and DD are not related parties within the meaning of section 179(d)(2)(A) and § 1.179– 4(c)(ii), or section 179(d)(2)(B) and § 1.179– 4(c)(iii). DA is not related to DC or to DD within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(ii). All parties are calendar year taxpayers. (2) DA’s purchase of the machine in June 2018 satisfies the original use requirement of paragraph (b)(3)(ii) of this section and, assuming all other requirements of this section are met, qualifies for the additional first year depreciation deduction under this section. (3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, the time to test whether the parties in the series of related transactions are related is immediately after each step in the series, and between the original transferor and the ultimate transferee immediately after the last transaction in the series. However, because DB placed in service and disposed of the machine in the same taxable year, DB is disregarded pursuant to paragraph (b)(3)(iii)(C)(2)(i) of this section. As a result, the following relationships are tested under section 179(d)(2)(A) and (B): DA and DC, DC and DD, and DA and DD. (4) Because DA is not related to DC within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(ii), DC’s acquisition of the VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 machine satisfies the used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming all other requirements of this section are satisfied, DC’s purchase price of the machine qualifies for the additional first year depreciation deduction under this section. (5) Because DC is not related to DD and DA is not related to DD within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(ii), or section 179(d)(2)(B) and § 1.179–4(c)(iii), DD’s acquisition of the machine satisfies the used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming all other requirements of this section are satisfied, DD’s purchase price of the machine qualifies for the additional first year depreciation deduction under this section. (HH) Example 34. (1) In June 2018, EA, an individual, bought and placed in service a new machine from an unrelated party for use in his trade or business. In a series of related transactions, EA sells the machine to EB and EB places it in service in September 2019, EB transfers the machine to EC in a transaction described in paragraph (g)(1)(iii) of this section and EC places it in service in November 2019, and EC sells the machine to ED and ED places it in service in January 2020. EA and EB are not related parties within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(ii). EB and EC are related parties within the meaning of section 179(d)(2)(B) and § 1.179–4(c)(iii). EB and ED are related parties within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(ii), or section 179(d)(2)(B) and § 1.179–4(c)(iii). EC and ED are not related parties within the meaning of section 179(d)(2)(A) and § 1.179– 4(c)(ii), or section 179(d)(2)(B) and § 1.179– 4(c)(iii). EA is not related to EC or to ED within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(ii). All parties are calendar year taxpayers. (2) EA’s purchase of the machine in June 2018 satisfies the original use requirement of paragraph (b)(3)(ii) of this section and, assuming all other requirements of this section are met, qualifies for the additional first year depreciation deduction under this section. (3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, the time to test whether the parties in the series of related transactions are related is immediately after each step in the series, and between the original transferor and the ultimate transferee immediately after the last transaction in the series. However, because EB placed in service and transferred the machine in the same taxable year in a transaction described in paragraph (g)(1)(iii) of this section, the section 168(i)(7) transaction between EB and EC is disregarded pursuant to paragraph (b)(3)(iii)(C)(2)(iii) of this section. As a result, the following relationships are tested under section 179(d)(2)(A) and (B): EA and EB, EB and ED, EC and ED, and EA and ED. (4) Because EA is not related to EB within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(ii), EB’s acquisition of the machine satisfies the used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 assuming all other requirements of this section are satisfied, EB’s purchase price of the machine qualifies for the additional first year depreciation deduction under this section. Pursuant to paragraph (g)(1)(iii) of this section, EB is allocated 2⁄12 of its 100percent additional first year depreciation deduction for the machine, and EC is allocated the remaining portion of EB’s 100percent additional first year depreciation deduction for the machine. (5) EC is not related to ED and EA is not related to ED within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(ii), or section 179(d)(2)(B) and § 1.179–4(c)(iii). However, EB and ED are related parties within the meaning of section 179(d)(2)(A) and § 1.179– 4(c)(ii), or section 179(d)(2)(B) and § 1.179– 4(c)(iii). Accordingly, ED’s acquisition of the machine does not satisfy the used property acquisition requirements of paragraph (b)(3)(iii) of this section and is not eligible for the additional first year depreciation deduction. * * * * * (5) * * * (ii) * * * (A) * * * For determination of acquisition date, see paragraph (b)(5)(ii)(B) of this section for property acquired pursuant to a written binding contract, paragraph (b)(5)(iv) of this section for self-constructed property, and paragraph (b)(5)(v) of this section for property not acquired pursuant to a written binding contract. * * * * * (iii) * * * (G) Acquisition of a trade or business or an entity. A contract to acquire all or substantially all of the assets of a trade or business or to acquire an entity (for example, a corporation, a partnership, or a limited liability company) is binding if it is enforceable under State law against the parties to the contract. The presence of a condition outside the control of the parties, including, for example, regulatory agency approval, will not prevent the contract from being a binding contract. Further, the fact that insubstantial terms remain to be negotiated by the parties to the contract, or that customary conditions remain to be satisfied, does not prevent the contract from being a binding contract. This paragraph (b)(5)(iii)(G) also applies to a contract for the sale of the stock of a corporation that is treated as an asset sale as a result of an election under section 338. * * * * * (v) Determination of acquisition date for property not acquired pursuant to a written binding contract. Except as provided in paragraphs (b)(5)(iv), (vi), and (vii) of this section, the acquisition date of property that the taxpayer acquires pursuant to a contract that does not meet the definition of a written E:\FR\FM\24SEP2.SGM 24SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules binding contract in paragraph (b)(5)(iii) of this section, is the date on which the taxpayer paid (in the case of a cash basis taxpayer) or incurred (in the case of an accrual 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 and designing, securing financing, exploring, or researching. This paragraph (b)(5)(v) does not apply to an acquisition described in paragraph (b)(5)(iii)(G) of this section. * * * * * (viii) * * * Unless the facts specifically indicate otherwise, assume that the parties are not related within the meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c), paragraph (c) of this section does not apply, and the parties do not have predecessors: * * * * * (c) Election for components of larger self-constructed property for which the manufacture, construction, or production begins before September 28, 2017—(1) In general. A taxpayer may elect to treat any acquired or selfconstructed component, as described in paragraph (c)(3) of this section, of the larger self-constructed property, as described in paragraph (c)(2) of this section, as being eligible for the additional first year depreciation deduction under this section, assuming all requirements of section 168(k) and this section are met. The taxpayer may make this election for one or more such components. (2) Eligible larger self-constructed property—(i) In general. Solely for purposes of this paragraph (c) and except as provided in paragraph (c)(2)(ii) of this section, the larger selfconstructed property must be qualified property under section 168(k)(2), as in effect on the day before the date of the enactment of the Act, for which the taxpayer begins the manufacture, construction, or production before September 28, 2017. The determination of when manufacture, construction, or production of the larger self-constructed property begins is made in accordance with the rules in § 1.168(k)– 1(b)(4)(iii)(B). A larger self-constructed property is property that is manufactured, constructed, or produced by the taxpayer for its own use in its trade or business or for its production of income, or property that is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract, as defined in § 1.168(k)–1(b)(4)(ii), that is entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in its VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 trade or business or for its production of income. If the taxpayer enters into a written binding contract, as defined in paragraph (b)(5)(iii) of this section, before September 28, 2017, with another person to manufacture, construct, or produce the larger self-constructed property and the manufacture, construction, or production of this property begins after September 27, 2017, paragraph (b)(5)(iv) of this section applies and paragraph (c) of this section does not apply. (ii) Exceptions. This paragraph (c) does not apply to any larger selfconstructed property that meets at least one of the following criteria— (A) Is placed in service by the taxpayer before September 28, 2017; (B) Is placed in service by the taxpayer after December 31, 2019, or for property described in section 168(k)(2)(B) or (C) as in effect on the day before the date of the enactment of the Act, after December 31, 2020; (C) Does not meet the original use requirement in section 168(k)(2)(A)(ii) as in effect on the day before the date of the enactment of the Act; (D) Is described in section 168(k)(9) and § 1.168(k)–2(b)(2)(ii)(F) or (G); (E) Is described in section 168(g)(1)(F) and (g)(8) (electing real property trade or business) or section 168(g)(1)(G) (electing farming business) and placed in service by the taxpayer in any taxable year beginning after December 31, 2017; (F) Is 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, and placed in service by the taxpayer after December 31, 2017; (G) Is 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, and placed in service by the taxpayer after December 31, 2017; (H) Is 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, and placed in service by the taxpayer after December 31, 2017; (I) Is qualified improvement property as defined in § 1.168(b)–1(a)(5)(i)(A) (placed in service by the taxpayer after December 31, 2017); or (J) Is included in a class of property for which the taxpayer made an election under section 168(k)(7) (formerly section 168(k)(2)(D)(iii)) not to deduct the additional first year depreciation deduction. (3) Eligible components—(i) In general. Solely for purposes of this paragraph (c), a component of the larger PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 50169 self-constructed property, as described in paragraph (c)(2) of this section, must be qualified property under section 168(k)(2) and paragraph (b) of this section. (ii) Acquired components. Solely for purposes of this paragraph (c), a binding contract, as defined in paragraph (b)(5)(iii) of this section, to acquire a component of the larger self-constructed property must be entered into by the taxpayer after September 27, 2017. (iii) Self-constructed components. Solely for purposes of this paragraph (c), the manufacture, construction, or production of a component of the larger self-constructed property must begin after September 27, 2017. The determination of when manufacture, construction, or production of the component begins is made in accordance with the rules in paragraph (b)(5)(iv)(B) of this section. (4) Special rules—(i) Installation costs. If the taxpayer pays or incurs costs, including labor costs, to install a component of the larger self-constructed property, as described in paragraph (c)(2) of this section, such costs are eligible for additional first year depreciation under this section, assuming all requirements are met, only if the component being installed meets the requirements in paragraph (c)(3) of this section. (ii) Property described in section 168(k)(2)(B). For purposes of this paragraph (c), the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of qualified property in section 168(k)(2)(B), as in effect on the day before the date of the enactment of the Act, is limited to the property’s unadjusted depreciable basis attributable to the property’s manufacture, construction, or production before January 1, 2020. The amounts of unadjusted depreciable basis attributable to the property’s manufacture, construction, or production before January 1, 2020, are referred to as ‘‘progress expenditures.’’ Rules similar to the rules in section 4.02(1)(b) of Notice 2007–36 (2007–17 I.R.B. 1000) (see § 601.601(d)(2)(ii)(b) of this chapter) apply for determining progress expenditures. (5) Computation of additional first year depreciation deduction—(i) Election is made. Before determining the allowable additional first year depreciation deduction for property for which the taxpayer makes the election specified in this paragraph (c), the taxpayer must determine the portion of the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of the larger self-constructed property, including all components, attributable E:\FR\FM\24SEP2.SGM 24SEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 50170 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules to the component that meets the requirements of paragraph (c)(3) of this section (component basis). The additional first year depreciation deduction for the component basis is determined by multiplying such component basis by the applicable percentage for the placed-in-service year of the larger self-constructed property. The additional first year depreciation deduction for the remaining unadjusted depreciable basis of the larger selfconstructed property, as described in paragraph (c)(2) of this section, is determined by multiplying such remaining unadjusted depreciable basis by the phase-down percentage in section 168(k)(8) applicable to the placed-in-service year of the larger selfconstructed property. For purposes of this paragraph (c), the remaining unadjusted depreciable basis of the larger self-constructed property is equal to the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of the larger self-constructed property, including all components, reduced by the sum of the component basis of the components for which the taxpayer makes the election specified in this paragraph (c). If the phase-down percentage in section 168(k)(8) is zero for the placed-in-service year of the larger self-constructed property, none of the components of the larger selfconstructed property qualify for the additional first year depreciation deduction under this section. (ii) Election is not made. If the taxpayer does not make the election specified in this paragraph (c), the additional first year depreciation deduction for the larger self-constructed property, including all components, that is qualified property under section 168(k)(2), as in effect on the day before the date of the enactment of the Act, is determined by multiplying the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of the larger selfconstructed property, including all components, by the phase-down percentage in section 168(k)(8) applicable to the placed-in-service year of the larger self-constructed property. (6) Time and manner for making election—(i) Time for making election. The election specified in this paragraph (c) must be made by the due date, including extensions, of the Federal tax return for the taxable year in which the taxpayer placed in service the larger self-constructed property. (ii) Manner of making election. The election specified in this paragraph (c) must be made by attaching a statement to such return indicating that the taxpayer is making the election provided in this paragraph (c) and VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 whether the taxpayer is making the election for all or some of the components described in paragraph (c)(3) of this section. 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 a lower-tier partnership), or by the S corporation). (7) Examples. The application of this paragraph (c) is illustrated by the following examples. Unless the facts specifically indicate otherwise, assume that the larger self-constructed property is qualified property under section 168(k)(2) as in effect on the day before the date of the enactment of the Act, and the components acquired or selfconstructed after September 27, 2017, are qualified property under section 168(k)(2) and paragraph (b) of this section. (i) Example 1. (A) BC, a calendar year taxpayer, is engaged in a trade or business described in section 163(j)(7)(A)(iv). In December 2015, BC decided to construct an electric generation power plant for its own use. This plant is property described in section 168(k)(2)(B) as in effect on the day before the date of the enactment of the Act. However, the turbine for the plant had to be manufactured by another person for BC. In January 2016, BC entered into a written binding contract with CD to acquire the turbine. BC received the completed turbine in August 2017 at which time BC incurred the cost of the turbine. The cost of the turbine is 11 percent of the total cost of the electric generation power plant to be constructed by BC. BC began constructing the electric generation power plant in October 2017 and placed in service this new power plant, including all component parts, in 2020. (B) BC uses the safe harbor test in § 1.168(k)–1(b)(4)(iii)(B)(2) to determine when physical work of a significant nature begins for the electric generation power plant. Because the turbine that was manufactured by CD for BC is more than 10 percent of the total cost of the electric generation power plant, physical work of a significant nature for this plant began before September 28, 2017. None of BC’s expenditures for components of the power plant that are acquired or self-constructed after September 27, 2017, are eligible for the election specified in this paragraph (c) because the power plant is described in section 168(k)(9)(A) and paragraph (b)(2)(ii)(F) of this section and, therefore, are not eligible for the election pursuant to paragraph (c)(2)(ii)(D) of this section. Assuming all requirements are met under section 168(k)(2) as in effect on the day before the date of the enactment of the Act, the unadjusted depreciable basis of the power plant, including all components, attributable to its construction before January 1, 2020, is eligible for the 30-percent additional first year depreciation deduction pursuant to section 168(k)(8). (ii) Example 2. (A) In August 2017, BD, a calendar-year taxpayer, entered into a written PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 binding contract with CE for CE to manufacture a locomotive for BD for use in its trade or business. Before September 28, 2017, BD incurred $500,000 of expenses for the locomotive, which is more than 10 percent of the total cost of the locomotive. After September 27, 2017, BD incurred $4,000,000 of expenses for components of the locomotive. These components were acquired or self-constructed after September 27, 2017. In February 2019, CE delivered the locomotive to BD and BD placed in service the locomotive. The total cost of the locomotive is $4,500,000. The locomotive is property described in section 168(k)(2)(B) as in effect on the day before the date of the enactment of the Act. On its timely filed Federal income tax return for 2019, BD made the election specified in this paragraph (c). (B) BD uses the safe harbor test in § 1.168(k)–1(b)(4)(iii)(B)(2) to determine when physical work of a significant nature begins for the locomotive. Because BD had incurred more than 10 percent of the total cost of the locomotive before September 28, 2017, physical work of a significant nature for this locomotive began before September 28, 2017. Because BD made the election specified in this paragraph (c), the cost of $4,000,000 for the locomotive’s components acquired or self-constructed after September 27, 2017, qualifies for the 100-percent additional first year depreciation deduction, assuming all other requirements are met. The remaining cost of the locomotive is $500,000 and such amount qualifies for the 40-percent additional first year depreciation deduction pursuant to section 168(k)(8). (iii) Example 3. (A) In March 2017, BE, a calendar-year taxpayer, decided to construct qualified leasehold improvement property, as defined in section 168(e)(6) as in effect on the day before enactment of the Act, for its own use in its trade or business. This qualified leasehold improvement property also met the definition of qualified improvement property as defined in section 168(k)(3) as in effect on the day before enactment of the Act. Physical work of a significant nature for this qualified leasehold improvement property began before September 28, 2017. After September 27, 2017, BE acquired components of the qualified leasehold improvement property at a cost of $100,000. BE placed in service the qualified leasehold improvement property in February 2018. (B) Because BE placed in service the qualified leasehold improvement property after December 31, 2017, none of BE’s expenditures of $100,000 for components of the qualified leasehold improvement property that are acquired after September 27, 2017, are eligible for the election specified in this paragraph (c) pursuant to paragraph (c)(2)(ii)(F) of this section. Additionally, BE’s unadjusted depreciable basis of the qualified leasehold improvement property, including all components, is not eligible for any additional first year depreciation deduction under section 168(k) and this section nor under section 168(k) as in effect on the day before enactment of the Act. * * * (e) * * * (1) * * * E:\FR\FM\24SEP2.SGM 24SEP2 * * Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 (iii) * * * The amounts of unadjusted depreciable basis attributable to the property’s manufacture, construction, or production before January 1, 2020, are referred to as ‘‘progress expenditures.’’ Rules similar to the rules in section 4.02(1)(b) of Notice 2007–36 (2007–17 I.R.B. 1000) (see § 601.601(d)(2)(ii)(b) of this chapter) apply for determining progress expenditures. * * * * * (g) * * * (11) Mid-quarter convention. In determining whether the mid-quarter convention applies for a taxable year under section 168(d)(3) and § 1.168(d)– 1, the depreciable basis, as defined in § 1.168(d)–1(b)(4), for the taxable year the qualified property is placed in service by the taxpayer is not reduced by the allowed or allowable additional first year depreciation deduction for that taxable year. See § 1.168(d)–1(b)(4). (h) * * * (4) Regulation project REG–106808– 19—(i) In general. Except as provided in paragraph (h)(4)(ii) of this section, the rules of this section in this regulation project REG–106808–19 apply to— (A) 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; VerDate Sep<11>2014 18:58 Sep 23, 2019 Jkt 247001 (B) 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; and (C) Components acquired or selfconstructed after September 27, 2017, of larger self-constructed property for which manufacture, construction, or production begins before September 28, 2017, and that is qualified property under section 168(k)(2) as in effect before the enactment of the Act and 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. (ii) Early application of regulation project REG–106808–19. A taxpayer may rely on the provisions of this section in this regulation project REG–106808–19, in its entirety, for— (A) Qualified property under section 168(k)(2) acquired and placed in service after September 27, 2017, by the taxpayer during the taxpayer’s taxable year 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 PO 00000 Frm 00021 Fmt 4701 Sfmt 9990 50171 adopting these rules as final regulations in the Federal Register; (B) 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 the taxpayer’s taxable year 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 (C) Components acquired or selfconstructed after September 27, 2017, of larger self-constructed property for which manufacture, construction, or production begins before September 28, 2017, and that is qualified property under section 168(k)(2) as in effect before the enactment of the Act and placed in service by the taxpayer during the taxpayer’s taxable year 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. Kirsten Wielobob, Deputy Commissioner for Services and Enforcement. [FR Doc. 2019–20035 Filed 9–17–19; 4:15 pm] BILLING CODE 4830–01–P E:\FR\FM\24SEP2.SGM 24SEP2

