Additional First Year Depreciation Deduction, 50108-50150 [2019-20036]

Download as PDF 50108 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9874] RIN 1545–BO74 Additional First Year Depreciation Deduction Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. AGENCY: This document contains final regulations that provide guidance regarding the additional first year depreciation deduction under section 168(k) of the Internal Revenue Code (Code). The final regulations reflect and clarify the increase of the benefit and expansion of the universe of qualifying property, particularly to certain classes of used property, authorized by the Tax Cuts and Jobs Act. The final regulations affect taxpayers who deduct depreciation for qualified property acquired and placed in service after September 27, 2017. DATES: Effective date: These regulations are effective on September 24, 2019. Applicability date: For dates of applicability, see §§ 1.48–12(a)(2)(i), 1.167(a)–14(e)(3), 1.168(b)–1(b)(2), 1.168(d)–1(d)(2), 1.168(i)–4(g)(2), 1.168(i)–6(k)(4), 1.168(k)–2(h), 1.169– 3(g), 1.179–6, 1.312–15(e), 1.704– 1(b)(1)(ii)(a), 1.704–3(f), and 1.743–1(l). A taxpayer may choose to apply these final 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, provided the taxpayer consistently applies all rules in these final regulations. Additionally, a taxpayer may rely on the proposed regulations under section 168(k) in regulation project REG–104397–18 (2018–41 I.R.B. 558), for 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, and ending before September 24, 2019. FOR FURTHER INFORMATION CONTACT: Elizabeth R. Binder or Kathleen Reed at (202) 317–7005 (not a toll-free number). SUPPLEMENTARY INFORMATION: khammond on DSKJM1Z7X2PROD with RULES2 SUMMARY: Background This document contains amendments to the Income Tax Regulations (26 CFR VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 part 1) under section 168(k). On August 8, 2018, the Department of the Treasury (Treasury Department) and the IRS published a notice of proposed rulemaking (REG–104397–18) in the Federal Register (83 FR 39292) containing proposed regulations under section 168(k) (the August Proposed Regulations). The Summary of Comments and Explanation of Revisions section summarizes the provisions of section 168(k) and the provisions of the August Proposed Regulations, which are explained in greater detail in the preamble to the August Proposed Regulations. The Treasury Department and the IRS received written and electronic comments responding to the August Proposed Regulations and held a public hearing on the proposed regulations on November 28, 2018. After full consideration of the comments received on the August Proposed Regulations and the testimony heard at the public hearing, this Treasury decision adopts the August Proposed Regulations with modifications in response to certain comments and testimony, as described in the Summary of Comments and Explanation of Revisions section. Concurrently with the publication of these final regulations, the Treasury Department and the IRS are publishing in the Proposed Rule section of this edition of the Federal Register a notice of proposed rulemaking providing, also in response to the above-cited comments and testimony, additional proposed regulations under section 168(k) (REG–106808–19). Summary of Comments and Explanation of Revisions The Treasury Department and the IRS received comments from approximately 20 commenters in response to the August Proposed Regulations. All comments were considered and are available at https://www.regulations.gov or upon request. The comments addressing the August Proposed Regulations are summarized in this Summary of Comments and Explanation of Revisions section. Section 168(k) was amended on December 22, 2017, by sections 12001(b)(13), 13201, and 13204 of the Tax Cuts and Jobs Act, Public Law 115– 97 (131 Stat. 2054) (the ‘‘Act’’). Because of these amendments, the August Proposed Regulations and these final regulations update existing regulations in § 1.168(k)–1 by providing a new section at § 1.168(k)–2 for property acquired and placed in service after September 27, 2017, and make conforming amendments to the existing regulations. PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 As discussed in the preamble to the August Proposed Regulations, the August Proposed Regulations and these final regulations describe and clarify the statutory requirements that must be met for depreciable property to qualify for the additional first year depreciation deduction provided by section 168(k). Further, the August Proposed Regulations and these final regulations provide guidance to taxpayers in determining the additional first year depreciation deduction and the amount of depreciation otherwise allowable for this property. Part I of this section provides an overview of section 168(k). Part II of this section addresses the operational rules. Part III of this section addresses the computation of the additional first year depreciation deduction and the elections under section 168(k). Part IV addresses the special rules for certain situations described in § 1.168(k)–2(g) of the final regulations (§ 1.168(k)–2(f) of the August Proposed Regulations). I. Overview Section 167(a) allows as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in a trade or business or of property held for the production of income. The depreciation deduction allowable for tangible depreciable property placed in service after 1986 generally is determined under the Modified Accelerated Cost Recovery System provided by section 168 (MACRS property). The depreciation deduction allowable for computer software that is placed in service after August 10, 1993, and is not an amortizable section 197 intangible, is determined under section 167(f)(1). Section 168(k) 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-inservice 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. Section 168(k), prior to amendment by the Act, allowed an additional first year depreciation deduction for the placed-in-service year equal to 50 percent of the adjusted basis of qualified property. Qualified property was E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations defined in part as property the original use of which begins with the taxpayer; that is, the property had to be new property. Section 13201 of the Act made several amendments to the allowance for additional first year depreciation deduction in section 168(k). For example, the additional first year depreciation deduction percentage is increased from 50 to 100 percent. In addition, the property eligible for the additional first year depreciation deduction is expanded to include certain used depreciable property and certain film, television, or live theatrical productions. Also, the placed-in-service date is extended from before January 1, 2020, to before January 1, 2027 (from before January 1, 2021, to before January 1, 2028, for longer production period property or certain aircraft property described in section 168(k)(2)(B) or (C)). A final example of the amendments by the Act to section 168(k) is the date on which a specified plant is planted or grafted by the taxpayer is extended from before January 1, 2020, to before January 1, 2027. Section 168(k), as amended by the Act, allows a 100-percent additional first year depreciation deduction for qualified property acquired and placed in service after September 27, 2017, and placed in service before January 1, 2023 (before January 1, 2024, for longer production period property or certain aircraft property described in section 168(k)(2)(B) or (C)). If a taxpayer elects to apply section 168(k)(5), the 100percent additional first year depreciation deduction also is allowed for a specified plant planted or grafted after September 27, 2017, and before January 1, 2023. The 100-percent additional first year depreciation deduction is decreased by 20 percentage points annually for qualified property placed in service, or a specified plant planted or grafted, after December 31, 2022 (after December 31, 2023, for longer production