Agencies

[Federal Register Volume 84, Number 185 (Tuesday, September 24, 2019)]
[Proposed Rules]
[Pages 50152-50171]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20035]



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Vol. 84

Tuesday,

No. 185

September 24, 2019

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. 84, No. 185 / Tuesday, September 24, 2019 / 
Proposed Rules

[[Page 50152]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-106808-19]
RIN 1545-BP32


Additional First Year Depreciation Deduction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking; partial withdrawal of a 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 and clarify the increase of the benefit 
and expansion of the universe of qualifying property, particularly to 
certain classes of used property, made by the Tax Cuts and Jobs Act. 
These proposed regulations generally affect taxpayers who deduct 
depreciation for qualified property acquired and placed in service 
after September 27, 2017. This document also provides notice of a 
public hearing on these proposed regulations. Finally, this document 
withdraws a portion of the proposed regulations published on August 8, 
2018.

DATES: Written or electronic comments must be received by November 25, 
2019. Outlines of topics to be discussed at the public hearing 
scheduled for Wednesday, November 13, 2019, at 10 a.m. must be received 
by October 23, 2019. If no outlines of topics are received by October 
23, 2019, the public hearing will be cancelled.

ADDRESSES: Submit electronic submissions via the Federal eRulemaking 
Portal at https://www.regulations.gov (indicate IRS and REG-106808-19) 
by following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury (Treasury Department) and 
the IRS will publish for public availability any comment received to 
its public docket, whether submitted electronically or in hard copy. 
Send hard copy submissions to: CC:PA:LPD:PR (REG-106808-19), 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-
106808-19), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW, Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Elizabeth R. Binder or Kathleen Reed, (202) 317-7005; concerning 
submissions of comments and outlines of topics, the hearing, or to be 
placed on the building access list to attend the hearing, Regina L. 
Johnson, (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under section 168(k) of the Code. 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.
    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 by the Act.
    The Treasury Department and the IRS published proposed regulations 
interpreting section 168(k) on August 8, 2018 (the August Proposed 
Regulations) (83 FR 39292). This notice of proposed rulemaking 
withdraws Sec.  1.168(k)-2(b)(3)(iii)(B)(3)(i) through (iii) and 
Examples 19 through 22 in Sec.  1.168(k)-2(b)(3)(vi) of the August 
Proposed Regulations, and proposes in their place Sec.  1.168(k)-
2(b)(3)(v)(A) through (E) and Examples 26 through 30 in Sec.  1.168(k)-
2(b)(3)(vii)(Z) through (DD), respectively. This notice of proposed 
rulemaking also withdraws Sec.  1.168(k)-2(b)(3)(iii)(C) and Example 18 
in Sec.  1.168(k)-2(b)(3)(vi) of the August Proposed Regulations, and 
proposes in their place Sec.  1.168(k)-2(b)(3)(iii)(C) and Examples 31 
through 34 in Sec.  1.168(k)-2(b)(3)(vii)(EE) through (HH), 
respectively. The August Proposed Regulations, with modifications in 
response to comments and testimony received, were adopted as final 
regulations, issued concurrently with these proposed regulations and 
published elsewhere in this issue of the Federal Register (the Final 
Regulations).

Explanation of Provisions

    These proposed regulations propose amendments to the Final 
Regulations to provide taxpayers with guidance that is not addressed in 
the Final Regulations regarding the application of section 168(k). 
Specifically, these proposed regulations contain amendments to Sec.  
1.168(k)-2(b)(2), (3), and (5) of the Final Regulations, each of which 
provides rules relevant to the definition of qualified property for 
purposes of the additional first year depreciation deduction under 
section 168(k). These proposed regulations also amend Sec.  1.168(k)-
2(b)(3)(v) by adding special rules for consolidated groups. 
Additionally, these proposed regulations amend Sec.  1.168(k)-2(c) by 
adding rules regarding components acquired or self-constructed after 
September 27, 2017, for larger self-constructed property for which 
manufacture, construction, or production began before September 28, 
2017. Further, these proposed regulations amend Sec.  1.168(k)-2(g)(11) 
by adding rules regarding the application of the mid-quarter 
convention, as determined under section 168(d). These additional 
proposed rules respond to comments received on the August Proposed 
Regulations as well as address certain issues identified after 
additional study. This Explanation of Provisions section describes each 
of the proposed rules contained in this document.

1. Property Excluded From the Additional First Year Depreciation 
Deduction by Section 168(k)(9)

    Section 1.168(k)-2(b)(2)(ii)(F) of the Final Regulations provides 
that qualified property does not include any property that is primarily 
used in a trade or business described in section 163(j)(7)(A)(iv). 
Section 1.168(k)-2(b)(2)(ii)(G) of the Final Regulations provides that 
qualified property does not include 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, as defined in 
section 163(j)(9), related to such indebtedness is taken into account 
under section 163(j)(1)(C) for the taxable year. Sections 1.168(k)-
2(b)(2)(ii)(F) and (G) of the Final Regulations apply to property

[[Page 50153]]

placed in service by the taxpayer in a taxable year beginning after 
December 31, 2017.
A. Lessor Leasing Property to a Trade or Business Described in Section 
168(k)(9)
    Several commenters to the August Proposed Regulations requested 
guidance on whether a taxpayer that leases property to a trade or 
business described in section 168(k)(9) is eligible to claim the 
additional first year depreciation for the property, and they recommend 
allowing the additional first year depreciation deduction (assuming all 
other requirements are met). The Treasury Department and the IRS agree 
with the commenters' recommendation, provided the lessor is not 
described in section 168(k)(9)(A) or (B). Accordingly, these proposed 
regulations amend Sec.  1.168(k)-2(b)(2)(ii)(F) and (G) to provide that 
such exclusion from the additional first year depreciation deduction 
does not apply to lessors of property to a trade or business described 
in section 168(k)(9) so long as the lessor is not described in such 
Code section.
B. Property Described in Section 168(k)(9)(A)
    The Treasury Department and the IRS are aware that taxpayers and 
practitioners have questioned how to determine whether property is 
primarily used in a trade or business described in section 
168(k)(9)(A). For depreciation purposes, Sec.  1.167(a)-
11(b)(4)(iii)(b) and (e)(3)(iii) classify property according to its 
primary use. The Treasury Department and the IRS believe that the same 
standard should apply for purposes of section 168(k)(9)(A). 
Accordingly, these proposed regulations amend Sec.  1.168(k)-
2(b)(2)(ii)(F) to provide that for purposes of section 168(k)(9)(A) and 
Sec.  1.168(k)-2(b)(2)(ii)(F), the term primarily used has the same 
meaning as that term is used in Sec.  1.167(a)-11(b)(4)(iii)(b) and 
(e)(3)(iii) for classifying property.
C. Property Described in Section 168(k)(9)(B)
    A commenter to the August Proposed Regulations requested guidance 
on when floor plan financing is ``taken into account'' for purposes of 
section 168(k)(9)(B). The commenter believed that section 168(k)(9)(B) 
does not apply when a taxpayer does not deduct interest in excess of 
the sum of the amounts calculated under section 163(j)(1)(A) and (B). 
The Treasury Department and the IRS do not believe that section 163(j) 
is optional. However, the Treasury Department and the IRS agree that, 
for purposes of section 168(k)(9)(B), floor plan financing interest is 
not taken into account by a trade or business that has had floor plan 
financing indebtedness if the sum of the amounts calculated under 
section 163(j)(1)(A) and (B) for the trade or business for the taxable 
year equals or exceeds the business interest, as defined in section 
163(j)(5) (including carryforwards of disallowed business interest 
under section 163(j)(2)), which includes floor plan financing interest 
of the trade or business, for the taxable year. Accordingly, these 
proposed regulations amend Sec.  1.168(k)-2(b)(2)(ii)(G) to provide 
that solely for purposes of section 168(k)(9)(B) and Sec.  1.168(k)-
2(b)(2)(ii)(G), floor plan financing interest is not taken into account 
for the taxable year by a trade or business that has had floor plan 
financing indebtedness if the sum of the amounts calculated under 
section 163(j)(1)(A) and (B) for the trade or business for the taxable 
year equals or exceeds the business interest, as defined in section 
163(j)(5), for the taxable year.
    If floor plan financing interest is taken into account for a 
taxable year by a trade or business that has had floor plan financing 
indebtedness, the Treasury Department and the IRS are aware that 
taxpayers and practitioners have questioned whether the additional 
first year depreciation deduction is not allowed for property placed in 
service by that trade or business in any subsequent taxable year. In 
such a case, the additional first year depreciation deduction for 
subsequent taxable years would not be allowed, even if the amount of 
the floor plan financing interest taken into account for the current 
taxable year is de minimis. For this reason, the Treasury Department 
and the IRS have decided that, for purposes of section 168(k)(9)(B), 
the determination of whether a trade or business that has had floor 
plan financing indebtedness has taken into account floor plan financing 
interest is made annually. Accordingly, these proposed regulations 
amend Sec.  1.168(k)-2(b)(2)(ii)(G) to provide that if the trade or 
business has taken floor plan financing interest into account pursuant 
to Sec.  1.168(k)-2(b)(2)(ii)(G) for a taxable year, Sec.  1.168(k)-
2(b)(2)(ii)(G) applies to any property placed in service by that trade 
or business in that taxable year.

2. Used Property

A. Depreciable Interest
    As a result of comments received on the August Proposed Regulations 
regarding sale-leaseback transactions, the Treasury Department and the 
IRS have determined that it is appropriate to provide an exception to 
the depreciable interest rule in the Final Regulations when the 
taxpayer disposes of property within a short period of time after the 
taxpayer placed such property in service. Accordingly, these proposed 
regulations amend Sec.  1.168(k)-2 by adding paragraph 
(b)(3)(iii)(B)(4) to provide that if (a) a taxpayer acquires and places 
in service property, (b) the taxpayer or a predecessor did not 
previously have a depreciable interest in the property, (c) the 
taxpayer disposes of the property to an unrelated party within 90 
calendar days after the date the property was originally placed in 
service by the taxpayer (without taking into account the applicable 
convention), and (d) the taxpayer reacquires and again places in 
service the property, the taxpayer's depreciable interest in the 
property during that 90-day period is not taken into account for 
determining whether the property was used by the taxpayer or a 
predecessor at any time prior to its reacquisition by the taxpayer. The 
90-day period is consistent with the period of time specified in 
section 168(k)(2)(E)(iii). To prevent the churning of assets, this 
proposed rule does not apply if the taxpayer reacquires and again 
places in service the property during the same taxable year the 
taxpayer disposed of the property. The proposed regulations also define 
an unrelated party as meaning a person not described in section 
179(d)(2)(A) or (B), and Sec.  1.179-4(c)(1)(ii) or (iii), or (c)(2).
B. Application to Partnerships
    One commenter to the August Proposed Regulations asked for 
clarification regarding a partner's depreciable interest in property 
held by a partnership. The Treasury Department and the IRS clarify in 
these proposed regulations the extent to which a person is treated as 
having a depreciable interest in property by virtue of being a partner 
in a partnership that holds the property.
    Under the August Proposed Regulations, each partner is treated as 
having owned and used the partner's proportionate share of partnership 
property for purposes of determining whether a section 743(b) basis 
adjustment meets the used property acquisition requirements of section 
168(k)(2)(E)(ii). Consistent with this approach, a person should be 
considered as having a depreciable interest in a portion of property if 
the person is a partner in the partnership while the partnership owns 
the property. The same rule should apply whether a current partner 
purchases property directly from the partnership or a person acquires 
property that the

[[Page 50154]]

partnership previously owned while the person was a partner.
    These proposed regulations amend Sec.  1.168(k)-2 by adding 
paragraph (b)(3)(iii)(B)(5) to provide that a partner is considered to 
have a depreciable interest in a portion of property equal to the 
partner's total share of depreciation deductions with respect to the 
property as a percentage of the total depreciation deductions allocated 
to all partners with respect to that property during the current 
calendar year and five calendar years immediately prior to the 
partnership's current year. For this purpose, only the portion of the 
current calendar year and previous 5-year period during which the 
partnership owned the property and the person was a partner is taken 
into account. The Treasury Department and the IRS believe that this 
provides an accurate reflection of the partner's prior depreciable 
interest in the property.
C. Series of Related Transactions
    Section 1.168(k)-2(b)(3)(iii)(C) of the August Proposed Regulations 
provides that, in the case of a series of related transactions, 
property is treated as directly transferred from the original 
transferor to the ultimate transferee, and the relationship between the 
original transferor and the ultimate transferee is tested immediately 
after the last transaction in the series (related transactions rule).
    A commenter requested clarification on whether the related 
transactions rule applies only to test relatedness under section 
179(d)(2)(A) or whether this rule applies more broadly for purposes of 
all of the rules under section 168(k)(2)(E)(ii). For example, if, in a 
series of related transactions, A transfers property to B in exchange 
for cash and B transfers property to C in a nonrecognition transaction 
in exchange for stock or other property, the commenter states that it 
is not clear whether the related transactions rule is intended to test 
only the relatedness between A and C under section 179(d)(2)(A). If 
this rule is intended to apply more broadly, the commenter states that 
it is not clear whether the rule also determines the basis of the 
property or whether B's prior use of the property is relevant.
    The commenter also requested clarification on whether the related 
transactions rule applies to transactions described in Sec.  1.168(k)-
2(f)(1)(iii) of the August Proposed Regulations (qualified property 
that 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). For example, if a person purchased qualified 
property and contributed it to a partnership in a transaction described 
in section 721 in the same taxable year, the commenter questioned 
whether the related transactions rule would treat the transfer as 
occurring directly between the original seller and the partnership, 
assuming that the initial acquisition of the property by the person and 
the person's transfer of such property to the partnership are part of a 
series of related transactions.
    The Treasury Department and the IRS intended to apply the related 
transactions rule only for purposes of testing the relatedness of the 
parties under section 179(d)(2)(A) or (B) in a series of related 
transactions. The related transactions rule was not intended to test 
relatedness between the parties involved in a transaction described in 
section 168(i)(7).
    These proposed regulations amend Sec.  1.168(k)-2 by revising 
paragraph (b)(3)(iii)(C) to provide rules for a series of related 
transactions (proposed related transactions rule). The proposed related 
transactions rule generally provides that the relationship between the 
parties under section 179(d)(2)(A) or (B) in a series of related 
transactions is tested immediately after each step in the series, and 
between the original transferor and the ultimate transferee immediately 
after the last transaction in the series.
    The Treasury Department and the IRS believe that the relationship 
between the parties in a series of related transactions should not be 
tested in certain cases. Accordingly, the proposed related transactions 
rule provides that a party in the series that is neither the original 
transferor nor the ultimate transferee is disregarded in applying the 
relatedness test if the party placed in service and disposed of the 
property in the party's same taxable year or did not place the property 
in service. The proposed related transactions rule also provides that 
any step in a series of related transactions that is neither the 
original step nor the ultimate step is disregarded for purposes of 
testing relatedness if the step is a transaction described in Sec.  
1.168(k)-2(g)(1)(iii) (that is, a transfer of property in a transaction 
described in section 168(i)(7) in the same taxable year that the 
property is placed in service by the transferor) (Sec.  1.168(k)-
2(f)(1)(iii) of the August Proposed Regulations). Finally, these 
proposed regulations provide that the proposed related transactions 
rule does not apply when all transactions in the series are described 
in Sec.  1.168(k)-2(g)(1)(iii) or to a syndication transaction 
described in Sec.  1.168(k)-2(b)(3)(vi).
    The commenter also requested clarification on the application of 
the related transactions rule in transactions involving sections 
179(d)(2)(B) and 1563. For example, if there is a series of related 
transactions involving a sale of qualified property between two 
corporations that also become members of the same controlled group, 
section 179(d)(2)(B) would require testing whether the two corporations 
are component members of the same controlled group for purposes of 
section 1563. Under section 1563 and the regulations issued thereunder, 
a corporation is generally a component member of a controlled group if 
it is a member of the controlled group for at least one half of the 
days in the relevant taxable year. See Sec.  1.1563-1(b). If the 
corporations both become members of the controlled group pursuant to a 
series of related transactions ending in the first half of the taxable 
year, the corporations should be component members for purposes of 
section 179(d)(2)(B). However, if the series of related transactions 
ends in the second half of the taxable year, the commenter questioned 
whether the related transactions rule applies to treat the two 
corporations as non-members prior to the end of the series of related 
transactions, in which case the purchaser of the qualified property may 
be eligible for immediate expensing (setting aside the potential 
application of section 179(d)(2)(A)).
    The Treasury Department and the IRS also received comments 
concerning the application of section 179(d)(2)(B) to Example 21 of 
Sec.  1.168(k)-2(b)(3)(vi) in the August Proposed Regulations. In 
response, the Treasury Department and the IRS have proposed new rules 
covering the application of section 179(d)(2)(B) to acquisitions of 
depreciable property between members of the same consolidated group, as 
explained in the following section of this Explanation of Provisions.
D. Application to Members of a Consolidated Group
i. Overview of Used Property Acquisition Requirements
    Section 1.168(k)-2(b)(3)(iii)(A) of the August Proposed Regulations 
and the Final Regulations lists the following three requirements that 
must be satisfied in order for acquisitions of used property to qualify 
for the additional first year depreciation deduction (used property 
acquisition requirements). First, the property must not have been used 
by the taxpayer or

[[Page 50155]]

a predecessor at any time prior to the acquisition (No Prior Use 
Requirement). Second, the acquisition of the property must satisfy 
Sec.  1.168(k)-2(b)(3)(iii)(A)(2) of the August Proposed Regulations 
and the Final Regulations, which requires that (a) the property was not 
acquired from a related person (within the meaning of section 
179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii)) (Related Party Requirement), 
(b) the property was not acquired by one component member of a 
controlled group from another component member of the same controlled 
group (Component Member Requirement), and (c) the basis of the property 
in the hands of the acquirer is not determined, in whole or in part, by 
reference to the adjusted basis in the hands of the transferor. Third, 
the acquisition of the property must meet the requirements of section 
179(d)(3) and Sec.  1.179-4(d) (concerning like-kind exchanges and 
involuntary conversions).
ii. Application of the Used Property Acquisition Requirements to 
Consolidated Groups
    Section 1.168(k)-2(b)(3)(iii)(B)(3) of the August Proposed 
Regulations provides special rules applying the No Prior Use 
Requirement to consolidated groups. Section 1.168(k)-
2(b)(3)(iii)(B)(3)(i) of the August Proposed Regulations treats a 
member that acquires depreciable property as having a prior depreciable 
interest in such property if the consolidated group had a depreciable 
interest at any time prior to the member's acquisition of the property 
(Group Prior Use Rule). For these purposes, a consolidated group is 
treated as having a depreciable interest in property during the period 
in which any current or previous member of the consolidated group had a 
depreciable interest in the property while a member of the consolidated 
group. Section 1.168(k)-2(b)(3)(iii)(B)(3)(ii) of the August Proposed 
Regulations provides that, for purposes of applying the No Prior Use 
Requirement, a member is treated as having a depreciable interest in 
property prior to the time of its acquisition if, as part of a series 
of related transactions, the property is acquired by a member of a 
consolidated group and a corporation that had a depreciable interest in 
the property becomes a member of that consolidated group (Stock and 
Asset Acquisition Rule). For purposes of applying these two rules, 
Sec.  1.168(k)-2(b)(3)(iii)(B)(3)(iii) of the August Proposed 
Regulations provides that, 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.
    Commenters have asked for clarification regarding the application 
of the Group Prior Use Rule to situations in which a consolidated group 
terminates as a result of all of its members joining another 
consolidated group, including as a result of a reverse acquisition as 
defined in Sec.  1.1502-75(d)(3). By its terms, the Group Prior Use 
Rule applies only to the acquisition of property by a member of a 
consolidated group. Thus, the Treasury Department and the IRS have 
determined that this rule should apply only as long as the consolidated 
group remains in existence, as determined under Sec.  1.1502-75(d) and 
other applicable law.
    Several commenters also have requested confirmation that a member 
of a consolidated group that is treated as having a depreciable 
interest in property solely as a result of the application of the Group 
Prior Use Rule does not continue to be treated under that rule as 
having a depreciable interest in the property after the member leaves 
the consolidated group (that is, deconsolidates). Commenters have noted 
that, if a former member continues to be treated as having a 
depreciable interest in the property after deconsolidation, the Stock 
and Asset Acquisition Rule could apply whenever one consolidated group 
acquires from another consolidated group both qualified property and 
the stock of a member of that second consolidated group (the target 
member), even if the target member had no actual depreciable interest 
in the qualified property (as opposed to a depreciable interest arising 
solely from the application of the Group Prior Use Rule).
    The Treasury Department and the IRS did not intend the Group Prior 
Use Rule to continue to apply to a member of a consolidated group after 
the member leaves that consolidated group. By its terms, the Group 
Prior Use Rule applies only as long as a corporation remains a member 
of a consolidated group. Therefore, when a member deconsolidates, it 
does not continue to be treated under that rule as having a depreciable 
interest in the property. Accordingly, a departing member does not 
continue to have a depreciable interest in the property unless it 
actually owned such property.
    Further, the Treasury Department and the IRS intended the Stock and 
Asset Acquisition Rule to apply only when the member whose stock is 
acquired had an actual depreciable interest in the qualified property 
that also is acquired as part of the same series of related 
transactions. Accordingly, these proposed regulations clarify that the 
phrase ``a corporation that had a depreciable interest in the 
property'' in the Stock and Asset Acquisition Rule refers only to a 
corporation that has such an interest without regard to the application 
of the Group Prior Use Rule.
iii. Sales of Property Between Members of the Same Consolidated Group 
(Example 21 in Sec.  1.168(k)-2(b)(3)(vi) of the August Proposed 
Regulations)
    The Treasury Department and the IRS have received comments 
regarding the interaction of the August Proposed Regulations for 
consolidated groups with the statutorily prescribed Related Party 
Requirement and Component Member Requirement, as illustrated by Example 
21 in Sec.  1.168(k)-2(b)(3)(vi) of the August Proposed Regulations 
(Former Example 21). Generally, a corporation qualifies as a component 
member of a controlled group if the corporation was a member of such 
controlled group during the majority of the corporation's taxable year. 
See section 1563(b). In addition, the taxable year of a member of a 
consolidated group ends for all Federal income tax purposes at the end 
of the day on which its status as a member changes. See Sec.  1.1502-
76(b). Therefore, commenters have questioned how the August Proposed 
Regulations for consolidated groups could apply to treat the Component 
Member Requirement as satisfied if a member acquires depreciable 
property from another member of the same consolidated group (selling 
group) and, as part of an integrated plan that includes the 
acquisition, the acquiring member deconsolidates from the selling 
group.
    In Former Example 21, Parent is the common parent of a consolidated 
group that includes F Corporation (F) and G Corporation (G). G has a 
depreciable interest in certain equipment (Equipment #3). As part of a 
series of related transactions, (1) G sells Equipment #3 to F, and then 
(2) Parent sells all of its F stock to X Corporation (X), the common 
parent of an unrelated consolidated group. Based on those facts, Former 
Example 21 concludes that the Group Prior Use Rule does not apply to 
treat F as previously having a depreciable interest in Equipment #3 
because F's status as a member of the Parent consolidated group is 
tested immediately after the last transaction in the related series, at 
which point F has ceased to be a member of the Parent

[[Page 50156]]

consolidated group. Former Example 21 relies on the same analysis to 
conclude that the Related Party Requirement and Component Member 
Requirement are also satisfied, and that, assuming all other relevant 
requirements are satisfied, F would be eligible to claim the additional 
first year depreciation deduction for Equipment #3.
    Commenters also have requested guidance concerning the amount, 
location, and timing of the additional first year depreciation 
deduction in transactions similar to the transaction described in 
Former Example 21. In particular, commenters have asked whether the 
deduction should be reported on the consolidated return of the Parent 
consolidated group (that is, the selling group) or on the consolidated 
return of the X consolidated group (that is, the acquiring group), and 
whether the deduction would be limited by section 168(i)(7). Commenters 
have noted that, if F were treated as placing Equipment #3 in service 
while a member of the Parent consolidated group, the deduction might be 
reported on the consolidated return of the Parent group. In addition, 
because the transaction between F and G is an intercompany transaction, 
section 168(i)(7)(B)(ii) might apply to limit the amount of the 
deduction to an amount equaling G's gain from the transaction. One 
commenter further noted that, even if section 168(i)(7)(B)(ii) did not 
apply to the transaction, any amount of the deduction in excess of G's 
gain nevertheless might be disallowed under Sec.  1.1502-13 as a 
noncapital, nondeductible amount.
    Commenters have asserted that these potential results regarding the 
location (the Parent consolidated group) and the amount (an amount not 
in excess of G's gain) of the deduction would be improper based on the 
legislative history of section 168(k), which indicates that Congress 
intended to stimulate economic activity and promote capital investment. 
See H. Rept. 115-409, at 232 (2017) (``The Committee believes that 
providing full expensing for certain business assets lowers the cost of 
capital for tangible property used in a trade or business. With lower 
costs of capital, the Committee believes that businesses will be 
encouraged to purchase equipment and other assets, which will promote 
capital investment and provide economic growth.''); H. Rept. 107-251, 
at 20 (2001) (``The Committee believes that allowing additional first-
year depreciation will accelerate purchases of equipment, promote 
capital investment, modernization, and growth, and will help to spur an 
economic recovery.'').
    The Treasury Department and the IRS agree with commenters that, in 
situations similar to Former Example 21, the additional first year 
depreciation deduction should be reported on the consolidated return of 
the acquiring group rather than the selling group. With respect to 
Former Example 21, the Treasury Department and the IRS note that F made 
the economic outlay for Equipment #3, which was included in the amount 
paid by X for F's stock. Additionally, F's acquisition of Equipment #3 
and Parent's sale of the F stock to X occur as part of the same series 
of related transactions; thus, at the time of F's acquisition of 
Equipment #3, the parties expected F to deconsolidate from the Parent 
consolidated group, and the substance of the transaction is the same as 
if F first became a member of the X consolidated group and then 
acquired Equipment #3. Furthermore, F's purchase of Equipment #3 is the 
type of activity that section 168(k) was intended to encourage--if F 
had become a member of the X consolidated group before purchasing 
Equipment #3, it is clear that F, as a member of the X consolidated 
group, would be allowed the deduction in its full amount.
    Moreover, in circumstances similar to Former Example 21, the 
statute and regulations disregard a transitory acquisition of 
depreciable property when the property is acquired and disposed of 
within 90 calendar days. See section 168(k)(2)(E)(iii) and Sec.  
1.168(k)-2(b)(3)(vi) and (b)(4)(iv) (concerning syndication 
transactions) of the Final Regulations; see also Sec.  1.168(k)-
2(b)(3)(iii)(B)(4) of these proposed regulations (concerning de minimis 
uses of property).
    To ensure that the additional first year depreciation deduction is 
reported on the acquiring group's consolidated return in circumstances 
like those described in Former Example 21, Sec.  1.168(k)-2(b)(3)(v)(C) 
of these proposed regulations (Proposed Consolidated Acquisition Rule) 
provides that, if a member of a consolidated group acquires depreciable 
property from another member of the same consolidated group (that is, 
the selling group) in a taxable transaction, and if the transferee 
member ceases to be a member of the selling group in a series of 
related transactions that includes the property acquisition within 90 
calendar days of the date of the property acquisition, then (1) the 
disposition and acquisition of the property are treated as occurring 
one day after the date on which the transferee member ceases to be a 
member of the selling group (Deconsolidation Date) for all Federal 
income tax purposes, and (2) the transferee member is treated as 
placing the depreciable property in service not earlier than one day 
after the Deconsolidation Date for purposes of claiming depreciation or 
the investment credit.
    The Proposed Consolidated Acquisition Rule would ensure that the 
used property acquisition requirements, including the No Prior Use 
Requirement and the Related Party Requirement, are satisfied in cases 
similar to Former Example 21. With respect to the No Prior Use 
Requirement, because the proposed rule treats the transferee member as 
acquiring the property after it ceases to be a member of the selling 
group, the transferee member is not attributed the selling group's 
usage of the property under the Group Prior Use Rule. The Related Party 
Requirement and Component Member Requirements would be tested using the 
same analysis.
    The Proposed Consolidated Acquisition Rule applies the same 
treatment for purposes of determining whether the transaction is 
covered by section 168(i)(7)(B)(ii). Therefore, because the acquisition 
is not treated as occurring between members of the same consolidated 
group, if the transferee member is eligible to claim the additional 
first year depreciation deduction, then section 168(i)(7)(B)(ii) will 
not apply to limit the amount of the deduction.
    In order to allow the deduction to the appropriate party, the 
Proposed Consolidated Acquisition Rule also provides that the 
transferee member is treated as placing the property in service not 
earlier than one day after the Deconsolidation Date for purposes of 
sections 167 and 168 and Sec. Sec.  1.46-3(d) and 1.167(a)-11(e)(1). In 
so providing, the Treasury Department and the IRS intend to prohibit 
the transferee member from claiming the additional first year 
depreciation deduction on the selling group's consolidated return. The 
rule also prevents the transferee member from claiming regular 
depreciation or the investment credit with respect to the acquired 
property during the period after the transferee member acquires the 
property but before it leaves the selling group. Example 28 (that is, 
revised Former Example 21) in proposed Sec.  1.168(k)-2(b)(3)(vii)(BB) 
illustrates the application of the Proposed Consolidated Acquisition 
Rule to the acquisition of depreciable property by one member of a 
consolidated group from another member of the same consolidated group.

[[Page 50157]]

iv. Deemed Acquisitions of Depreciable Property Between Members of the 
Same Consolidated Group
    Commenters have noted that issues similar to those in Former 
Example 21 also arise in the context of deemed acquisitions of property 
within a consolidated group resulting from an election under either 
section 338(h)(10) or section 336(e). The Treasury Department and the 
IRS have determined that deemed acquisitions of property should be 
treated the same as actual acquisitions of property. Thus, Sec.  
1.168(k)-2(b)(3)(v)(D) of these proposed regulations provides a rule 
(Proposed Consolidated Deemed Acquisition Rule) that applies if (1) the 
transferee member acquires the stock of another member of the same 
group that holds depreciable property (target) in a qualified stock 
purchase or a qualified stock disposition for which a section 338 
election or a section 336(e) election for a disposition described in 
Sec.  1.336-2(b)(1), respectively, is made, and (2) the transferee 
member and target cease to be members of the consolidated group within 
90 calendar days of the acquisition date (within the meaning of Sec.  
1.338-2(c)(1)) or disposition date (within the meaning of Sec.  1.336-
1(b)(8)) as part of the same series of related transactions that 
includes the acquisition. The Proposed Consolidated Deemed Acquisition 
Rule does not apply to qualified stock dispositions described in 
section 355(d)(2) or (e)(2) because the rules applicable to such 
dispositions do not treat a new target corporation as acquiring assets 
from an unrelated person. See Sec.  1.336-2(b)(2).
    If the Proposed Consolidated Deemed Acquisition Rule applies, then 
(a) the acquisition date or disposition date, as applicable, is treated 
as the date that is one day after the date on which the transferee 
member and target cease to be members of the consolidated group 
(Deconsolidation Date) for all Federal income tax purposes, and (b) new 
target is treated as placing the depreciable property in service not 
earlier than one day after the Deconsolidation Date for purposes of 
sections 167 and 168 and Sec. Sec.  1.46-3(d) and 1.167(a)-11(e)(1).
    Without the proposed rule, new target might be treated as having a 
depreciable interest in the assets new target is deemed to acquire by 
virtue of the Group Prior Use Rule because old target, a member of the 
same consolidated group, had a depreciable interest in those assets. If 
applicable, the proposed rule prevents new target from being treated as 
having a depreciable interest in the assets by moving the acquisition 
date or disposition date to the day after the Deconsolidation Date. New 
target is therefore a member of the acquiring group at the time it is 
deemed to acquire the assets. Similar to the Proposed Consolidated 
Acquisition Rule, this deemed acquisition rule also provides that the 
transferee member is treated as placing the property in service not 
earlier than one day after the Deconsolidation Date for purposes of 
sections 167 and 168 and Sec. Sec.  1.46-3(d) and 1.167(a)-11(e)(1). 
Example 29 in proposed Sec.  1.168(k)-2(b)(3)(vii)(CC) illustrates the 
application of the rule to the deemed acquisition of depreciable 
property by one member of a consolidated group from another member of 
the same consolidated group pursuant to a section 338(h)(10) election.
    Neither the Proposed Consolidated Acquisition Rule nor the Proposed 
Consolidated Deemed Acquisition Rule applies if the property that is 
acquired (or deemed acquired) is subsequently disposed of by the 
transferee member or new target, respectively, in a transaction that is 
part of the same series of related transactions as the actual or deemed 
acquisition of the property. For special rules governing the transfer 
of property in a series of related transactions, see Sec.  1.168(k)-
2(b)(3)(iii)(C) of these proposed regulations. For special rules 
governing property placed in service and disposed of in the same 
taxable year, see Sec.  1.168(k)-2(g)(1).