period property or certain aircraft property described in section 168(k)(2)(B) or (C)). Section 168(k)(2)(A), as amended by the Act, defines ‘‘qualified property’’ as meaning, in general, property (1) to which section 168 applies that has a recovery period of 20 years or less, (2) which is computer software as defined in section 167(f)(1)(B), for which a deduction is allowable under section 167(a) without regard to section 168(k), (3) which is water utility property, (4) which is a qualified film or television production as defined in section 181(d), for which a deduction would have been allowable under section 181 without regard to section 181(a)(2) or (g) or VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 section 168(k), or (5) which is a qualified live theatrical production as defined in section 181(e), for which a deduction would have been allowable under section 181 without regard to section 181(a)(2) or (g) or section 168(k). ‘‘Qualified property’’ also is defined in section 168(k)(2)(A) as meaning property, the original use of which begins with the taxpayer or the acquisition of which by the taxpayer meets the requirements of section 168(k)(2)(E)(ii); and which is placed in service by the taxpayer before January 1, 2027. Section 168(k)(2)(E)(ii) requires that the acquired property was not used by the taxpayer at any time prior to such acquisition and the acquisition of such property meets the requirements of section 179(d)(2)(A), (B), and (C) and section 179(d)(3). However, section 168(k)(2)(D) provides that qualified property does not include any property to which the alternative depreciation system specified in section 168(g) applies, determined without regard to section 168(g)(7) (relating to election to have the alternative depreciation system apply), and after application of section 280F(b) (relating to listed property with limited business use). Section 13201(h) of the Act provides the effective dates of the amendments to section 168(k) made by section 13201 of the Act. Except as provided in section 13201(h)(2) of the Act, section 13201(h)(1) of the Act provides that these amendments apply to property acquired and placed in service after September 27, 2017. However, property is not treated as acquired after the date on which a written binding contract, as defined in § 1.168(k)–2(b)(5)(iii) of these final regulations, is entered into for such acquisition. Section 13201(h)(2) provides that the amendments apply to specified plants planted or grafted after September 27, 2017. Additionally, section 12001(b)(13) of the Act repealed section 168(k)(4) (relating to the election to accelerate alternative minimum tax credits in lieu of the additional first year depreciation deduction) for taxable years beginning after December 31, 2017. Further, section 13204(a)(4)(B)(ii) repealed section 168(k)(3) (relating to qualified improvement property) for property placed in service after December 31, 2017. Unless otherwise indicated, all references to section 168(k) hereinafter are references to section 168(k) as amended by the Act. PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 50109 II. Operational Rules A. Eligibility Requirements for Additional First Year Depreciation Deduction The August Proposed Regulations and these final regulations follow section 168(k)(2) and section 13201(h) of the Act to provide that depreciable property must meet four requirements to be qualified property. These requirements are (1) the depreciable property must be of a specified type; (2) the original use of the depreciable property must commence with the taxpayer or used depreciable property must meet the acquisition requirements of section 168(k)(2)(E)(ii); (3) the depreciable property must be placed in service by the taxpayer within a specified time period or must be planted or grafted by the taxpayer before a specified date; and (4) the depreciable property must be acquired by the taxpayer after September 27, 2017. The written and electronic comments that the Treasury Department and the IRS received with respect to each of these requirements are discussed below. B. Property of a Specified Type 1. Property Eligible for the Additional First Year Depreciation Deduction a. In General The August Proposed Regulations and these final regulations follow the definition of qualified property in section 168(k)(2)(A)(i) and (k)(5) and provide that qualified property must be one of the following: (1) MACRS property that has a recovery period of 20 years or less; (2) computer software as defined in, and depreciated under, section 167(f)(1); (3) water utility property as defined in section 168(e)(5) and depreciated under section 168; (4) a qualified film or television production as defined in section 181(d) and for which a deduction would have been allowable under section 181 without regard to section 181(a)(2) and (g) or section 168(k); (5) a qualified live theatrical production as defined in section 181(e) and for which a deduction would have been allowable under section 181 without regard to section 181(a)(2) and (g) or section 168(k); or (6) a specified plant as defined in section 168(k)(5)(B) and for which the taxpayer has made an election to apply section 168(k)(5). b. Qualified Improvement Property The August Proposed Regulations and these final regulations provide that qualified property also includes qualified improvement property that is acquired by the taxpayer after E:\FR\FM\24SER2.SGM 24SER2 50110 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 September 27, 2017, and placed in service by the taxpayer after September 27, 2017, and before January 1, 2018. Multiple commenters requested clarification that qualified improvement property placed in service after 2017 also is qualified property eligible for the additional first year depreciation deduction. Another commenter requested that the IRS not challenge or audit taxpayers that treat qualified improvement property placed in service after 2017 as 15-year property eligible for the additional first year depreciation deduction. For property placed in service after December 31, 2017, section 13204 of the Act amended section 168(k) to eliminate qualified improvement property as a specific category of qualified property, and amended section 168(e) to eliminate the 15-year MACRS property classification for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The legislative history of section 13204 of the Act provides that the MACRS recovery period is 15 years for qualified improvement property. Conf. Rep. No. 115–466, at 367 (2017). However, section 168(e), as amended by section 13204 of the Act, does not classify qualified improvement property as having a recovery period of 20 years or less. Consequently, a legislative change must be enacted to provide for a recovery period of 20 years or less for qualified improvement property placed in service after 2017 to be qualified property. Accordingly, the Treasury Department and the IRS decline to adopt these comments. c. Qualified Restaurant Property and Qualified Retail Improvement Property The August Proposed Regulations and these final regulations provide that MACRS property with a recovery period of 20 years or less includes the following MACRS property that is acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer after September 27, 2017, and before January 1, 2018: (1) Qualified leasehold improvement property; (2) qualified restaurant property that is qualified improvement property; and (3) qualified retail improvement property. One commenter requested clarification that qualified retail improvement property, and qualified restaurant property that is qualified improvement property, also are qualified property eligible for the additional first year depreciation deduction. In making this request, the Treasury Department and the IRS assume the commenter is concerned VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 about such property that is placed in service after 2017. For property placed in service after December 31, 2017, section 13204 of the Act amended section 168(e) to eliminate the 15-year MACRS property classifications for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. Because these property classifications are no longer in effect for property placed in service after 2017, the Treasury Department and the IRS decline to adopt this comment. d. Qualified Film, Television, or Live Theatrical Production Consistent with section 168(k)(2)(A)(i)(IV) and (V), the August Proposed Regulations provide that qualified property includes a qualified film or television production, or a qualified live theatrical production, for which a deduction would have been allowable under section 181 without regard to section 181(a)(2) and (g), or section 168(k). One commenter requested guidance on when a qualified film had to be produced by an unrelated party so that a taxpayer acquiring the film now can claim additional first year depreciation. In making this request, the Treasury Department and the IRS assume the commenter interpreted the rule as allowing the additional first year depreciation deduction for a used film production. Another commenter requested clarification on whether a used film or television production qualifies for the additional first year depreciation deduction. These requests involve the interaction of sections 168(k) and 181. Section 181 allows a taxpayer to elect to deduct up to $15 million of the aggregate production costs of a qualified film, television, or live theatrical production for the taxable year in which the costs are paid or incurred by the taxpayer instead of capitalizing the costs and recovering such costs through depreciation deductions. See § 1.181– 1(a)(1). Pursuant to § 1.181–1(a)(3), production costs do not include the cost of obtaining a production after its initial release or broadcast. Further, § 1.181– 1(a)(1) provides that only an owner of the qualified film or television production is eligible to a make a section 181 election. Section 1.181– 1(a)(2)(i) defines an owner, for purposes of §§ 1.181–1 through –6, as any person that is required under section 263A to capitalize the costs of producing the production into the cost basis of the production, or that would be required to do so if section 263A applied to that person. Pursuant to § 1.181–1(a)(2)(ii), a person that acquires a finished or PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 partially-finished production is treated as an owner of that production for purposes §§ 1.181–1 through –6, but only if the production is acquired prior to its initial release or broadcast. Section 1.181–1(a)(7) defines initial release or broadcast, for purposes of §§ 1.181–1 through 1.181–6, as the first commercial exhibition or broadcast of a production to an audience. The Treasury Department and the IRS agree that clarification is needed on whether section 168(k) applies to a used qualified film, television, or live theatrical production. The deduction which would have been allowable under section 181 and §§ 1.181–1 through1.181–6 for a qualified film, television, or live theatrical production is only for production costs paid or incurred by an owner of the qualified film or television production prior to its initial release or broadcast or by an owner of the qualified live theatrical production prior to its initial live staged performance. Accordingly, section 168(k) does not apply to a used qualified film, television, or live theatrical production (that is, such production acquired after its initial release or broadcast, or after its initial live staged performance, as applicable). However, the final regulations clarify that only production costs of the qualified film, television, or live theatrical production for which a deduction would have been allowable under section 181 and the regulations under section 181 are eligible for the additional first year depreciation deduction. The final regulations also clarify that the owner, as defined in § 1.181–1(a)(2), of the qualified film, television, or live theatrical production is the only taxpayer eligible to claim the additional first year depreciation for such production and must be the taxpayer that places such production in service. A commenter requested clarification that a licensee may deduct the additional first year depreciation for the cost of acquiring a license to a qualified film (for example, the cost of acquiring a license of video on demand rights for a limited term or the cost of acquiring a license of rights in a foreign country for a limited term). As stated in the preceding paragraphs, only the owner of the qualified film, television, or live theatrical production is eligible to make a section 181 election. Section 1.181– 1(a)(2)(ii) provides that a person that acquires only a limited license or right to exploit a production is not an owner of a production for purposes of §§ 1.181–1 through 1.181–6. Therefore, for the reasons stated above, the E:\FR\FM\24SER2.SGM 24SER2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations Treasury Department and the IRS decline to adopt this comment. One commenter suggested that the final regulations clarify when a qualified film, television, or live theatrical production had to be produced to be eligible for the additional first year depreciation deduction. Section 181 is effective for a qualified film or television production commencing after October 22, 2004, and for a qualified live theatrical production commencing after December 31, 2015. Because this suggestion concerns the effective dates of section 181, the suggestion is beyond the scope of these final regulations. Accordingly, the Treasury Department and the IRS decline to adopt this suggestion. 2. Property Not Eligible for the Additional First Year Depreciation Deduction a. In General The August Proposed Regulations and these final regulations provide that qualified property does not include (1) property excluded from the application of section 168 as a result of section 168(f); (2) property that is required to be depreciated under the alternative depreciation system of section 168(g) (ADS); (3) any class of property for which the taxpayer elects not to deduct the additional first year depreciation under section 168(k)(7); (4) a specified plant placed in service by the taxpayer in the taxable year and for which the taxpayer made an election to apply section 168(k)(5) for a prior year under section 168(k)(5)(D); (5) any class of property for which the taxpayer elects to apply section 168(k)(4), as in effect before the enactment of the Act, to property placed in service in any taxable year beginning before January 1, 2018; or (6) property described in section 168(k)(9)(A) or (B). khammond on DSKJM1Z7X2PROD with RULES2 b. Property Required To Be Depreciated Under the ADS Property described in section 168(g)(1)(A), (B), (C), (D), (F), or (G) is required to be depreciated under the ADS. In addition, other provisions of the Code require property to be depreciated under the ADS. For example, property described in section 263A(e)(2)(A) if the taxpayer or any related person (as defined in section 263A(e)(2)(B)) has made an election under section 263A(d)(3), and property described in section 280F(b)(1) is required to be depreciated under the ADS. The Treasury Department and the IRS are aware that taxpayers and practitioners have questioned whether VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 using the ADS to determine the adjusted basis of the taxpayer’s qualified business asset investment pursuant to section 250(b)(2)(B) or 951A(d)(3) causes the taxpayer’s tangible property to be ineligible for the additional first year depreciation deduction. The final regulations clarify that it does not make that property ineligible for the additional first year depreciation deduction. The final regulations also clarify that using the ADS to determine the adjusted basis of the taxpayer’s tangible assets for allocating business interest expense between excepted and non-excepted trades or businesses under section 163(j) does not make that property ineligible for the additional first year depreciation deduction. In both instances, however, this rule does not apply if