3. Acquisition of Property

A. Definition of Binding Contract for Acquisition of Entity
    The Treasury Department and the IRS are aware that taxpayers and 
practitioners are having difficulty applying the binding contract rules 
in the August Proposed Regulations to transactions involving the 
acquisition of an entity. Because those rules were written to apply to 
the purchase of an asset instead of an entity, the Treasury Department 
and the IRS recognize that a binding contract rule for an acquisition 
of a trade or business, or an entity, is needed. Accordingly, these 
proposed regulations amend Sec.  1.168(k)-2 by adding paragraph 
(b)(5)(iii)(G) to provide that a contract to acquire all or 
substantially all of the assets of a trade or business or to acquire an 
entity (for example, a corporation, a partnership, or a limited 
liability company) is binding if it is enforceable under State law 
against the parties to the contract. The presence of a condition 
outside the control of the parties, including, for example, regulatory 
agency approval, will not prevent the contract from being a binding 
contract. Further, the fact that insubstantial terms remain to be 
negotiated by the parties to the contract, or that customary conditions 
remain to be satisfied, does not prevent the contract from being a 
binding contract. This proposed rule also applies to a contract for the 
sale of the stock of a corporation that is treated as an asset sale as 
a result of an election under section 338.
B. Property Not Acquired Pursuant to a Written Binding Contract
    The Treasury Department and the IRS also are aware that, in some 
cases, a taxpayer may acquire property that was not pursuant to a 
written binding contract. If such property is not self-constructed 
property, a qualified film, television, or live theatrical production, 
or a specified plant, these proposed regulations amend Sec.  1.168(k)-2 
by adding paragraph (b)(5)(v) to provide that the acquisition date of 
property acquired pursuant to a contract that is not a written binding 
contract is the date on which the taxpayer paid or incurred more than 
10 percent of the total cost of the property, excluding the cost of any 
land and preliminary activities such as planning and designing, 
securing financing, exploring, or researching. This 10-percent proposed 
rule is the same as the safe harbor provided in Sec.  1.168(k)-
2(b)(5)(iv)(B)(2) of the Final Regulations for determining the 
acquisition date of self-constructed property. This proposed rule does 
not apply to the acquisition of a trade or business, or an entity. The 
Treasury Department and the IRS request comments on this proposed rule.

4. Components

    Multiple commenters to the August Proposed Regulations requested an 
election similar to the one provided in section 3.02(2)(b) of Rev. 
Proc. 2011-26 (2011-16 I.R.B. 664 (April 18, 2011)) for components 
acquired or self-constructed after September 27, 2017, of larger self-
constructed property for which the manufacture, construction, or 
production of the larger self-constructed property begins before 
September 28, 2017.
    The Treasury Department and the IRS have determined that it is 
appropriate to allow a taxpayer to elect to treat one or more 
components acquired or self-constructed after September 27, 2017, of 
certain larger self-constructed property as being eligible for the 
additional first year depreciation deduction under section 168(k). The 
larger self-constructed property must be qualified property under 
section 168(k)(2), as in effect before the enactment of the Act,

[[Page 50158]]

for which the manufacture, construction, or production began before 
September 28, 2017. However, the election is not available for 
components of larger self-constructed property when such property is 
not eligible for any additional first year depreciation deduction under 
section 168(k) (for example, property described in section 168(k)(9) 
and placed in service by the taxpayer in any taxable year beginning 
after December 31, 2017, or qualified improvement property placed in 
service by the taxpayer after December 31, 2017). These proposed 
regulations amend Sec.  1.168(k)-2 by adding paragraph (c) to provide 
for this election. These proposed regulations also provide rules 
regarding installation costs and the determination of the basis 
attributable to the manufacture, construction, or production before 
January 1, 2020, for longer production period property or certain 
aircraft property described in section 168(k)(2)(B) or (C). 
Additionally, these proposed regulations provide the time and manner of 
making the election, and examples to illustrate the proposed rules.
    These proposed regulations also amend Sec.  1.168(k)-2(e)(1)(iii) 
to provide rules regarding the determination of the basis attributable 
to the manufacture, construction, or production before January 1, 2027, 
for longer production period property or certain aircraft property 
described in section 168(k)(2)(B) or (C).
    Commenters to the August Proposed Regulations requested guidance on 
whether property acquired before September 28, 2017, by a trade or 
business described in section 168(k)(9)(A) is eligible for the 
additional first year depreciation deduction provided by section 168(k) 
as in effect before the enactment of the Act. Another commenter 
requested clarification on whether any of the costs of property 
acquired before September 28, 2017, pursuant to a written binding 
contract, and placed in service after 2017 are eligible for the 
additional first year depreciation deduction under section 168(k). 
Property acquired before September 28, 2017, is eligible for the 
additional first year depreciation deduction provided by section 168(k) 
as in effect before the enactment of the Act provided such property is 
qualified property under section 168(k) as in effect before the 
enactment of the Act. However, if the taxpayer makes the election in 
proposed Sec.  1.168(k)-2(c), as described above, for components 
acquired or self-constructed after September 27, 2017, those components 
are eligible for the additional first year depreciation deduction under 
section 168(k). Such election, however, does not apply to, among other 
things, property described in section 168(k)(9) and placed in service 
in a taxable year beginning after December 31, 2017.

5. Special Rules: Mid-Quarter Convention

    The Treasury Department and the IRS are aware that taxpayers and 
practitioners have questioned whether the unadjusted depreciable basis 
of qualified property for which the additional first year depreciation 
deduction is claimed is taken into account in determining whether the 
mid-quarter convention under section 168(d) and Sec.  1.168(d)-1 
applies for the taxable year. The Treasury Department and the IRS agree 
that a rule is necessary and that it should be consistent with the 
definition of depreciable basis in Sec.  1.168(d)-1(b)(4). Accordingly, 
the proposed regulations amend Sec.  1.168(k)-2 by adding paragraph 
(g)(11) to provide that in determining whether the mid-quarter 
convention applies for a taxable year under section 168(d)(3) and Sec.  
1.168(d)-1, the depreciable basis, as defined in Sec.  1.168(d)-
1(b)(4), for the taxable year the qualified property is placed in 
service by the taxpayer, is not reduced by the allowed or allowable 
additional first year depreciation deduction for that taxable year.

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. These regulations also are 
proposed to apply to components acquired or self-constructed after 
September 27, 2017, of larger self-constructed property for which the 
manufacture, construction, or production begins before September 28, 
2017, and that is qualified property under section 168(k)(2) as in 
effect before the enactment of the Act and 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. Pending the issuance of 
final regulations, a taxpayer may choose to rely on these proposed 
regulations, in their entirety, 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. Pending the issuance of final regulations, a 
taxpayer also may choose to rely on these proposed regulations, in 
their entirety, to components acquired or self-constructed after 
September 27, 2017, of larger self-constructed property for which the 
manufacture, construction, or production begins before September 28, 
2017, and that is qualified property under section 168(k)(2) as in 
effect before the enactment of the Act and placed in service by the 
taxpayer during taxable years ending on or after September 28, 2017. If 
a taxpayer chooses to rely on these proposed regulations, the taxpayer 
must consistently apply all rules of these proposed regulations.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Executive Orders 12866 and 13563 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including (i) potential economic, environmental, and public health and 
safety effects, (ii) potential distributive impacts, and (iii) equity). 
Executive Order 13563 emphasizes the importance of quantifying both 
costs and benefits, reducing costs, harmonizing rules, and promoting 
flexibility.
    These proposed regulations have been designated as subject to 
review under Executive Order 12866 pursuant to the Memorandum of 
Agreement (April 11, 2018) (MOA) between the Treasury Department and 
the Office of Management and Budget (OMB) regarding review of tax 
regulations. The Office of Information and Regulatory Affairs has 
designated these proposed regulations as significant under section 1(b) 
of the MOA. Accordingly, the OMB has reviewed these proposed 
regulations.
A. Background
i. Bonus Depreciation Generally
    In general, section 168(k) allows taxpayers to immediately deduct 
some portion of investment in certain types of physical capital, what 
is colloquially known as bonus depreciation. The Act changed section 
168(k) in several ways. Arguably most substantially, the Act increased 
the bonus percentage as it applies to property generally acquired after 
September 27, 2017, which accelerates depreciation deductions. The Act 
also removed the ``original use'' requirement, meaning that taxpayers

[[Page 50159]]

could claim bonus depreciation on ``used'' property. The Act made 
several other modest changes to the operation of section 168(k). First, 
it excluded from the definition of qualified property any property used 
by rate-regulated utilities and firms (primarily automobile 
dealerships) with ``floor plan financing indebtedness'' as defined 
under section 163(j). Furthermore, section 168(k)(2)(a)(ii)(IV) and (V) 
allowed qualified film, television, and live theatrical productions (as 
defined under Section 181) to qualify for bonus depreciation.
    The regulations under Sec.  1.168(k)-2 generally provide structure 
and clarity for the implementation of section 168(k). However, Treasury 
and the IRS determined that there remained several outstanding issues 
requiring clarification that should be subject to notice and comment. 
First, these proposed regulations address some ambiguities related to 
the operation of section 168(k)(9), which describes some property that 
is ineligible for bonus depreciation. Second, these proposed 
regulations create a de minimis rule which provides that a taxpayer 
will not be deemed to have had a prior depreciable interest in a 
property--and thus that property will be eligible for bonus 
depreciation in that taxpayer's hands--if the taxpayer previously 
disposed of that property within 90 days of the date on which that 
property was placed in service. Third, these proposed regulations 
clarify the interpretation of an example in the August Proposed 
Regulations regarding an asset acquisition as part of a sale of a 
member of a controlled group from one group to another. Fourth, these 
proposed regulations modify the treatment of series of related 
transactions. Finally, these proposed regulations provide that certain 
components of larger self-constructed property can be eligible for the 
increased bonus depreciation percentage even if the construction of 
such larger self-constructed property began before September 28, 2017.
B. No-Action Baseline
    The Treasury Department and the IRS have assessed the benefits and 
costs of the proposed regulations relative to a no-action baseline 
reflecting anticipated Federal income tax-related behavior in the 
absence of these proposed regulations.
C. Economic Analysis of NPRM
    This section describes the main provisions of these proposed 
regulations and provides a qualitative economic analysis of each one.
i. Property Excluded From Bonus Depreciation by Section 168(k)(9)
    As discussed above, section 168(k)(9) provides that property used 
by certain businesses is not eligible for bonus depreciation. These 
businesses include certain rate-regulated utilities and motor vehicle 
dealerships with floor plan financing indebtedness.
    These proposed regulations first clarify that those taxpayers that 
lease property to such businesses described by section 168(k)(9) may 
claim bonus depreciation, so long as other requirements of section 
168(k) are met. This approach broadly follows the existing 
normalization rules (which provide generally for the reconciliation of 
tax income and book income for regulatory purposes for utilities), 
which provides that lessors to public utilities are not bound by such 
rules so long as they themselves are not a public utility. The Treasury 
Department and the IRS project that this guidance will be easy for 
taxpayers to interpret and comply with. Additionally, this decision 
allows businesses to receive some share of the economic benefit of 
section 168(k). To the extent that lessors can claim bonus 
depreciation, it is plausible that the market-clearing lease price for 
such assets will fall, potentially enabling some expansions of output 
and contributing to economic growth.
    These proposed regulations next clarify which businesses fall under 
the umbrella of section 168(k)(9)(A) (utilities) and section 
168(k)(9)(B) (dealerships with floor plan financing indebtedness). For 
utilities, these proposed regulations clarify that the ``primary use'' 
of an item described in the Code is consistent with how primary use is 
determined in existing regulations under section 167. This application 
should be familiar to taxpayers, and thus relatively easy to comply 
with.
    The statutory language of section 168(k)(9)(B) is somewhat more 
ambiguous, and thus more substantive clarifications were necessary. 
First, section 168(k)(9)(B) provides that dealerships with floor plan 
financing indebtedness are ineligible for bonus depreciation ``if the 
floor plan financing interest was taken into account under [section 
163(j)(1)(C)].'' These proposed regulations clarify that such interest 
is in fact ``taken into account'' only if the firm in fact received a 
benefit from section 163(j)(1)(C)--i.e., if total business interest 
expense (including floor plan financing interest) exceeds business 
interest income plus 30 percent of adjusted taxable income. This 
decision allows more firms to claim bonus depreciation than if the 
Treasury Department and the IRS had made the opposite interpretation 
(deeming all dealerships with floor plan financing interest to be 
ineligible for bonus depreciation, regardless of whether the firm 
received a benefit from section 163(j)(1)(C)).
    The Treasury Department and the IRS have undertaken an analysis of 
the investment effects of this provision, under the assumption that 10 
to 50 percent of affected taxpayers would have come to the opposite 
interpretation in the absence of the proposed regulations. Using tax 
return data and parameters from the literature on the effect of bonus 
depreciation on investment, this analysis has found that this provision 
would increase investment by an annual maximum of $20 to $90 million, 
although this range would likely decrease over time as uncertainty over 
the interpretation of the statute is resolved. Additionally, these 
proposed regulations will resolve a substantial compliance uncertainty 
facing these taxpayers.
    An additional ambiguity in section 168(k)(9)(B) pertains to the 
length of time that the section applies to a given firm. The section 
refers to a ``trade or business that has had floor plan financing 
indebtedness . . . if the floor plan financing interest related to such 
indebtedness was taken into account under [section 163(j)(1)(C)]''. 
Consider a firm (Example A) that received a benefit from section 
163(j)(C)(1) in tax year 2018 (meaning that its interest deduction 
would have been smaller if not for section 163(j)(C)(1)) but not in tax 
year 2019 or any other later year. One interpretation of the statute 
would deem that firm forever ineligible for bonus depreciation, in 2019 
and later. The Treasury Department and the IRS came to the opposite 
conclusion and deemed that section 168(k)(9)(B) is determined on an 
annual basis: For example, the firm in Example A of this part of the 
Special Analysis section would not be eligible for bonus depreciation 
in 2018, but so long as the other requirements were met, it would be 
eligible for bonus depreciation in 2019. As with the interpretation of 
``taken into account,'' this interpretation enables more firms to be 
eligible for bonus depreciation in more years, potentially increasing 
investment by such firms. The Treasury Department and the IRS expect 
that some taxpayers would have come to a different conclusion regarding 
the interpretation of this timing in the absence of these proposed 
regulations. Therefore, this provision could also have some economic 
effects. The Treasury Department and the IRS engaged in an

[[Page 50160]]

analysis on these effects based on historical tax data, parameter 
values from the economic literature for the effect of bonus 
depreciation on investment, and assumptions regarding taxpayer 
interpretations in the absence of these proposed regulations. The 
result of this analysis projects that this provision will cause 
investment to increase in this industry by no greater than $55 million 
in any year, and approximately $25 million per year on average over the 
period from 2019 to 2028. The Treasury Department and the IRS 
additionally project that some share of this increased investment will 
reduce investment in other industries through crowd-out effects.
    Importantly, the estimated effect of this provision interacts 
substantially with the rule that floor plan financing is ``taken into 
account'' only if the firm in fact received a benefit from section 
163(j)(1)(C). In the absence of the proposed regulations, the Treasury 
Department and the IRS project that some share of taxpayers in this 
industry would have interpreted section 168(k)(9)(B) as rendering them 
ineligible for bonus depreciation in substantially all circumstances. 
Therefore, the effect of both provisions together is less than the sum 
of each of the provisions considered independently. In total, the 
Treasury Department and the IRS have determined that the effect of both 
rules related to section 168(k)(9)(B), when considered together, would 
have a maximum annual effect on investment in the range of $65 million 
to $90 million and declining over time as uncertainty over the 
interpretation of the statute is resolved.
ii. Prior Depreciable Interest
    In general, to be eligible for bonus depreciation, a given property 
may not have been owned by the same firm in the past. This requirement 
was instituted by Congress in order to prevent ``churning'' of assets, 
whereby a firm could sell and soon thereafter repurchase the same asset 
in order to claim the 100 percent deduction. The August Proposed 
Regulations defined ``ownership'' for this purpose as having a prior 
depreciable interest. Section 1.168(k)-2 finalizes this interpretation. 
These proposed regulations introduce an exception, providing that a 
taxpayer does not have a depreciable interest in a given property if 
the taxpayer disposed of the property within 90 days of the initial 
date when the property was placed in service (so long as the asset is 
not repurchased and placed in service again within the same taxable 
year). The Treasury Department and the IRS primarily instituted this 
rule in order to coordinate with the syndication transaction rules of 
section 168(k)(E)(2)(iii). The Treasury Department and the IRS do not 
anticipate substantial economic effects of this provision. 
Nevertheless, it will generally have the effect of causing more 
property to be eligible for bonus depreciation (increasing incentives 
to invest), while minimizing incentives for wasteful churning of 
assets.
    Furthermore, these proposed regulations clarify that partners in a 
partnership hold a depreciable interest in the property held by that 
partnership, and that the share of the property to which this applies 
equals the partner's share of the depreciation deductions of the 
partnership over a certain period. The Treasury Department and the IRS 
have determined that this provides an accurate reflection of the 
partner's prior depreciable interest in the property, and therefore 
aligns tax consequences and economic consequences, which is generally 
favorable for economic efficiency. However, as is the case with the 
``prior use'' rules generally, the Treasury Department and the IRS do 
not project this provision to substantially affect behavior.
iii. Group Prior Use Rule
    These proposed regulations clarify several aspects of the ``Group 
Prior Use Rule.'' Under that rule, all members of a consolidated group 
are treated as having had a depreciable interest in a property if any 
member of the consolidated group had such a depreciable interest. 
First, these proposed regulations clarify that the rule ceases to be in 
effect once the consolidated group terminates as a result of joining 
another consolidated group. Second, these proposed regulations clarify 
that the Group Prior Use Rule does not apply to a corporation after it 
deconsolidates from the consolidated group, so long as that corporation 
did not in fact own that property. As is the case with the prior use 
rules generally, the Treasury Department and the IRS do not anticipate 
large economic effects as a result of this section of these proposed 
regulations.
iv. Purchases of Assets as Part of Acquisition of Entire Business
    Additionally, these proposed regulations clarify the proper 
procedure for certain purchases of assets by a given corporation from a 
related party that are a part of an integrated plan involving the 
selling of that corporation from one group to another. Specifically, 
these proposed regulations provide that the deduction for bonus 
depreciation is allowed in such circumstances, and should be claimed by 
the acquiring group. These proposed regulations provide for a similar 
treatment in the case of deemed acquisitions in the case of an election 
under section 338(h)(10) or section 336(e). These rules cause the tax 
treatment to reflect the economic reality, in which the acquiring group 
is bearing the economic outlay of the asset purchase, and that 
acquiring group had no economic prior depreciable interest. By aligning 
the tax consequences with the economic allocations, this treatment 
minimizes potential distortions caused by the anti-churning rules.
v. Component Rule Election
    In 2010, Congress increased the bonus percentage from 50 percent to 
100 percent for property placed in service between September 9, 2010 
and December 31, 2011. In 2011, the IRS issued Revenue Procedure 2011-
26 to allow taxpayers to elect to have the 100 percent bonus rate apply 
to components of larger self-constructed property whose construction 
began before September 9, 2010, so long as (1) the components were 
acquired (or self-constructed) after than that date and (2) the larger 
self-constructed property itself qualifies for bonus depreciation 
generally. These proposed regulations provide an analogous rule, 
replacing September 9, 2010 with September 27, 2017. This provision 
will allow more property to qualify for 100 percent bonus depreciation. 
Furthermore, this provision provides neutrality between taxpayers who 
acquire distinct, smaller pieces of depreciable property and those 
taxpayers that invest a similar amount in fewer, larger pieces of 
depreciable property whose construction takes place over a longer 
period of time. By treating similar taxpayers (and similar choices) 
similarly, this rule enhances economic efficiency by minimizing tax-
related distortions. However, the Treasury Department and the IRS 
project these rules to have only a modest effect on future economic 
decisions. These rules affect only taxpayers (1) that acquire (or self-
construct) components after the date of enactment of these proposed 
regulations and (2) for whom the construction of the larger self-
constructed property began prior to September 28, 2017 (approximately 
21 months ago). The Treasury Department and the IRS expect relatively 
few taxpayers to be affected by this provision going forward.
vi. Series of Related Transactions
    The August Proposed Regulations provided that, in a series of 
related transactions, the relationship between

[[Page 50161]]

the transferor and transferee of an asset was determined only after the 
final transaction in the series (the ``Series of Related Transaction 
Rule''). Commenters had expressed confusion regarding whether this 
applies to testing whether parties are related under section 179(d)(2), 
or whether it applies more broadly (e.g., in determining whether the 
taxpayer had a prior depreciable interest). These proposed regulations 
clarify that this Series of Related Transaction Rule is intended only 
to test the relatedness of two parties.
    These proposed regulations further revise the Series of Related 
Transaction Rule to address its application in various situations. 
Under these proposed regulations, the relatedness is tested after each 
step of the series of related transactions, with the substantial 
exception that any intermediary (i.e., a taxpayer other than the 
original transferor or ultimate transferee) is disregarded so long as 
that intermediary (1) never places the property in service or (2) 
disposes of the property in the same taxable year in which it was 
placed in service. This would tend to eliminate the benefit of the 
Series of Related Transaction Rule in cases where intermediate 
transferees maintained use of the property for a non-trivial length of 
time. The Treasury Department and the IRS project that this 
interpretation will prevent abuse. The Treasury Department and the IRS 
do not predict substantial economic effects of this provision.
vii. Miscellaneous
    Lastly, these proposed regulations put forward rules to the extent 
existing regulations apply in slightly new contexts. In particular, 
these proposed regulations clarify when a binding contract is in force 
to acquire all or substantially all the assets of a trade or business. 
Additionally, consistent with the rules of Sec.  1.168(d)-1(b)(4), 
these proposed regulations provide that, for the purpose of determining 
whether the mid-quarter convention applies, depreciable basis is not 
reduced by the amount of bonus depreciation. The Treasury Department 
and the IRS do not anticipate large economic effects of these 
clarifications, though the additional clarity of these regulations will 
likely reduce compliance burdens.

II. Paperwork Reduction Act

    The collection of information in these proposed regulations are in 
proposed Sec.  1.168(k)-2(c). The collection of information in proposed 
Sec.  1.168(k)-2(c) is an election that a taxpayer may make to treat 
one or more components acquired or self-constructed after September 27, 
2017, of certain larger self-constructed property as being eligible for 
the 100-percent additional first year depreciation deduction under 
section 168(k). The larger self-constructed property must be qualified 
property under section 168(k)(2) as in effect before the enactment of 
the Act and for which the manufacture, construction, or production 
began before September 28, 2017. The election is made by attaching a 
statement to a Federal income tax return indicating that the taxpayer 
is making the election under proposed Sec.  1.168(k)-2(c) and whether 
the taxpayer is making the election for all or some of the components 
described in proposed Sec.  1.168(k)-2(c).
    For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) (PRA), the reporting burden associated with proposed Sec.  
1.168(k)-2(c) will be reflected in the PRA submission associated with 
income tax returns in the Form 1120 series, Form 1040 series, Form 1041 
series, and Form 1065 series (for OMB control numbers, see chart at the 
end of this part II of this Special Analysis section). The estimate for 
the number of impacted filers with respect to the collection of 
information described in this part is 0 to 137,000 respondents. 
Historical data was not available to directly estimate the number of 
impacted filers. This estimate assumes that no more than 10 percent of 
income tax return filers with a nonzero entry on Form 4562 Line 14 
(additional first year depreciation deduction) will make this election 
(5 percent in the case of filers of Form 1040 series). The IRS 
estimates the number of affected filers to be the following:

                           Tax Forms Impacted
------------------------------------------------------------------------
                                       Number of     Forms to which the
     Collection of information        respondents    information may be
                                      (estimated)         attached
------------------------------------------------------------------------
Section 1.168(k)-2(c) Election for       0-137,000  Form 1120 series,
 components of larger self-                          Form 1040 series,
 constructed property for which                      Form 1041 series,
 the manufacture, construction, or                   and Form 1065
 production begins before                            series.
 September 28, 2017.
------------------------------------------------------------------------
Source: IRS:RAAS:KDA (CDW 6-1-19).

    The current status of the PRA submissions related to the tax forms 
that will be revised as a result of the information collections in the 
section 168(k) regulations is provided in the accompanying table. As 
described above, the reporting burdens associated with the information 
collections in the regulations are included in the aggregated burden 
estimates for OMB control numbers 1545-0123 (which represents a total 
estimated burden time for all forms and schedules for corporations of 
3.157 billion hours and total estimated monetized costs of $58.148 
billion ($2017)), 1545-0074 (which represents a total estimated burden 
time, including all other related forms and schedules for individuals, 
of 1.784 billion hours and total estimated monetized costs of $31.764 
billion ($2017)), and 1545-0092 (which represents a total estimated 
burden time, including all other related forms and schedules for trusts 
and estates, of 307,844,800 hours and total estimated monetized costs 
of $9.950 billion ($2016)). The overall burden estimates provided for 
the OMB control numbers below are aggregate amounts that relate to the 
entire package of forms associated with the applicable OMB control 
number and will in the future include, but not isolate, the estimated 
burden of the tax forms that will be created or revised as a result of 
the information collections in the regulations. These numbers are 
therefore unrelated to the future calculations needed to assess the 
burden imposed by the regulations. These burdens have been reported for 
other regulations that rely on the same OMB control numbers to conduct 
information collections under the PRA, and the Treasury Department and 
the IRS urge readers to recognize that these numbers are duplicates and 
to guard against over counting the burden that the regulations that 
cite these OMB control numbers imposed prior to the Act. No burden 
estimates specific to the forms affected by the regulations are 
currently available. The Treasury Department and the IRS have not

[[Page 50162]]

estimated the burden, including that of any new information 
collections, related to the requirements under the regulations. For the 
OMB control numbers discussed in above, the Treasury Department and the 
IRS estimate PRA burdens on a taxpayer-type basis rather than a 
provision-specific basis. Those estimates would capture changes made by 
the Act, the final regulations under section 168(k), and those that 
arise out of discretionary authority exercised in these proposed 
regulations and other regulations that affect the compliance burden for 
those forms.
    The Treasury Department and the IRS request comments on all aspects 
of information collection burdens related to the proposed regulations, 
including estimates for how much time it would take to comply with the 
paperwork burdens described above for each relevant form and ways for 
the IRS to minimize the paperwork burden. In addition, when available, 
drafts of IRS forms are posted for comment at https://apps.irs.gov/app/picklist/list/draftTaxForms.htm. IRS forms are available at https://www.irs.gov/forms-instructions. Forms will not be finalized until after 
they have been approved by OMB under the PRA.

----------------------------------------------------------------------------------------------------------------
                 Form                         Type of filer          OMB No.(s)                Status
----------------------------------------------------------------------------------------------------------------
Form 1040.............................  Individual (NEW Model)...       1545-0074  Published in the Federal
                                                                                    Register on 7/20/18. Public
                                                                                    Comment period closed on 9/
                                                                                    18/18.
                                       -------------------------------------------------------------------------
                                        Link: https://www.federalregister.gov/documents/2018/07/20/2018-15627/proposed-collection-comment-request-for-regulation-project.
----------------------------------------------------------------------------------------------------------------
Form 1041.............................  Trusts and estates.......       1545-0092  Published in the Federal
                                                                                    Register on 4/4/18. Public
                                                                                    Comment period closed on 6/4/
                                                                                    18.
                                       -------------------------------------------------------------------------
                                        Link: https://www.federalregister.gov/documents/2018/04/04/2018-06892/proposed-collection-comment-request-for-form-1041.
----------------------------------------------------------------------------------------------------------------
Forms 1065 and 1120...................  Business (NEW Model).....       1545-0123  Published in the Federal
                                                                                    Register on 10/8/18. Public
                                                                                    Comment period closed on 12/
                                                                                    10/18.
                                       -------------------------------------------------------------------------
                                        Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
----------------------------------------------------------------------------------------------------------------

III. Regulatory Flexibility Act

    It is hereby certified that these proposed regulations will not 
have a significant economic impact on a substantial number of small 
entities within the meaning of section 601(6) of the Regulatory 
Flexibility Act (5 U.S.C. chapter 6).
    Section 168(k) generally affects taxpayers that own and use 
depreciable property in their trades or businesses or for their 
production of income. The reporting burden in proposed Sec.  1.168(k)-
2(c) generally affects taxpayers that elect to have the 100 percent 
additional first year depreciation deduction apply to components that 
are acquired or self-constructed after September 27, 2017, of 
depreciable property for which the manufacture, construction, or 
production began before September 28, 2017, and was completed generally 
before January 1, 2020. The election is made by attaching a statement 
to a Federal income tax return indicating that the taxpayer is making 
the election under proposed Sec.  1.168(k)-2(c) and whether the 
taxpayer is making this election for all or some of the components 
described in Sec.  1.168(k)-2(c).
    For purposes of the PRA, the Treasury Department and the IRS 
estimate that there are 0 to 181,500 respondents of all sizes that are 
likely to be impacted by this collection of information. Only a small 
proportion of these filers are likely to be small entities (business 
entities with gross receipts of $25 million or less pursuant to section 
448(c)(1)). The Treasury Department and the IRS estimate the number of 
filers affected by proposed Sec.  1.168(k)-2(c) to be the following:

------------------------------------------------------------------------
                                Gross receipts of    Gross receipts over
            Form               $25 million or less       $25 million
------------------------------------------------------------------------
Form 1040...................  0-12,000 Respondents  0-32,500 Respondents
                               (estimated).          (estimated).
Form 1065...................  0-1,250 Respondents   0-35,000 Respondents
                               (estimated).          (estimated).
Form 1120...................  0-1,750 Respondents   0-11,000 Respondents
                               (estimated).          (estimated).
Form 1120S..................  0-2,500 Respondents   0-41,000 Respondents
                               (estimated).          (estimated).
                             -------------------------------------------
    Total...................  0-29,500 Respondents  0-152,000
                               (estimated).          Respondents
                                                     (estimated).
------------------------------------------------------------------------
Source: IRS:RAAS:KDA (CDW 6-1-19).

    Regardless of the number of small entities potentially affected by 
these proposed regulations, the Treasury Department and the IRS have 
concluded that proposed Sec.  1.168(k)-2(c) will not have a significant 
economic impact on a substantial number of small entities. As a result 
of all changes in these proposed regulations, the Treasury Department 
and the IRS estimate that individual taxpayers who have gross receipts 
of $25 million or less and experience an increase in burden will incur 
an average increase of 0 to 3 hours, and business taxpayers that have 
gross receipts of $25 million or less and experience an increase in 
burden will incur an average increase of 0 to 2 hours (Source: IRS:RAAS 
(8-28-2019)). Because the election in proposed Sec.  1.168(k)-2(c) is 
one of several changes in these proposed regulations, the Treasury 
Department and the IRS expect the average increase in burden to be less 
for the collection of information in proposed Sec.  1.168(k)-2(c) than 
the average increase in burden in the preceding sentence. The Treasury 
Department and the IRS also note that many taxpayers with gross 
receipts of

[[Page 50163]]

$25 million or less may experience a reduction in burden as a result of 
all changes in these proposed regulations.
    Additionally: (1) Many small businesses are not required to 
capitalize under section 263(a) the amount paid or incurred for the 
acquisition of depreciable tangible property that costs $5,000 or less 
if the business has an applicable financial statement or costs $500 or 
less if the business does not have an applicable financial statement, 
pursuant to Sec.  1.263(a)-1(f)(1); (2) many small businesses are no 
longer required to capitalize under section 263A the costs to 
construct, build, manufacture, install, improve, raise, or grow 
depreciable property if their average annual gross receipts are 
$25,000,000 or less; and (3) a small business that capitalizes costs of 
depreciable tangible property may deduct under section 179 up to 
$1,020,000 (2019 inflation adjusted amount) of the cost of such 
property placed in service during the taxable year if the total cost of 
depreciable tangible property placed in service during the taxable year 
does not exceed $2,550,000 (2019 inflation adjusted amount). Therefore, 
the Treasury Department and the IRS have determined that a substantial 
number of small entities will not be subject to these proposed 
regulations. Finally, proposed Sec.  1.168(k)-2(c) applies only if the 
taxpayer chooses to make an election to a more favorable rule. 
Consequently, the Treasury Department and the IRS hereby certify that 
these proposed regulations will not have a significant economic impact 
on a substantial number of small entities.
    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.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a state, 
local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. In 2019, that threshold is approximately $154 million. These 
proposed regulations do not include any Federal mandate that may result 
in expenditures by state, local, or tribal governments, or by the 
private sector in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive Order. These proposed regulations do not 
have federalism implications and do not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive Order.

Comments and 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 https://www.regulations.gov or upon request.
    A public hearing is scheduled on November 13, 2019, beginning at 10 
a.m. in the Auditorium of the Internal Revenue Building, 1111 
Constitution Avenue NW, Washington, DC 20224. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For more information about having your name placed on 
the building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit an outline of 
the topics to be discussed and the time to be devoted to each topic by 
October 23, 2019. Submit a signed paper or electronic copy of the 
outline as prescribed in this preamble under the ADDRESSES heading. A 
period of 10 minutes will be allotted to each person making comments. 
An agenda showing the scheduling of the speakers will be prepared after 
the deadline for receiving outlines has passed. Copies of the agenda 
will be available free of charge at the hearing.
    If no outline of the topics to be discussed at the hearing is 
received by October 23, 2019, the public hearing will be cancelled. If 
the public hearing is cancelled, a notice of cancellation of 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.

Partial Withdrawal of Proposed Regulations

    Under the authority of 26 U.S.C. 7805 and 26 U.S.C. 1502, Sec.  
1.168(k)-2(b)(3)(iii)(B)(3)(i) through (iii), Sec.  1.168(k)-
2(b)(3)(iii)(C), and Sec.  1.168(k)-2(b)(3)(vi) Examples 18 through 22 
of the notice of proposed rulemaking (REG-104397-18) published in the 
Federal Register on August 8, 2018 (83 FR 39292) are withdrawn.