the property is required to be depreciated under the ADS pursuant to section 168(g)(1)(A), (B), (C), (D), (F), or (G), or other provisions of the Code other than section 163(j), 250(b)(2)(B), or 951A(d)(3). If section 168(h)(6) applies (property owned by partnerships treated as taxexempt use property), the Treasury Department and the IRS also are aware that taxpayers and practitioners have questioned whether only the tax-exempt entity’s proportionate share of the property or the entire property is not eligible for the additional first year depreciation deduction. If section 168(h)(6) applies, section 168(h)(6)(A) provides that the tax-exempt entity’s proportionate share of the property is treated as tax-exempt use property. Accordingly, the final regulations clarify that only the tax-exempt entity’s proportionate share of the property is described in section 168(g)(1)(B) and is not eligible for the additional first year depreciation deduction. c. Property Described in Section 168(k)(9) i. In General Consistent with section 168(k)(9)(A), the August Proposed Regulations and these final regulations provide 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). Further, consistent with section 168(k)(9)(B), the August Proposed Regulations and these final regulations provide that qualified property does not include any property used in a trade or business that has had floor plan financing indebtedness if the floor plan financing interest related to such indebtedness is taken into account under section 168(j)(1)(C). Because section 163(j) applies to taxable years beginning after December PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 50111 31, 2017, the August Proposed Regulations and these final regulations also provide that these exclusions from the additional first year depreciation deduction apply to property placed in service in any taxable year beginning after December 31, 2017. The August Proposed Regulations did not provide any further guidance under section 168(k)(9). Several commenters 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. Concurrently with the publication of these final regulations, the Treasury Department and the IRS are publishing elsewhere in this issue of the Federal Register proposed regulations under section 168(k) (REG–106808–19) that address these comments. ii. Property Described in Section 168(k)(9)(A) (Regulated Public Utility Property) 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). Concurrently with the publication of these final regulations, the Treasury Department and the IRS are publishing elsewhere in this issue of the Federal Register proposed regulations under section 168(k) (REG–106808–19) that address this question. Several commenters 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. This comment is related to the comment discussed in part II(D)(3) of this Summary of Comments and Explanation of Revisions section regarding the election provided in section 3.02(2)(b) of Rev. Proc. 2011–26 (2011–16 I.R.B. 664). Concurrently with the publication of these final regulations, the Treasury Department and the IRS are publishing elsewhere in this issue of the Federal Register proposed regulations under section 168(k) (REG–106808–19) that address both comments. Another commenter requested that the Treasury Department and the IRS change the position in the August Proposed Regulations so that qualified property does not include property that is primarily used in a trade business described in section 168(k)(9)(A), acquired after September 27, 2017, and E:\FR\FM\24SER2.SGM 24SER2 50112 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations placed in service before January 1, 2018. The commenter asserted that the definition of a trade or business in section 163(j)(7)(A)(iv) is not new, and regulated public utility companies were not expecting such property to be eligible for the additional first year depreciation deduction. The definition of a trade or business under section 163(j)(7)(A)(iv) is outside the scope of these final regulations. Further, because section 163(j) applies to taxable years beginning after December 31, 2017, the Treasury Department and the IRS believe that the exclusion of property described in section 168(k)(9)(A) from the additional first year depreciation deduction applies to such property placed in service in taxable years beginning after December 31, 2017. Accordingly, the Treasury Department and the IRS decline to adopt this suggestion. iii. Property Described in Section 168(k)(9)(B) (Floor Plan Financing Indebtedness) A commenter requested guidance on when floor plan financing interest is ‘‘taken into account’’ for purposes of section 168(k)(9)(B). If section 168(k)(9)(B) applies for a taxable year, the Treasury Department and the IRS also are aware that taxpayers and practitioners have questioned whether ‘‘has had floor plan financing indebtedness’’ in section 168(k)(9)(B) means that the additional first year depreciation deduction is not allowed for property placed in service by a trade or business described in section 168(k)(9)(B) in any subsequent taxable year. Concurrently with the publication of these final regulations, the Treasury Department and the IRS are publishing elsewhere in this issue of the Federal Register proposed regulations under section 168(k) (REG–106808–19) that address both matters. C. New and Used Property khammond on DSKJM1Z7X2PROD with RULES2 1. New Property The August Proposed Regulations and these final regulations generally retain the original use rules in § 1.168(k)– 1(b)(3). Pursuant to section 168(k)(2)(A)(ii), the August Proposed Regulations and these final regulations do not provide any date by which the original use of the property must commence with the taxpayer. The August Proposed Regulations and these final regulations define original use as meaning the first use to which the property is put, whether or not that use corresponds to the use of the property by the taxpayer. A commenter requested that this definition be revised VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 to provide that original use means the first use of the property within the United States. The definition of original use in the August Proposed Regulations and in § 1.168(k)–1(b)(3) is the same as the definition of such term in the legislative history of the Job Creation and Worker Assistance Act of 2002, Public Law 107–147 (116 Stat. 21), that added section 168(k) to the Code. There is no indication in the legislative history of section 13201 of the Act that Congress intended to change the definition of original use. Accordingly, the Treasury Department and the IRS decline to adopt this comment. 2. Used Property a. In General Pursuant to section 168(k)(2)(A)(ii) and (k)(2)(E)(ii), the August Proposed Regulations and these final regulations provide that the acquisition of used property is eligible for the additional first year depreciation deduction if such acquisition meets the following three requirements: (1) The property was not used by the taxpayer or a predecessor at any time prior to the acquisition; (2) the acquisition of the property meets the related party and carryover basis requirements of section 179(d)(2)(A), (B), and (C) and § 1.179–4(c)(1)(ii), (iii), and (iv), or § 1.179–4(c)(2); and (3) the acquisition of the property meets the cost requirements of section 179(d)(3) and § 1.179–4(d). Several commenters requested a definition of ‘‘predecessor.’’ One commenter suggested that the term be limited to a transfer described in section 381. Another commenter suggested that the term be comprehensively defined, including transactions between partners and partnerships, or shareholders and corporations. This commenter also asserted that restrictions based on use by a predecessor should be removed because the language is not in section 168(k). Besides the used property requirements in the August Proposed Regulations, the term ‘‘predecessor’’ is used in the acquisition requirements in the proposed regulations and in § 1.168(k)–1(b)(4). The Treasury Department and the IRS have determined that the inclusion of predecessor in both requirements is necessary and appropriate to prevent abuse by taxpayers to churn assets. Accordingly, the Treasury Department and the IRS do not adopt the suggestion to remove the term ‘‘predecessor.’’ However, the Treasury Department and the IRS agree that a definition of predecessor is needed. The final regulations provide that a predecessor PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 includes (i) a transferor of an asset to a transferee in a transaction to which section 381(a) applies, (ii) a transferor of an asset to a transferee in a transaction in which the transferee’s basis in the asset is determined, in whole or in part, by reference to the basis of the asset in the hands of the transferor, (iii) a partnership that is considered as continuing under section 708(b)(2), (iv) the decedent in the case of an asset acquired by an estate, or (v) a transferor of an asset to a trust. b. Depreciable Interest The August Proposed Regulations and these final regulations provide that the property is treated as used by the taxpayer or a predecessor at any time prior to acquisition by the taxpayer or predecessor if the taxpayer or the predecessor had a depreciable interest in the property at any time prior to such acquisition, whether or not the taxpayer or the predecessor claimed depreciation deductions for the property. i. Definition A commenter requested a definition of ‘‘depreciable interest’’ or a clarification that the term has the meaning as applied for purposes of section 167. The term ‘‘depreciable interest’’ in the August Proposed Regulations and these final regulations has the same meaning as that term is used for purposes of section 167. The property must be used in the taxpayer’s trade or business or held by the taxpayer for the production of income pursuant to section 167(a). In addition, case law provides that the person who made the capital investment in the property is the person entitled to a return on that capital by means of claiming a depreciation deduction. Gladding Dry Goods Co. v. Commissioner, 2 B.T.A. 336, 338 (1925). Legal title and the right of possession are not determinative. Hopkins Partners v. Commissioner, T.C. Memo. 2009–107 (citing Gladding Dry Goods, 2 B.T.A. at 338). Instead, the question is which party actually invested in the property. Id. The issue of whether a taxpayer has a depreciable interest in property generally arises when a lessor or a lessee makes improvements to property. If a lessor makes improvements at the lessor’s own expense, the lessor is entitled to depreciation deductions even though the lessee has the use of the improvements. Gladding Dry Goods, 2 B.T.A. at 338–339; Hopkins Partners. If a lessee makes improvements and the title to the improvements vests immediately in the lessor, the lessor’s bare legal title does not preclude the lessee from recovering its investment in E:\FR\FM\24SER2.SGM 24SER2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 the improvements through depreciation deductions. Hopkins Partners; see also McGrath v. Commissioner, T.C. Memo. 2002–231. However, when the lessee makes improvements as a substitute for rent, the lessee has no depreciable interest in the leasehold improvement. Hopkins Partners (citing Your Health Club, Inc. v. Commissioner, 4 T.C. 385, 390 (1944), acq., 1945 C.B. 7). Because the determination of whether a person has a depreciable interest in the property depends on the facts and circumstances and concerns whether the property is eligible for the depreciation deduction under section 167, the request is beyond the scope of these final regulations. Accordingly, the Treasury Department and the IRS decline to adopt this comment. ii. Safe Harbor The preamble to the August Proposed Regulations requested comments on whether a safe harbor should be provided on how many taxable years a taxpayer or a predecessor should look back to determine if the taxpayer or the predecessor previously had a depreciable interest in the property. Multiple commenters made suggestions. One commenter suggested a look-back period of five years from the placed-inservice date of the property, with a rebuttable presumption that neither the taxpayer nor a predecessor held a depreciable interest in the property prior to the 5-year period. Other commenters suggested a look-back period of three years, including the current taxable year. Another commenter suggested that the prior use rule apply only to property initially owned on or after the date of enactment of the Act and a look-back period that is the shorter of the applicable recovery period of the property or 10 years. Another commenter suggested no lookback period for used property to be used in the United States for the first time. Finally, another commenter suggested the following three alternatives for determining if property is previously used by the taxpayer or a predecessor: The prior use or disposition of the property occurred pursuant to a plan that included the taxpayer’s reacquisition of the property; the person possesses actual or constructive knowledge of the prior use of the property; or provide a look-back period measured by reference to the property’s recovery period, such as the lesser of the property’s recovery period or a set number of years. After considering these suggestions, the Treasury Department and the IRS have decided to provide a look-back period of five calendar years VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 immediately prior to the taxpayer’s current placed-in-service year of the property. We believe that five years is the appropriate number of years to reduce the potential for churning assets. Most assets have a recovery period of five or seven years under section 168(c). In addition, we believe that this brightline test will be easy for both taxpayers and the IRS to administer. Therefore, the final regulations provide that to determine if the taxpayer or a predecessor had a depreciable interest in the property at any time prior to acquisition, only the five calendar years immediately prior to the taxpayer’s current placed-in-service year of the property are taken into account. If the taxpayer and a predecessor have not been in existence for this entire 5-year period, only the number of calendar years the taxpayer and the predecessor have been in existence is taken into account. iii. Used in the United States for the First Time A commenter requested the August Proposed Regulations be revised to allow the used property requirements be met for property that will be used in the United States for the first time and that is acquired at its fair market value by a U.S. taxpayer from a non-U.S. related party, and for property that is acquired by a U.S. affiliate from a non-U.S. parent corporation in an arm’s-length transaction. The statutory language of section 168(k)(2)(E)(ii) and the legislative history of section 13201 of the Act do not support such a rule. Conf. Rep. No. 115–466, at 353. Accordingly, the Treasury Department and the IRS decline to adopt this comment. iv. Substantial Renovation of Property The Treasury Department and the IRS are aware that taxpayers and practitioners have questioned whether a taxpayer that purchases substantially renovated property is eligible to claim the additional first year depreciation deduction for such property (assuming all other requirements are met). The August Proposed Regulations and these final regulations retain the original use rules in § 1.168(k)–1(b)(3)(i). Under these rules, the cost of reconditioned or rebuilt property does not satisfy the original use requirement. However, if the cost of the used parts in such property is not more than 20 percent of the total cost of the property, whether acquired or self-constructed, the property is treated as meeting the original use requirement. Consistent with the original use rules, the final regulations provide that if a PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 50113 taxpayer acquires and places in service substantially renovated property and the taxpayer or a predecessor previously had a depreciable