Statement of Availability

    IRS Revenue Procedures and Notices cited in this preamble are 
published in the Internal Revenue Bulletin (or Cumulative Bulletin) and 
are available from the Superintendent of Documents, U.S. Government 
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 1.168(k)-0 is amended by adding entries for Sec.  
1.168(k)-2(b)(3)(iii)(C), (b)(3)(v), (b)(5)(iii)(G), (b)(5)(v), (c), 
and (g)(11); and adding an entry for Sec.  1.168(k)-2(h)(4) to read as 
follows:


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

* * * * *

[[Page 50164]]

Sec.  1.168(k)-2  Additional first year depreciation deduction for 
property acquired and placed in service after September 27, 2017.

* * * * *
    (b) * * *
    (3) * * *
    (iii) * * *
    (C) Special rules for a series of related transactions.
* * * * *
    (v) Application to members of a consolidated group.
* * * * *
    (5) * * *
    (iii) * * *
    (G) Acquisition of a trade or business or an entity.
* * * * *
    (v) Determination of acquisition date for property not acquired 
pursuant to a written binding contract.
* * * * *
    (c) Election for components of larger self-constructed property 
for which the manufacture, construction, or production begins before 
September 28, 2017.
    (1) In general.
    (2) Eligible larger self-constructed property.
    (i) In general.
    (ii) Exceptions.
    (3) Eligible components.
    (i) In general.
    (ii) Acquired components.
    (iii) Self-constructed components.
    (4) Special rules.
    (i) Installation costs.
    (ii) Property described in section 168(k)(2)(B).
    (5) Computation of additional first year depreciation deduction.
    (i) Election is made.
    (ii) Election is not made.
    (6) Time and manner for making election.
    (i) Time for making election.
    (ii) Manner of making election.
    (7) Examples.
* * * * *
    (g) * * *
    (11) Mid-quarter convention.
    (h) * * *

    (4) Regulation project REG-106808-19.
0
Par. 3. Section 1.168(k)-2 is amended by:
0
1. At the end of paragraph (a)(1), adding ``, except as provided in 
paragraph (c) of this section'';
0
2. Revising paragraph (b)(2)(ii)(F);
0
3. Adding three sentences at the end of paragraph (b)(2)(ii)(G);
0
4. Adding paragraphs (b)(2)(iii)(F), (G), and (H);
0
5. Adding paragraphs (b)(3)(iii)(B)(4) and (5), (b)(3)(iii)(C), 
(b)(3)(v), and (b)(3)(vii)(Y) through (HH);
0
6. Revising the last sentence in paragraph (b)(5)(ii)(A);
0
7. In the first sentence in paragraph (b)(5)(iii)(A), removing the word 
``A'' at the beginning of the sentence and adding ``Except as provided 
in paragraph (b)(5)(iii)(G) of this section, a'' in its place;
0
8. In the first sentence in paragraph (b)(5)(iii)(B), removing the word 
``A'' at the beginning of the sentence and adding ``Except as provided 
in paragraph (b)(5)(iii)(G) of this section, a'' in its place;
0
9. Adding paragraph (b)(5)(iii)(G);
0
10. In the penultimate sentence in paragraph (b)(5)(iv)(C)(1), removing 
the period at the end of the sentence and adding ``, except as provided 
in paragraph (c) of this section.'' in its place;
0
11. In the penultimate sentence in paragraph (b)(5)(iv)(C)(2), removing 
the period at the end of the sentence and adding ``, except as provided 
in paragraph (c) of this section.'' in its place;
0
12. Adding paragraph (b)(5)(v);
0
13. Revising the second sentence in paragraph (b)(5)(viii) introductory 
text;
0
14. Adding paragraph (c);
0
15. Adding two sentences at the end of paragraph (e)(1)(iii);
0
16. Adding paragraph (g)(11);
0
17. In introductory paragraph (h)(1), removing ``paragraphs (h)(2) and 
(3)'' and adding ``paragraphs (h)(2), (3), and (4)'' in its place; and
0
18. Adding paragraph (h)(4).
    The additions and revisions read as follows:


Sec.  1.168(k)-2  Additional first year depreciation deduction for 
property acquired and placed in service after September 27, 2017.

* * * * *
    (b) * * *
    (2) * * *
    (ii) * * *
    (F) Primarily used in a trade or business described in section 
163(j)(7)(A)(iv), and placed in service by the taxpayer in any taxable 
year beginning after December 31, 2017. For purposes of section 
168(k)(9)(A) and this paragraph (b)(2)(ii)(F), the term primarily used 
has the same meaning as that term is used in Sec.  1.167(a)-
11(b)(4)(iii)(b) and (e)(3)(iii) for classifying property. This 
paragraph (b)(2)(ii)(F) does not apply to property that is leased to a 
trade or business described in section 163(j)(7)(A)(iv) by a lessor's 
trade or business that is not described in section 163(j)(7)(A)(iv) for 
the taxable year; or
    (G) * * * Solely for purposes of section 168(k)(9)(B) and this 
paragraph (b)(2)(ii)(G), floor plan financing interest is not taken 
into account for the taxable year by a trade or business that has had 
floor plan financing indebtedness if the sum of the amounts calculated 
under section 163(j)(1)(A) and (B) for the trade or business for the 
taxable year equals or exceeds the business interest, as defined in 
section 163(j)(5), of the trade or business for the taxable year (which 
includes floor plan financing interest). If the trade or business has 
taken floor plan financing interest into account pursuant to this 
paragraph (b)(2)(ii)(G) for a taxable year, this paragraph 
(b)(2)(ii)(G) applies to any property placed in service by that trade 
or business in that taxable year. This paragraph (b)(2)(ii)(G) does not 
apply to property that is leased to a trade or business that has had 
floor plan financing indebtedness by a lessor's trade or business that 
has not had floor plan financing indebtedness during the taxable year 
or that has had floor plan financing indebtedness but did not take into 
account floor plan financing interest for the taxable year pursuant to 
this paragraph (b)(2)(ii)(G).
    (iii) * * *

    (F) Example 6. In 2019, a financial institution buys new 
equipment for $1 million and then leases this equipment to a lessee 
that primarily uses the equipment in a trade or business described 
in section 163(j)(7)(A)(iv). The financial institution is not 
described in section 163(j)(7)(A)(iv). As a result, paragraph 
(b)(2)(ii)(F) of this section does not apply to this new equipment. 
Assuming all other requirements are met, the financial institution's 
purchase price of $1 million for the new equipment qualifies for the 
additional first year depreciation deduction under this section.
    (G) Example 7. In 2019, F, an automobile dealer, buys new 
computers for $50,000 for use in its trade or business of selling 
automobiles. For purposes of section 163(j), F has the following for 
2019: $1,000 of adjusted taxable income, $40 of business interest 
income, $400 of business interest (which includes $100 of floor plan 
financing interest). The sum of the amounts calculated under section 
163(j)(1)(A) and (B) for F for 2019 is $340 ($40 + ($1,000 x 30 
percent)). F's business interest, which includes floor plan 
financing interest, for 2019 is $400. As a result, F's floor plan 
financing interest is taken into account by F for 2019 pursuant to 
paragraph (b)(2)(ii)(G) of this section. Accordingly, F's purchase 
price of $50,000 for the computers does not qualify for the 
additional first year depreciation deduction under this section.
    (H) Example 8. The facts are the same as in Example 7 in 
paragraph (b)(2)(iii)(G) of this section. In 2020, F buys new 
copiers for $30,000 for use in its trade or business of selling 
automobiles. For purposes of section 163(j), F has the following for 
2020: $1,300 of adjusted taxable income, $40 of business interest 
income, $400 of business interest (which includes $100 of floor plan 
financing interest). The sum of the amounts calculated under section 
163(j)(1)(A) and (B) for F for 2020 is $430 ($40 + ($1,300 x 30 
percent)). F's business interest, which includes floor plan 
financing interest, for 2020 is $400. As a result, F's floor plan 
financing interest is

[[Page 50165]]

not taken into account by F for 2020 pursuant to paragraph 
(b)(2)(ii)(G) of this section. Assuming all other requirements are 
met, F's purchase price of $30,000 for the copiers qualifies for the 
additional first year depreciation deduction under this section.

    (3) * * *
    (iii) * * *
    (B) * * *
    (4) De minimis use of property. If a taxpayer acquires and places 
in service property, the taxpayer or a predecessor did not previously 
have a depreciable interest in the property, the taxpayer disposes of 
the property to an unrelated party within 90 calendar days after the 
date the property was originally placed in service by the taxpayer, 
without taking into account the applicable convention, and the taxpayer 
reacquires and again places in service the property, the taxpayer's 
depreciable interest in the property during that 90-day period is not 
taken into account for determining whether the property was used by the 
taxpayer or a predecessor at any time prior to its reacquisition by the 
taxpayer under paragraphs (b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of 
this section. This paragraph (b)(3)(iii)(B)(4) does not apply if the 
taxpayer reacquires and again places in service the property during the 
same taxable year the taxpayer disposed of the property. For purposes 
of this paragraph (b)(3)(iii)(B)(4), an unrelated party is a person not 
described in section 179(d)(2)(A) or (B), and Sec.  1.179-4(c)(1)(ii) 
or (iii), or (c)(2).
    (5) Partner's prior depreciable interest in property held by 
partnership. Solely for purposes of applying paragraphs 
(b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) and (2) of this section, a 
person is treated as having a depreciable interest in a portion of 
property prior to the person's acquisition of the property if the 
person was a partner in a partnership at any time the partnership owned 
the property. For purposes of the preceding sentence, the portion of 
property that a partner is treated as having a depreciable interest in 
is equal to the total share of depreciation deductions with respect to 
the property allocated to the partner as a percentage of the total 
depreciation deductions with respect to that property allocated to all 
partners during the current calendar year and five calendar years 
immediately prior to the partnership's current year. If the person was 
not a partner in the partnership for this entire period, or if the 
partnership did not own the property for the entire period, only the 
period during which the person was a partner and the partnership owned 
the property is taken into account for purposes of determining a 
partner's share of depreciation deductions.
    (C) Special rules for a series of related transactions--(1) In 
general. Solely for purposes of paragraph (b)(3)(iii) of this section, 
the relationship between parties under section 179(d)(2)(A) or (B) in a 
series of related transactions is tested immediately after each step in 
the series, and between the original transferor and the ultimate 
transferee immediately after the last transaction in the series. A 
series of related transactions may include, for example, a transfer of 
partnership assets followed by a transfer of an interest in the 
partnership that owned the assets; or a disposition of property and 
disposition, directly or indirectly, of the transferor or transferee of 
the property.
    (2) Special rules--(i) Property placed in service and disposed of 
in same taxable year or property not placed in service. Any party in a 
series of related transactions that is neither the original transferor 
nor the ultimate transferee is disregarded (disregarded party) for 
purposes of testing the relationships under paragraph (b)(3)(iii)(C)(1) 
of this section if the party places in service and disposes of the 
depreciable property subject to the series, other than in a transaction 
described in paragraph (g)(1)(iii) of this section, during the party's 
same taxable year or if the party does not place in service the 
depreciable property subject to the series for use in the party's trade 
or business or production of income. In this case, the relationship is 
tested between the party from which the disregarded party acquired the 
depreciable property and the party to which the disregarded party 
disposed of the depreciable property. If the series has consecutive 
disregarded parties, the relationship is tested between the party from 
which the first disregarded party acquired the depreciable property and 
the party to which the last disregarded party disposed of the 
depreciable property. The rules for testing the relationships in 
paragraph (b)(3)(iii)(C)(1) of this section continue to apply for the 
other transactions in the series and for the last transaction in the 
series.
    (ii) All section 168(i)(7) transactions. This paragraph 
(b)(3)(iii)(C) does not apply if all transactions in a series of 
related transactions are described in paragraph (g)(1)(iii) of this 
section (section 168(i)(7) transactions in which property is 
transferred in the same taxable year that the property is placed in 
service by the transferor).
    (iii) One or more section 168(i)(7) transactions. Any step in a 
series of related transactions that is neither the original step nor 
the ultimate step is disregarded (disregarded step) for purposes of 
testing the relationships under paragraph (b)(3)(iii)(C)(1) of this 
section if the step is a transaction described in paragraph (g)(1)(iii) 
of this section. In this case, the relationship is not tested between 
the transferor and transferee of that transaction. Instead, the 
relationship is tested between the transferor in the disregarded step 
and the party to which the transferee in the disregarded step disposed 
of the depreciable property, and the transferee in the disregarded step 
and the party to which the transferee in the disregarded step disposed 
of the depreciable property. If the series has consecutive disregarded 
steps, the relationship is tested between the transferor in the first 
disregarded step and the party to which the transferee in the last 
disregarded step disposed of the depreciable property, and the 
transferee in the last disregarded step and the party to which the 
transferee in the last disregarded step disposed of the depreciable 
property. The rules for testing the relationships in paragraph 
(b)(3)(iii)(C)(1) of this section continue to apply for the other 
transactions in the series and for the last transaction in the series.
    (iv) Syndication transaction. This paragraph (b)(3)(iii)(C) does 
not apply to a syndication transaction described in paragraph 
(b)(3)(vi) of this section.
    (v) Application of paragraph (g)(1) of this section. Paragraph 
(g)(1) of this section applies to each step in a series of related 
transactions.
* * * * *
    (v) Application to members of a consolidated group--(A) In general. 
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 group had a 
depreciable interest at any time prior to the member's acquisition of 
the property, the member is treated as having a depreciable interest in 
the property prior to the acquisition. For purposes of this paragraph 
(b)(3)(v)(A), a consolidated group is 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.
    (B) Certain acquisitions pursuant to a series of related 
transactions. Solely for purposes of applying paragraph (b)(3)(v)(A) 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,

[[Page 50166]]

determined without regard to the application of paragraph (b)(3)(v)(A) 
of this section, becomes a member of the group, the member that 
acquires the property is treated as having a depreciable interest in 
the property prior to the time of its acquisition.
    (C) Sale of depreciable property to a member that leaves the group. 
Except as otherwise provided in paragraph (b)(3)(v)(E) of this section, 
if a member of a consolidated group (transferee member) acquires from 
another member of the same group (transferor member) depreciable 
property in an acquisition meeting the requirements of paragraph 
(b)(3)(iii)(A) of this section without regard to section 179(d)(2)(A) 
or (B) or paragraph (b)(3)(v)(A) of this section, and if, as part of 
the same series of related transactions that includes the acquisition, 
the transferee member ceases to be a member of the consolidated group 
within 90 calendar days of the date of the acquisition, then--
    (1) The transferor member is treated as disposing of, and the 
transferee member is treated as acquiring, the depreciable property one 
day after the date on which the transferee member ceases to be a member 
of the consolidated group (Deconsolidation Date) for all Federal income 
tax purposes; and
    (2) The transferee member is treated as placing the depreciable 
property in service not earlier than one day after the Deconsolidation 
Date for purposes of sections 167 and 168 and Sec. Sec.  1.46-3(d) and 
1.167(a)-11(e)(1).
    (D) Deemed sales of depreciable property under section 338 or 
336(e) to a member that leaves the group. This paragraph (b)(3)(v)(D) 
applies only if a member of a consolidated group (transferee member) 
acquires the stock of another member of the same group that holds 
depreciable property (target) in either a qualified stock purchase for 
which a section 338 election is made or a qualified stock disposition 
described in Sec.  1.336-2(b)(1) for which a section 336(e) election is 
made. Except as otherwise provided in paragraph (b)(3)(v)(E) of this 
section, if the target would be eligible for the additional first year 
depreciation deduction under this section with respect to the 
depreciable property without regard to paragraph (b)(3)(v)(A) of this 
section, and if the transferee member and the target cease to be 
members of the group within 90 calendar days of the acquisition date, 
within the meaning of Sec.  1.338-2(c)(1), or disposition date, within 
the meaning of Sec.  1.336-1(b)(8), as part of the same series of 
related transactions that includes the acquisition, then--
    (1) The acquisition date or disposition date, as applicable, is 
treated as the date that is one day after the Deconsolidation Date for 
all Federal income tax purposes; and
    (2) New target is treated as placing the depreciable property in 
service not earlier than one day after the Deconsolidation Date for 
purposes of sections 167 and 168 and Sec. Sec.  1.46-3(d) and 1.167(a)-
11(e)(1).
    (E) Disposition of depreciable property pursuant to the same series 
of related transactions. Paragraph (b)(3)(v)(C) of this section does 
not apply if, following the acquisition of depreciable property, the 
transferee member disposes of such property pursuant to the same series 
of related transactions that includes the property acquisition. 
Paragraph (b)(3)(v)(D) of this section does not apply if, following the 
deemed acquisition of depreciable property, the target disposes of such 
property pursuant to the same series of related transactions that 
includes the deemed acquisition. See paragraph (b)(3)(iii)(C) of this 
section for rules regarding the transfer of property in a series of 
related transactions. See also paragraph (g)(1) of this section for 
rules regarding property placed in service and disposed of in the same 
taxable year.
* * * * *
    (vii) * * *

    (Y) Example 25. (1) On September 5, 2017, Y, a calendar-year 
taxpayer, acquires and places in service a new machine (Machine #1), 
and begins using Machine #1 in its manufacturing trade or business. 
On November 1, 2017, Y sells Machine #1 to Z, then Z leases Machine 
#1 back to Y for 4 years, and Y continues to use Machine #1 in its 
manufacturing trade or business. The lease agreement contains a 
purchase option provision allowing Y to buy Machine #1 at the end of 
the lease term. On November 1, 2021, Y exercises the purchase option 
in the lease agreement and buys Machine #1 from Z. The lease between 
Y and Z for Machine #1 is a true lease for Federal tax purposes.
    (2) Because Y, a calendar-year taxpayer, placed in service and 
disposed of Machine #1 during 2017, Machine #1 is not eligible for 
the additional first year depreciation deduction for Y pursuant to 
Sec.  1.168(k)-1(g)(1)(i).
    (3) The use of Machine #1 by Y prevents Z from satisfying the 
original use requirement of paragraph (b)(3)(ii) of this section. 
However, Z'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, Z's purchase price of 
Machine #1 qualifies for the additional first year depreciation 
deduction for Z under this section.
    (4) During 2017, Y sold Machine #1 within 90 calendar days of 
placing in service Machine #1. Pursuant to paragraph 
(b)(3)(iii)(B)(4) of this section, Y's depreciable interest in 
Machine #1 during that 90-day period is not taken into account for 
determining whether Machine #1 was used by Y or a predecessor at any 
time prior to its reacquisition by Y on November 1, 2021. 
Accordingly, assuming all other requirements are met, Y's purchase 
price of Machine #1 on November 1, 2021, qualifies for the 
additional first year depreciation deduction for Y under this 
section.
    (Z) Example 26. Parent owns all of the stock of B and C, which 
are members of the Parent consolidated group. C has a depreciable 
interest in Equipment #1. During 2018, C sells Equipment #1 to B. 
Prior to this acquisition, B never had a depreciable interest in 
Equipment #1. B'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 and C 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)(v)(A) of this 
section, B is treated as previously having a depreciable interest in 
Equipment #1 because B is a member of the Parent consolidated group 
and C, while a member of the Parent consolidated group, had a 
depreciable interest in Equipment #1. Accordingly, B's acquisition 
of Equipment #1 is not eligible for the additional first year 
depreciation deduction.
    (AA) Example 27--(1) Facts. Parent owns all of the stock of D 
and E, which are members of the Parent consolidated group. D has a 
depreciable interest in Equipment #2. No other current or previous 
member of the Parent consolidated group has ever had a depreciable 
interest in Equipment #2 while a member of the Parent consolidated 
group. During 2018, D 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 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).
    (2) Analysis. Pursuant to paragraph (b)(3)(v)(A) of this 
section, E is treated as previously having a depreciable interest in 
Equipment #2 because E is a member of the Parent consolidated group 
and D, while a member of the Parent consolidated group, had a 
depreciable interest in Equipment #2. As a result, E's acquisition 
of Equipment #2 does not satisfy the used property acquisition 
requirements of paragraph (b)(3)(iii) of this section. Thus, E's 
acquisition of Equipment #2 is not eligible for the additional first 
year depreciation deduction. The results would be the same if, after 
selling Equipment #2 to BA, D had ceased to be a member of the 
Parent consolidated group prior to E's acquisition of Equipment #2.
    (BB) Example 28--(1) Facts. Parent owns all of the stock of B 
and S, which are members of the Parent consolidated group. S has a 
depreciable interest in Equipment #3. No other current or previous 
member of the Parent consolidated group has ever had a depreciable 
interest in Equipment #3 while a member of the Parent consolidated 
group. X is the common parent of a consolidated

[[Page 50167]]

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 has ever 
had a depreciable interest in Equipment #3 while a member of the X 
consolidated group. On January 1, 2019, B purchases Equipment #3 
from S. On February 15, 2019, as part of the same series of related 
transactions that includes B's purchase of Equipment #3, Parent 
sells all of the stock of B to X. Thus, B leaves the Parent 
consolidated group at the end of the day on February 15, 2019, and 
joins the X consolidated group on February 16, 2019. See Sec.  
1.1502-76(b).
    (2) Application of paragraph (b)(3)(v)(C) of this section. B was 
a member of the Parent consolidated group when B acquired Equipment 
#3 from S, another member of the same group. Paragraph (b)(3)(v)(A) 
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. However, B acquired Equipment #3 in a 
transaction meeting the requirements of paragraph (b)(3)(iii)(A) of 
this section, without regard to section 179(d)(2)(A) or (B) or 
paragraph (b)(3)(v)(A) of this section, and Parent sold all of the 
stock of B to X within 90 calendar days of B's acquisition of 
Equipment #3 as part of the same series of related transactions that 
included B's acquisition of Equipment #3. Thus, under paragraph 
(b)(3)(v)(C) of this section, B's acquisition of Equipment #3 is 
treated as occurring on February 16, 2019, for all Federal income 
tax purposes.
    (3) Eligibility for the additional first year depreciation 
deduction. B's acquisition of Equipment #3 on February 16, 2019, 
under paragraph (b)(3)(v)(C) of this section satisfies the 
requirement in paragraph (b)(3)(iii)(A)(1) of this section because B 
does not have a prior depreciable interest in Equipment #3. In 
addition, because no member of the X consolidated group previously 
had a depreciable interest in Equipment #3 while a member of the X 
consolidated group, B is not treated as previously having a 
depreciable interest in Equipment #3 under paragraph (b)(3)(v)(A) of 
this section. Further, because the relation between S and B is 
tested as if B acquired Equipment #3 while a member of the X 
consolidated group, S and B are neither members nor component 
members of the same controlled group on February 16, 2019. 
Therefore, section 179(d)(2)(A) and (B) and Sec.  1.179-4(c)(1)(ii) 
and (iii) are satisfied. If the other requirements of paragraph 
(b)(3)(iii)(A) of this section are satisfied, B is treated as 
placing Equipment #3 in service on a date not earlier than February 
16, 2019, while a member of the X consolidated group. Accordingly, 
assuming all other requirements of this section are satisfied, B is 
eligible to claim the additional first year depreciation deduction 
for Equipment #3 on that date. In addition, because the sale of 
Equipment #3 is deemed to occur between S, a member of the Parent 
consolidated group, and B, a member of the X consolidated group, the 
transaction is not between members of the same consolidated group 
and thus is not covered by section 168(i)(7)(B)(ii). Therefore, B's 
deduction is not limited by section 168(i)(7)(A) when B is treated, 
under paragraph (b)(3)(v)(C) of this section, as placing Equipment 
#3 in service on a date not earlier than February 16, 2019.
    (CC) Example 29--(1) Facts. The facts are the same as Example 28 
in paragraph (b)(3)(viii)(BB)(1) of this section, except that S owns 
all of the stock of T (rather than a depreciable interest in 
Equipment #3), which is a member of the Parent consolidated group; T 
has a depreciable interest in Equipment #3; B acquires all of the 
stock of T (instead of a depreciable interest in Equipment #3) on 
January 1, 2019; and S and B make a section 338(h)(10) election for 
B's qualified stock purchase.
    (2) Application of paragraph (b)(3)(v)(D) of this section. As a 
result of the section 338(h)(10) election, Old T is treated as 
transferring all of its assets, including Equipment #3, to an 
unrelated person in a single transaction in exchange for 
consideration at the close of the acquisition date and then 
transferring the consideration received to S in liquidation. In 
turn, New T is treated as acquiring all of its assets, including 
Equipment #3, from an unrelated person in exchange for consideration 
on the following day. See Sec.  1.338-1(a)(1). New T was a member of 
the Parent consolidated group on January 1, 2019, the date that New 
T acquired Equipment #3. Paragraph (b)(3)(v)(A) 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. However, New T would be eligible for the additional first 
year depreciation deduction under this section without regard to 
paragraph (b)(3)(v)(A) of this section, and Parent sold all of its B 
stock to X within 90 calendar days of New T's acquisition of 
Equipment #3 as part of the same series of related transactions that 
included the acquisition, thereby causing B and New T to cease to be 
members of the Parent consolidated group at the end of the day on 
February 15, 2019. Thus, paragraph (b)(3)(v)(D) applies to treat the 
acquisition date as February 16, 2019, for all Federal income tax 
purposes.
    (3) Eligibility for the additional first year depreciation 
deduction. Pursuant to paragraph (b)(3)(v)(D), Old T is treated as 
selling its assets to an unrelated person on February 16, 2019, and 
New T is treated as acquiring those assets on the following day, 
February 17, 2019. If the other requirements of paragraph 
(b)(3)(iii)(A) of this section are satisfied, New T is treated as 
placing Equipment #3 in service on a date not earlier than February 
17, 2019, while a member of the X consolidated group. Accordingly, 
assuming all other requirements of this section are satisfied, New T 
is eligible to claim the additional first year depreciation 
deduction for Equipment #3 when New T places Equipment #3 in 
service. In addition, the amount of the deduction is not limited by 
section 168(i)(7)(A).
    (DD) Example 30--(1) Facts. G, which is not a member of a 
consolidated group, has a depreciable interest in Equipment #4. 
Parent owns all the stock of H, which is a member of the Parent 
consolidated group. No member of the Parent consolidated group has 
ever had a depreciable interest in Equipment #4 while a member of 
the Parent consolidated group, and neither Parent nor H is related 
to G within the meaning of section 179(d)(2)(A) or (B) and Sec.  
1.179-4(c). During 2018, G sells Equipment #4 to a person not 
related to G, Parent, or H 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 G, 
and H purchases Equipment #4 from an unrelated person.
    (2) Analysis. In a series of related transactions, G became a 
member of the Parent consolidated group, and H, also a member of the 
Parent consolidated group, acquired Equipment #4. Because G 
previously had a depreciable interest in Equipment #4, pursuant to 
paragraph (b)(3)(v)(B) of this section, H is treated as having a 
depreciable interest in Equipment #4. As a result, H's acquisition 
of Equipment #4 does not satisfy the used property acquisition 
requirements of paragraph (b)(3)(iii) of this section. Accordingly, 
H's acquisition of Equipment #4 is not eligible for the additional 
first year depreciation deduction.
    (EE) Example 31. (1) In a series of related transactions, a 
father sells a machine to an unrelated individual in December 2019 
who sells the machine to the father's daughter in January 2020 for 
use in the daughter's trade or business. Pursuant to paragraph 
(b)(3)(iii)(C)(1) of this section, the time to test whether the 
parties are related is immediately after each step in the series, 
and between the original transferor and the ultimate transferee 
immediately after the last transaction in the series. As a result, 
the following relationships are tested under section 179(d)(2)(A): 
The father and the unrelated individual, the unrelated individual 
and the father's daughter, and the father and his daughter.
    (2) Because the individual is not related to the father within 
the meaning of section 179(d)(2)(A) and Sec.  1.179-4(c)(ii), the 
individual's acquisition of the machine satisfies the used property 
acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this 
section. Accordingly, assuming all other requirements of this 
section are satisfied, the individual's purchase price of the 
machine qualifies for the additional first year depreciation 
deduction under this section.
    (3) The individual and the daughter are not related parties 
within the meaning of section 179(d)(2)(A) and Sec.  1.179-4(c)(ii). 
However, the father and his daughter are related parties within the 
meaning of section 179(d)(2)(A) and Sec.  1.179-4(c)(ii). 
Accordingly, the daughter's acquisition of the machine does not 
satisfy the used property acquisition requirements of paragraph 
(b)(3)(iii) of this section and is not eligible for the additional 
first year depreciation deduction.
    (FF) Example 32. (1) The facts are the same as in Example 31 of 
paragraph (b)(3)(viii)(EE)(1) of this section, except that instead 
of selling to an unrelated individual, the father sells the machine 
to his son in December 2019 who sells the machine to his

[[Page 50168]]

sister (the father's daughter) in January 2020. Pursuant to 
paragraph (b)(3)(iii)(C)(1) of this section, the time to test 
whether the parties are related is immediately after each step in 
the series, and between the original transferor and the ultimate 
transferee immediately after the last transaction in the series. As 
a result, the following relationships are tested under section 
179(d)(2)(A): The father and his son, the father's son and his 
sister, and the father and the father's daughter.
    (2) Because the father and his son are related parties within 
the meaning of section 179(d)(2)(A) and Sec.  1.179-4(c)(ii), the 
son's acquisition of the machine does not satisfy the used property 
acquisition requirements of paragraph (b)(3)(iii) of this section. 
Accordingly, the son's acquisition of the machine is not eligible 
for the additional first year depreciation deduction.
    (3) The son and his sister are not related parties within the 
meaning of section 179(d)(2)(A) and Sec.  1.179-4(c)(ii). However, 
the father and his daughter are related parties within the meaning 
of section 179(d)(2)(A) and Sec.  1.179-4(c)(ii). Accordingly, the 
daughter's acquisition of the machine does not satisfy the used 
property acquisition requirements of paragraph (b)(3)(iii) of this 
section and is not eligible for the additional first year 
depreciation deduction.
    (GG) Example 33. (1) In June 2018, DA, an individual, bought and 
placed in service a new machine from an unrelated party for use in 
its trade or business. In a series of related transactions, DA sells 
the machine to DB and DB places it in service in October 2019, DB 
sells the machine to DC and DC places it in service in December 
2019, and DC sells the machine to DD and DD places it in service in 
January 2020. DA and DB are related parties within the meaning of 
section 179(d)(2)(A) and Sec.  1.179-4(c)(ii). DB and DC are related 
parties within the meaning of section 179(d)(2)(B) and Sec.  1.179-
4(c)(iii). DC and DD are not related parties within the meaning of 
section 179(d)(2)(A) and Sec.  1.179-4(c)(ii), or section 
179(d)(2)(B) and Sec.  1.179-4(c)(iii). DA is not related to DC or 
to DD within the meaning of section 179(d)(2)(A) and Sec.  1.179-
4(c)(ii). All parties are calendar year taxpayers.
    (2) DA's purchase of the machine in June 2018 satisfies the 
original use requirement of paragraph (b)(3)(ii) of this section 
and, assuming all other requirements of this section are met, 
qualifies for the additional first year depreciation deduction under 
this section.
    (3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, the 
time to test whether the parties in the series of related 
transactions are related is immediately after each step in the 
series, and between the original transferor and the ultimate 
transferee immediately after the last transaction in the series. 
However, because DB placed in service and disposed of the machine in 
the same taxable year, DB is disregarded pursuant to paragraph 
(b)(3)(iii)(C)(2)(i) of this section. As a result, the following 
relationships are tested under section 179(d)(2)(A) and (B): DA and 
DC, DC and DD, and DA and DD.
    (4) Because DA is not related to DC within the meaning of 
section 179(d)(2)(A) and Sec.  1.179-4(c)(ii), DC's acquisition of 
the machine satisfies the used property acquisition requirement of 
paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming 
all other requirements of this section are satisfied, DC's purchase 
price of the machine qualifies for the additional first year 
depreciation deduction under this section.
    (5) Because DC is not related to DD and DA is not related to DD 
within the meaning of section 179(d)(2)(A) and Sec.  1.179-4(c)(ii), 
or section 179(d)(2)(B) and Sec.  1.179-4(c)(iii), DD's acquisition 
of the machine satisfies the used property acquisition requirement 
of paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, 
assuming all other requirements of this section are satisfied, DD's 
purchase price of the machine qualifies for the additional first 
year depreciation deduction under this section.
    (HH) Example 34. (1) In June 2018, EA, an individual, bought and 
placed in service a new machine from an unrelated party for use in 
his trade or business. In a series of related transactions, EA sells 
the machine to EB and EB places it in service in September 2019, EB 
transfers the machine to EC in a transaction described in paragraph 
(g)(1)(iii) of this section and EC places it in service in November 
2019, and EC sells the machine to ED and ED places it in service in 
January 2020. EA and EB are not related parties within the meaning 
of section 179(d)(2)(A) and Sec.  1.179-4(c)(ii). EB and EC are 
related parties within the meaning of section 179(d)(2)(B) and Sec.  
1.179-4(c)(iii). EB and ED are related parties within the meaning of 
section 179(d)(2)(A) and Sec.  1.179-4(c)(ii), or section 
179(d)(2)(B) and Sec.  1.179-4(c)(iii). EC and ED are not related 
parties within the meaning of section 179(d)(2)(A) and Sec.  1.179-
4(c)(ii), or section 179(d)(2)(B) and Sec.  1.179-4(c)(iii). EA is 
not related to EC or to ED within the meaning of section 
179(d)(2)(A) and Sec.  1.179-4(c)(ii). All parties are calendar year 
taxpayers.
    (2) EA's purchase of the machine in June 2018 satisfies the 
original use requirement of paragraph (b)(3)(ii) of this section 
and, assuming all other requirements of this section are met, 
qualifies for the additional first year depreciation deduction under 
this section.
    (3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, the 
time to test whether the parties in the series of related 
transactions are related is immediately after each step in the 
series, and between the original transferor and the ultimate 
transferee immediately after the last transaction in the series. 
However, because EB placed in service and transferred the machine in 
the same taxable year in a transaction described in paragraph 
(g)(1)(iii) of this section, the section 168(i)(7) transaction 
between EB and EC is disregarded pursuant to paragraph 
(b)(3)(iii)(C)(2)(iii) of this section. As a result, the following 
relationships are tested under section 179(d)(2)(A) and (B): EA and 
EB, EB and ED, EC and ED, and EA and ED.
    (4) Because EA is not related to EB within the meaning of 
section 179(d)(2)(A) and Sec.  1.179-4(c)(ii), EB's acquisition of 
the machine satisfies the used property acquisition requirement of 
paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming 
all other requirements of this section are satisfied, EB's purchase 
price of the machine qualifies for the additional first year 
depreciation deduction under this section. Pursuant to paragraph 
(g)(1)(iii) of this section, EB is allocated \2/12\ of its 100-
percent additional first year depreciation deduction for the 
machine, and EC is allocated the remaining portion of EB's 100-
percent additional first year depreciation deduction for the 
machine.
    (5) EC is not related to ED and EA is not related to ED within 
the meaning of section 179(d)(2)(A) and Sec.  1.179-4(c)(ii), or 
section 179(d)(2)(B) and Sec.  1.179-4(c)(iii). However, EB and ED 
are related parties within the meaning of section 179(d)(2)(A) and 
Sec.  1.179-4(c)(ii), or section 179(d)(2)(B) and Sec.  1.179-
4(c)(iii). Accordingly, ED's acquisition of the machine does not 
satisfy the used property acquisition requirements of paragraph 
(b)(3)(iii) of this section and is not eligible for the additional 
first year depreciation deduction.
* * * * *
    (5) * * *
    (ii) * * *
    (A) * * * For determination of acquisition date, see paragraph 
(b)(5)(ii)(B) of this section for property acquired pursuant to a 
written binding contract, paragraph (b)(5)(iv) of this section for 
self-constructed property, and paragraph (b)(5)(v) of this section for 
property not acquired pursuant to a written binding contract.
* * * * *
    (iii) * * *
    (G) Acquisition of a trade or business or an entity. A contract to 
acquire all or substantially all of the assets of a trade or business 
or to acquire an entity (for example, a corporation, a partnership, or 
a limited liability company) is binding if it is enforceable under 
State law against the parties to the contract. The presence of a 
condition outside the control of the parties, including, for example, 
regulatory agency approval, will not prevent the contract from being a 
binding contract. Further, the fact that insubstantial terms remain to 
be negotiated by the parties to the contract, or that customary 
conditions remain to be satisfied, does not prevent the contract from 
being a binding contract. This paragraph (b)(5)(iii)(G) also applies to 
a contract for the sale of the stock of a corporation that is treated 
as an asset sale as a result of an election under section 338.
* * * * *
    (v) Determination of acquisition date for property not acquired 
pursuant to a written binding contract. Except as provided in 
paragraphs (b)(5)(iv), (vi), and (vii) of this section, the acquisition 
date of property that the taxpayer acquires pursuant to a contract that 
does not meet the definition of a written