interest in the property before it was substantially renovated, that taxpayer’s or predecessor’s depreciable interest is not taken into account for determining whether the substantially renovated property was used by the taxpayer or a predecessor at any time before its acquisition by the taxpayer. For this purpose and consistent with the original use rules, property is substantially renovated if the cost of the used parts is not more than 20 percent of the total cost of the substantially renovated property, whether acquired or selfconstructed. c. Section 336(e) Election Section 1.179–4(c)(2) provides that property deemed to have been acquired by a new target corporation as a result of a section 338 election will be considered acquired by purchase for purposes of § 1.179–4(c)(1). Upon a section 338 election, the target corporation (old target) is treated as transferring all of its assets to an unrelated person in exchange for consideration that includes the discharge of its liabilities, and a different corporation (new target) is treated as acquiring all of its assets from an unrelated person in exchange for consideration that includes the assumption of those liabilities. Section 1.338–1(a)(1). Although both old target and new target are a single corporation under corporate law, § 1.338–1(a)(1) provides that they generally are considered to exist as separate corporations for purposes of subtitle A of the Code. The Federal income tax consequences of a section 336(e) election made with respect to a qualified stock disposition not described, in whole or in part, in section 355(d)(2) or (e)(2) are similar to the Federal income tax consequences of a section 338 election. See § 1.336– 2(b)(1). Accordingly, the August Proposed Regulations and these final regulations modify § 1.179–4(c)(2) to include property deemed to have been acquired by a new target corporation pursuant to a section 336(e) election made with respect to such a qualified stock disposition. Thus, property deemed to have been acquired by a new target corporation as a result of either a section 338 election or a section 336(e) election made with respect to a qualified stock disposition not described, in whole or in part, in section 355(d)(2) or (e)(2) is considered acquired by purchase for purposes of § 1.179–4(c)(1). E:\FR\FM\24SER2.SGM 24SER2 50114 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations Conversely, if a section 336(e) election is made with respect to a qualified stock disposition that is described, in whole or in part, in section 355(d)(2) or (e)(2), old target is treated as selling its assets to an unrelated person but then purchasing the assets back (sale-to-self model). Section 1.336– 2(b)(2). Because the sale-to-self model does not deem a new target corporation to acquire the assets from an unrelated person, commenters have questioned whether assets deemed purchased in such a qualified stock disposition should be considered acquired by purchase for purposes of § 1.179–4(c)(1). The final regulations clarify that the reference to section 336(e) in § 1.179– 4(c)(2) does not include dispositions described in section 355(d)(2) or (e)(2) because, under the sale-to-self model, old target will be treated as acquiring the assets in which it previously had a depreciable interest. khammond on DSKJM1Z7X2PROD with RULES2 d. Rules Applying to Consolidated Groups The August Proposed Regulations treat a member of a consolidated group as previously having a depreciable interest in all property in which the consolidated group is treated as previously having a depreciable interest. For purposes of this proposed rule, a consolidated group is treated as having a depreciable interest in property if any current or previous member of the group had a depreciable interest in the property while a member of the group. The August Proposed Regulations also do not allow the additional first year depreciation deduction when, as part of a series of related transactions, one or more members of a consolidated group acquire both the stock of a corporation that previously had a depreciable interest in the property and the property itself. Additionally, if the acquisition of property is part of a series of related transactions that also includes one or more transactions in which the transferee of the property ceases to be a member of a consolidated group, then whether the taxpayer is a member of a consolidated group is tested immediately after the last transaction in the series. Multiple commenters requested clarification of these rules. Concurrently with the publication of the final regulations, the Treasury Department and the IRS are publishing elsewhere in this issue of the Federal Register proposed regulations under section 168(k) (REG–106808–19) that address these comments. VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 e. 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 relation between the original transferor and the ultimate transferee is tested immediately after the last transaction in the series (related transactions rule). We received comments requesting clarification on the application of the related transactions rule in certain circumstances. Concurrently with the publication of the final regulations, the Treasury Department and the IRS are publishing elsewhere in this issue of the Federal Register proposed regulations under section 168(k) (REG–106808–19) that address these comments. f. Application to Partnerships The August Proposed Regulations and these final regulations address whether certain section 704(c) allocations, the basis of distributed property determined under section 732, and basis adjustments under sections 734(b) and 743(b) qualify for the additional first year depreciation deduction. One commenter recommended applying the principles underlying section 197(f)(9) to analyze these issues under section 168(k). The Treasury Department and the IRS considered this approach and determined that it was not appropriate for purposes of section 168(k). Although the regulations under section 197(f)(9) apply an aggregate approach with respect to basis adjustments under sections 732, 734, and 743 (as well as certain section 704(c) allocations), the Treasury Department and the IRS looked to the purpose of section 168(k), not section 197(f)(9), to determine how to best approach the entity versus aggregate theory question. Furthermore, the statutory language found in section 197(f)(9)(E), which treats each partner in a partnership as having owned and used the partner’s proportionate share of the partnership’s assets for purposes of determining basis increases under sections 732, 734, and 743, is not in section 168(k). Therefore, the August Proposed Regulations and these final regulations determine the proper treatment of each basis adjustment under section 168(k) on a case-by-case basis. One commenter to the August Proposed Regulations asked for clarification regarding a partner’s depreciable interest in property held by a partnership. Concurrently with the publication of the final regulations, the PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 Treasury Department and the IRS are publishing elsewhere in this issue of the Federal Register proposed regulations under section 168(k) (REG–106808–19) that address this comment. i. Section 704(c) Remedial Allocations The August Proposed Regulations and these final regulations provide that remedial allocations under section 704(c) do not qualify for the additional first year depreciation deduction. The same rule applies in the case of revaluations of partnership property (reverse section 704(c) allocations). One commenter requested that the final regulations permit immediate expensing of excess book basis under the remedial allocation method in § 1.704–3(d) and corresponding remedial allocations of income and depreciation. The Treasury Department and the IRS decline to adopt this comment because the underlying property that gives rise to remedial allocations was contributed to the partnership in a section 721 transaction and has a basis described in section 179(d)(2)(C), which is in violation of section 168(k)(2)(E)(ii)(I), as well as the original use requirement. ii. Section 734(b) Adjustments The August Proposed Regulations and these final regulations provide that section 734(b) basis adjustments are not eligible for the additional first year depreciation deduction. One commenter suggested that the Treasury Department and the IRS should permit immediate expensing of basis adjustments under section 734(b)(1)(A) allocable to qualified property. Section 734(b)(1)(A) provides that, in the case of a distribution of property to a partner with respect to which a section 754 election is in effect (or when there is a substantial basis reduction under section 734(d)), the partnership will increase the adjusted basis of partnership property by the amount of any gain recognized to the distributee partner under section 731(a)(1). The Treasury Department and the IRS decline to adopt this comment because section 734(b) adjustments are made to the common basis of partnership property and do not satisfy the original use clause of section 168(k)(2)(A)(ii) or the used property requirement of section 168(k)(2)(E)(ii)(I). iii. Section 743(b) Adjustments The August Proposed Regulations and these final regulations provide that, in determining whether a section 743(b) basis adjustment meets the used property acquisition requirements of section 168(k)(2)(E)(ii), each partner is E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations treated as having owned and used the partner’s proportionate share of partnership property. In the case of a transfer of a partnership interest, section 168(k)(2)(E)(ii)(I) will be satisfied if the partner acquiring the interest, or a predecessor of such partner, has not used the portion of the partnership property to which the section 743(b) basis adjustment relates at any time prior to the acquisition (that is, the transferee has not used the transferor’s portion of partnership property prior to the acquisition), notwithstanding the fact that the partnership itself has previously used the property. Similarly, for purposes of applying section 179(d)(2)(A), (B), and (C), the partner acquiring a partnership interest is treated as acquiring a portion of partnership property, and the partner who is transferring a partnership interest is treated as the person from whom the property is acquired. The August Proposed Regulations provide that a section 743(b) basis adjustment in a class of property (not including the property class for section 743(b) basis adjustments) may be recovered using the additional first year depreciation deduction under section 168(k) without regard to whether the partnership elects out of the additional first year depreciation deduction under section 168(k)(7) for all other qualified property in the same class of property and placed in service in the same taxable year. Similarly, a partnership may make the election out of the additional first year depreciation deduction under section 168(k)(7) for a section 743(b) basis adjustment in a class of property (not including the property class for section 743(b) basis adjustments), and this election will not bind the partnership to such election for all other qualified property of the partnership in the same class of property and placed in service in the same taxable year. One commenter recommended that the final regulations require consistent treatment for section 743(b) adjustments in a class of property and all other qualified property in the same class and placed in service in the same taxable year. The Treasury Department and the IRS believe that taxpayers should have the flexibility to use or elect out of the additional first year depreciation deduction for section 743(b) adjustments in a class of property without being bound to that choice for all other qualified property in the same class and placed in service in the same taxable year. Therefore, the final regulations retain the rule of the August Proposed Regulations. VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 One commenter requested that uppertier partnerships be able to make an election under section 168(k)(7), or not, for both qualified property held directly by the upper-tier partnership and qualified property held indirectly through lower-tier partnerships. The Treasury Department and the IRS believe that a system of upper-tier partnerships making this election on behalf of lower-tier partnerships would be difficult to administer, and decline to adopt this comment. Lower-tier partnerships can make a section 168(k)(7) separately or may choose not to make that election. One commenter suggested that there could be potential confusion with the language that would be added to § 1.743–1(j)(4)(i)(B)(1) by the August Proposed Regulations. This commenter stated that the addition of ‘‘notwithstanding the above’’ to that provision could be read to negate other provisions of § 1.743–1(j)(4)(i)(B). The Treasury Department and the IRS did not intend this implication. In these final regulations, the Treasury Department and the IRS have clarified this section by removing ‘‘notwithstanding the above.’’ The preamble to the August Proposed Regulations provides that a section 743(b) basis adjustment is eligible for the additional first year depreciation deduction provided all of the requirements of section 168(k) are met and assuming § 1.743–1(j)(4)(i)(B)(2) does not apply. Some commenters asked for clarification regarding the application of § 1.743–1(j)(4)(i)(B)(2). Section 1.743–1(j)(4)(i)(B)(2) provides that, if a partnership uses the remedial allocation method under § 1.704–3(d) with respect to an item of the partnership’s recovery property, then the portion of any section 743(b) basis increase for that property that is attributable to section 704(c) built-in gain is recovered over the remaining recovery period for the partnership’s excess book basis in the property as determined in the final sentence of § 1.704–3(d)(2). This would preclude the partner from taking the additional first year depreciation deduction for the portion of the section 743(b) basis increase attributable to section 704(c) built-in gain. Section 1.743– 1(j)(4)(i)(B)(2) further provides that any remaining portion of a section 743(b) basis increase is recovered under § 1.743–1(j)(4)(i)(B)(1), which treats a section 743(b) basis increase as newlypurchased property placed in service when the transfer of the partnership interest occurs. Section 1.743– 1(j)(4)(i)(B)(1) also provides that any applicable recovery period and method PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 50115 may be used for the basis increase. Therefore, under the August Proposed Regulations, the additional first year depreciation deduction is available for the portion of a section 743(b) basis increase that is not attributable to section 704(c) built-in gain, regardless of the section 704(c) method used, assuming all the requirements of section 168(k) are satisfied. One commenter requested that the final regulations permit a partnership to use the additional first year depreciation deduction with respect to the portion of the section 743(b) basis increase that is attributable to section 704(c) built-in gain, even if the partnership is using the remedial allocation method with respect to the property. The Treasury Department and the IRS agree with this comment. However, an exception to this rule is needed in the case of publicly traded partnerships (within the meaning of section 7704(b)) to maintain fungibility for publicly traded partnership units. Thus, the final regulations amend § 1.743– 1(j)(4)(i)(B)(2) to provide an exception to the rule that the portion of a section 743(b) basis increase that is attributable to section 704(c) built-in gain is recovered over the remaining recovery period for the partnership’s excess book basis in the property. This exception applies only in the case of a partnership that is not a publicly traded partnership and that is recovering a section 743(b) basis increase using the additional first year depreciation deduction under section 168(k). If this exception