[[Page 50169]]

binding contract in paragraph (b)(5)(iii) of this section, is the date 
on which the taxpayer paid (in the case of a cash basis taxpayer) or 
incurred (in the case of an accrual 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 and designing, 
securing financing, exploring, or researching. This paragraph (b)(5)(v) 
does not apply to an acquisition described in paragraph (b)(5)(iii)(G) 
of this section.
* * * * *
    (viii) * * * 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), paragraph (c) of this section 
does not apply, and the parties do not have predecessors:
* * * * *
    (c) Election for components of larger self-constructed property for 
which the manufacture, construction, or production begins before 
September 28, 2017--(1) In general. A taxpayer may elect to treat any 
acquired or self-constructed component, as described in paragraph 
(c)(3) of this section, of the larger self-constructed property, as 
described in paragraph (c)(2) of this section, as being eligible for 
the additional first year depreciation deduction under this section, 
assuming all requirements of section 168(k) and this section are met. 
The taxpayer may make this election for one or more such components.
    (2) Eligible larger self-constructed property--(i) In general. 
Solely for purposes of this paragraph (c) and except as provided in 
paragraph (c)(2)(ii) of this section, the larger self-constructed 
property must be qualified property under section 168(k)(2), as in 
effect on the day before the date of the enactment of the Act, for 
which the taxpayer begins the manufacture, construction, or production 
before September 28, 2017. The determination of when manufacture, 
construction, or production of the larger self-constructed property 
begins is made in accordance with the rules in Sec.  1.168(k)-
1(b)(4)(iii)(B). A larger self-constructed property is property that is 
manufactured, constructed, or produced by the taxpayer for its own use 
in its trade or business or for its production of income, or property 
that is manufactured, constructed, or produced for the taxpayer by 
another person under a written binding contract, as defined in Sec.  
1.168(k)-1(b)(4)(ii), 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. If the taxpayer 
enters into a written binding contract, as defined in paragraph 
(b)(5)(iii) of this section, before September 28, 2017, with another 
person to manufacture, construct, or produce the larger self-
constructed property and the manufacture, construction, or production 
of this property begins after September 27, 2017, paragraph (b)(5)(iv) 
of this section applies and paragraph (c) of this section does not 
apply.
    (ii) Exceptions. This paragraph (c) does not apply to any larger 
self-constructed property that meets at least one of the following 
criteria--
    (A) Is placed in service by the taxpayer before September 28, 2017;
    (B) Is placed in service by the taxpayer after December 31, 2019, 
or for property described in section 168(k)(2)(B) or (C) as in effect 
on the day before the date of the enactment of the Act, after December 
31, 2020;
    (C) Does not meet the original use requirement in section 
168(k)(2)(A)(ii) as in effect on the day before the date of the 
enactment of the Act;
    (D) Is described in section 168(k)(9) and Sec.  1.168(k)-
2(b)(2)(ii)(F) or (G);
    (E) Is described in section 168(g)(1)(F) and (g)(8) (electing real 
property trade or business) or section 168(g)(1)(G) (electing farming 
business) and placed in service by the taxpayer in any taxable year 
beginning after December 31, 2017;
    (F) Is 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, and placed in service by the taxpayer after 
December 31, 2017;
    (G) Is 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, and placed in service by the taxpayer after 
December 31, 2017;
    (H) Is 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, and placed in service by the taxpayer after 
December 31, 2017;
    (I) Is qualified improvement property as defined in Sec.  1.168(b)-
1(a)(5)(i)(A) (placed in service by the taxpayer after December 31, 
2017); or
    (J) Is included in a class of property for which the taxpayer made 
an election under section 168(k)(7) (formerly section 
168(k)(2)(D)(iii)) not to deduct the additional first year depreciation 
deduction.
    (3) Eligible components--(i) In general. Solely for purposes of 
this paragraph (c), a component of the larger self-constructed 
property, as described in paragraph (c)(2) of this section, must be 
qualified property under section 168(k)(2) and paragraph (b) of this 
section.
    (ii) Acquired components. Solely for purposes of this paragraph 
(c), a binding contract, as defined in paragraph (b)(5)(iii) of this 
section, to acquire a component of the larger self-constructed property 
must be entered into by the taxpayer after September 27, 2017.
    (iii) Self-constructed components. Solely for purposes of this 
paragraph (c), the manufacture, construction, or production of a 
component of the larger self-constructed property must begin after 
September 27, 2017. The determination of when manufacture, 
construction, or production of the component begins is made in 
accordance with the rules in paragraph (b)(5)(iv)(B) of this section.
    (4) Special rules--(i) Installation costs. If the taxpayer pays or 
incurs costs, including labor costs, to install a component of the 
larger self-constructed property, as described in paragraph (c)(2) of 
this section, such costs are eligible for additional first year 
depreciation under this section, assuming all requirements are met, 
only if the component being installed meets the requirements in 
paragraph (c)(3) of this section.
    (ii) Property described in section 168(k)(2)(B). For purposes of 
this paragraph (c), the unadjusted depreciable basis, as defined in 
Sec.  1.168(b)-1(a)(3), of qualified property in section 168(k)(2)(B), 
as in effect on the day before the date of the enactment of the Act, is 
limited to the property's unadjusted depreciable basis attributable to 
the property's manufacture, construction, or production before January 
1, 2020. The amounts of unadjusted depreciable basis attributable to 
the property's manufacture, construction, or production before January 
1, 2020, are referred to as ``progress expenditures.'' Rules similar to 
the rules in section 4.02(1)(b) of Notice 2007-36 (2007-17 I.R.B. 1000) 
(see Sec.  601.601(d)(2)(ii)(b) of this chapter) apply for determining 
progress expenditures.
    (5) Computation of additional first year depreciation deduction--
(i) Election is made. Before determining the allowable additional first 
year depreciation deduction for property for which the taxpayer makes 
the election specified in this paragraph (c), the taxpayer must 
determine the portion of the unadjusted depreciable basis, as defined 
in Sec.  1.168(b)-1(a)(3), of the larger self-constructed property, 
including all components, attributable

[[Page 50170]]

to the component that meets the requirements of paragraph (c)(3) of 
this section (component basis). The additional first year depreciation 
deduction for the component basis is determined by multiplying such 
component basis by the applicable percentage for the placed-in-service 
year of the larger self-constructed property. The additional first year 
depreciation deduction for the remaining unadjusted depreciable basis 
of the larger self-constructed property, as described in paragraph 
(c)(2) of this section, is determined by multiplying such remaining 
unadjusted depreciable basis by the phase-down percentage in section 
168(k)(8) applicable to the placed-in-service year of the larger self-
constructed property. For purposes of this paragraph (c), the remaining 
unadjusted depreciable basis of the larger self-constructed property is 
equal to the unadjusted depreciable basis, as defined in Sec.  
1.168(b)-1(a)(3), of the larger self-constructed property, including 
all components, reduced by the sum of the component basis of the 
components for which the taxpayer makes the election specified in this 
paragraph (c). If the phase-down percentage in section 168(k)(8) is 
zero for the placed-in-service year of the larger self-constructed 
property, none of the components of the larger self-constructed 
property qualify for the additional first year depreciation deduction 
under this section.
    (ii) Election is not made. If the taxpayer does not make the 
election specified in this paragraph (c), the additional first year 
depreciation deduction for the larger self-constructed property, 
including all components, that is qualified property under section 
168(k)(2), as in effect on the day before the date of the enactment of 
the Act, is determined by multiplying the unadjusted depreciable basis, 
as defined in Sec.  1.168(b)-1(a)(3), of the larger self-constructed 
property, including all components, by the phase-down percentage in 
section 168(k)(8) applicable to the placed-in-service year of the 
larger self-constructed property.
    (6) Time and manner for making election--(i) Time for making 
election. The election specified in this paragraph (c) must be made by 
the due date, including extensions, of the Federal tax return for the 
taxable year in which the taxpayer placed in service the larger self-
constructed property.
    (ii) Manner of making election. The election specified in this 
paragraph (c) must be made by attaching a statement to such return 
indicating that the taxpayer is making the election provided in this 
paragraph (c) and whether the taxpayer is making the election for all 
or some of the components described in paragraph (c)(3) of this 
section. 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 
a lower-tier partnership), or by the S corporation).
    (7) Examples. The application of this paragraph (c) is illustrated 
by the following examples. Unless the facts specifically indicate 
otherwise, assume that the larger self-constructed property is 
qualified property under section 168(k)(2) as in effect on the day 
before the date of the enactment of the Act, and the components 
acquired or self-constructed after September 27, 2017, are qualified 
property under section 168(k)(2) and paragraph (b) of this section.

    (i) Example 1. (A) BC, a calendar year taxpayer, is engaged in a 
trade or business described in section 163(j)(7)(A)(iv). In December 
2015, BC decided to construct an electric generation power plant for 
its own use. This plant is property described in section 
168(k)(2)(B) as in effect on the day before the date of the 
enactment of the Act. However, the turbine for the plant had to be 
manufactured by another person for BC. In January 2016, BC entered 
into a written binding contract with CD to acquire the turbine. BC 
received the completed turbine in August 2017 at which time BC 
incurred the cost of the turbine. The cost of the turbine is 11 
percent of the total cost of the electric generation power plant to 
be constructed by BC. BC began constructing the electric generation 
power plant in October 2017 and placed in service this new power 
plant, including all component parts, in 2020.
    (B) BC uses the safe harbor test in Sec.  1.168(k)-
1(b)(4)(iii)(B)(2) to determine when physical work of a significant 
nature begins for the electric generation power plant. Because the 
turbine that was manufactured by CD for BC is more than 10 percent 
of the total cost of the electric generation power plant, physical 
work of a significant nature for this plant began before September 
28, 2017. None of BC's expenditures for components of the power 
plant that are acquired or self-constructed after September 27, 
2017, are eligible for the election specified in this paragraph (c) 
because the power plant is described in section 168(k)(9)(A) and 
paragraph (b)(2)(ii)(F) of this section and, therefore, are not 
eligible for the election pursuant to paragraph (c)(2)(ii)(D) of 
this section. Assuming all requirements are met under section 
168(k)(2) as in effect on the day before the date of the enactment 
of the Act, the unadjusted depreciable basis of the power plant, 
including all components, attributable to its construction before 
January 1, 2020, is eligible for the 30-percent additional first 
year depreciation deduction pursuant to section 168(k)(8).
    (ii) Example 2. (A) In August 2017, BD, a calendar-year 
taxpayer, entered into a written binding contract with CE for CE to 
manufacture a locomotive for BD for use in its trade or business. 
Before September 28, 2017, BD incurred $500,000 of expenses for the 
locomotive, which is more than 10 percent of the total cost of the 
locomotive. After September 27, 2017, BD incurred $4,000,000 of 
expenses for components of the locomotive. These components were 
acquired or self-constructed after September 27, 2017. In February 
2019, CE delivered the locomotive to BD and BD placed in service the 
locomotive. The total cost of the locomotive is $4,500,000. The 
locomotive is property described in section 168(k)(2)(B) as in 
effect on the day before the date of the enactment of the Act. On 
its timely filed Federal income tax return for 2019, BD made the 
election specified in this paragraph (c).
    (B) BD uses the safe harbor test in Sec.  1.168(k)-
1(b)(4)(iii)(B)(2) to determine when physical work of a significant 
nature begins for the locomotive. Because BD had incurred more than 
10 percent of the total cost of the locomotive before September 28, 
2017, physical work of a significant nature for this locomotive 
began before September 28, 2017. Because BD made the election 
specified in this paragraph (c), the cost of $4,000,000 for the 
locomotive's components acquired or self-constructed after September 
27, 2017, qualifies for the 100-percent additional first year 
depreciation deduction, assuming all other requirements are met. The 
remaining cost of the locomotive is $500,000 and such amount 
qualifies for the 40-percent additional first year depreciation 
deduction pursuant to section 168(k)(8).
    (iii) Example 3. (A) In March 2017, BE, a calendar-year 
taxpayer, decided to construct qualified leasehold improvement 
property, as defined in section 168(e)(6) as in effect on the day 
before enactment of the Act, for its own use in its trade or 
business. This qualified leasehold improvement property also met the 
definition of qualified improvement property as defined in section 
168(k)(3) as in effect on the day before enactment of the Act. 
Physical work of a significant nature for this qualified leasehold 
improvement property began before September 28, 2017. After 
September 27, 2017, BE acquired components of the qualified 
leasehold improvement property at a cost of $100,000. BE placed in 
service the qualified leasehold improvement property in February 
2018.
    (B) Because BE placed in service the qualified leasehold 
improvement property after December 31, 2017, none of BE's 
expenditures of $100,000 for components of the qualified leasehold 
improvement property that are acquired after September 27, 2017, are 
eligible for the election specified in this paragraph (c) pursuant 
to paragraph (c)(2)(ii)(F) of this section. Additionally, BE's 
unadjusted depreciable basis of the qualified leasehold improvement 
property, including all components, is not eligible for any 
additional first year depreciation deduction under section 168(k) 
and this section nor under section 168(k) as in effect on the day 
before enactment of the Act.
* * * * *
    (e) * * *
    (1) * * *

[[Page 50171]]

    (iii) * * * The amounts of unadjusted depreciable basis 
attributable to the property's manufacture, construction, or production 
before January 1, 2020, are referred to as ``progress expenditures.'' 
Rules similar to the rules in section 4.02(1)(b) of Notice 2007-36 
(2007-17 I.R.B. 1000) (see Sec.  601.601(d)(2)(ii)(b) of this chapter) 
apply for determining progress expenditures.
* * * * *
    (g) * * *
    (11) Mid-quarter convention. In determining whether the mid-quarter 
convention applies for a taxable year under section 168(d)(3) and Sec.  
1.168(d)-1, the depreciable basis, as defined in Sec.  1.168(d)-
1(b)(4), for the taxable year the qualified property is placed in 
service by the taxpayer is not reduced by the allowed or allowable 
additional first year depreciation deduction for that taxable year. See 
Sec.  1.168(d)-1(b)(4).
    (h) * * *
    (4) Regulation project REG-106808-19--(i) In general. Except as 
provided in paragraph (h)(4)(ii) of this section, the rules of this 
section in this regulation project REG-106808-19 apply to--
    (A) 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;
    (B) 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; and
    (C) Components acquired or self-constructed after September 27, 
2017, of larger self-constructed property for which manufacture, 
construction, or production begins before September 28, 2017, and that 
is qualified property under section 168(k)(2) as in effect before the 
enactment of the Act and 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.
    (ii) Early application of regulation project REG-106808-19. A 
taxpayer may rely on the provisions of this section in this regulation 
project REG-106808-19, in its entirety, for--
    (A) Qualified property under section 168(k)(2) acquired and placed 
in service after September 27, 2017, by the taxpayer during the 
taxpayer's taxable year 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;
    (B) 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 the taxpayer's taxable year 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
    (C) Components acquired or self-constructed after September 27, 
2017, of larger self-constructed property for which manufacture, 
construction, or production begins before September 28, 2017, and that 
is qualified property under section 168(k)(2) as in effect before the 
enactment of the Act and placed in service by the taxpayer during the 
taxpayer's taxable year 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.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-20035 Filed 9-17-19; 4:15 pm]
 BILLING CODE 4830-01-P