applies, the entire section 743(b) basis increase is eligible for the additional first year depreciation. For publicly traded partnerships, the rules of the August Proposed Regulations described in the preceding paragraph continue to apply. g. Syndication Transaction The syndication transaction rule in the August Proposed Regulations and these final regulations is based on the rules in section 168(k)(2)(E)(iii) for syndication transactions. For new or used property, the August Proposed Regulations provide that if (1) a lessor has a depreciable interest in the property and the lessor and any predecessor did not previously have a depreciable interest in the property, (2) the property is sold by the lessor or any subsequent purchaser within three months after the date the property was originally placed in service by the lessor (or, in the case of multiple units of property subject to the same lease, within three months after the date the final unit is placed in service, so long as the period between the time the first unit is placed in service and the time E:\FR\FM\24SER2.SGM 24SER2 50116 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 the last unit is placed in service does not exceed 12 months), and (3) the user (lessee) of the property after the last sale during the three-month period remains the same as when the property was originally placed in service by the lessor, then the purchaser of the property in the last sale during the three-month period is considered the taxpayer that acquired the property, has a depreciable interest in the property, and the taxpayer that originally placed the property in service, but not earlier than the date of the last sale. Thus, if a transaction is within the rules described above, the purchaser of the property in the last sale during the three-month period is eligible to claim the additional first year depreciation for the property assuming all requirements are met, and the earlier purchasers of the property are not. If the lessor reacquires the property, a commenter requested that the August Proposed Regulations be clarified to provide that the lessor did not previously have a depreciable interest in the property. The Treasury Department and the IRS agree with this suggestion. Accordingly, the final regulations clarify that, if a transaction is within the rules described in the preceding paragraph, the purchaser of the property in the last sale during the three-month period is the original user of the property, if the lessor acquired and placed in service new property, and is the taxpayer having a depreciable interest in the property, if the lessor acquired and placed in service used property. Neither the lessor nor any intermediate purchaser is treated as previously having a depreciable interest in the property. h. Sale-Leaseback Transaction Because section 13201 of the Act removed the rules regarding saleleasebacks, the August Proposed Regulations did not retain the original use rules in § 1.168(k)–1(b)(3)(iii)(A) and (C) regarding such transactions, including a sale-leaseback transaction followed by a syndication transaction. A commenter requested that the depreciable interest rule in the August Proposed Regulations be changed to a never-have-depreciated test so that a seller-lessee in a sale-leaseback transaction that exercises the option to purchase the property at the end of the lease term will meet the used property rules in the proposed regulations. Alternatively, the commenter suggested § 1.168(k)–2(f)(1) of the August Proposed Regulations be revised to allow the additional first year depreciation deduction in the situation described in the preceding sentence VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 provided the sale-leaseback occurred in the same taxable year in which the seller-lessee placed the property in service. The commenter asserted that leased assets should not be treated differently than other used property. Another commenter asserted that a rule similar to the one in § 1.168(k)– 1(b)(3)(iii)(A) should be provided when the sale-leaseback occurs within a very short period of time after the property is placed in service by the seller-lessee. The Treasury Department and the IRS have decided not to adopt these comments, because section 13201 of the Act removed the rules regarding saleleasebacks. However, the Treasury Department and the IRS believe that an exception to the depreciable interest rule is appropriate when the taxpayer disposes of property within a short period of time after the taxpayer placed such property in service. Concurrently with the publication of these final regulations, the Treasury Department and the IRS are publishing elsewhere in this issue of the Federal Register proposed regulations under section 168(k) (REG–106808–19) that provide this proposed rule. D. Date of Acquisition 1. In General The August Proposed Regulations and these final regulations provide rules applicable to the acquisition requirements of the effective date under section 13201(h) of the Act. The August Proposed Regulations and these final regulations provide that these rules apply to all property, including selfconstructed property or property described in section 168(k)(2)(B) or (C). Pursuant to section 13201(h)(1)(A) of the Act, the August Proposed Regulations and these final regulations provide that the property must be acquired by the taxpayer after September 27, 2017, or, acquired by the taxpayer pursuant to a written binding contract entered into by the taxpayer after September 27, 2017. The August Proposed Regulations also provide that property that is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract that is entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in its trade or business or for its production of income is acquired pursuant to a written binding contract. Many commenters disagreed with this position because it is not supported by the legislative history of section 13201 of the Act, it is a departure from the self-constructed property rules in § 1.168(k)–1(b)(4)(iii), PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 and it is administratively burdensome. The Treasury Department and the IRS have reconsidered their decision. Accordingly, § 1.168(k)–2(b)(5)(ii)(A) and (b)(5)(iv) of the final regulations provide that property that is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract that is entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in its trade or business or for its production of income is not acquired pursuant to a written binding contract but is selfconstructed property. The August Proposed Regulations also provide that if the written binding contract states the date on which the contract was entered into and a closing date, delivery date, or other similar date, the date on which the contract was entered into is the date the taxpayer acquired the property. The Treasury Department and the IRS are aware that some contracts are not binding contracts on the date the contract is entered into (for example, due to a contingency clause). Accordingly, § 1.168(k)– 2(b)(5)(ii)(B) of the final regulations provides that the acquisition date of property that the taxpayer acquired pursuant to a written binding contract is the later of (1) the date on which the contract was entered into; (2) the date on which the contract is enforceable under State law; (3) if the contract has one or more cancellation periods, the date on which all cancellation periods end; or (4) if the contract has one or more contingency clauses, the date on which all conditions subject to such clauses are satisfied. For this purpose, a cancellation period is the number of days stated in the contract for any party to cancel the contract without penalty, and a contingency clause is one that provides for a condition (or conditions) or action (or actions) that is within the control of any party or a predecessor. 2. Written Binding Contract A commenter requested clarification on whether the liquidated damages rule in § 1.168(k)–2(b)(5)(iii)(A) in the August Proposed Regulations applies only to a breach by the purchaser. A similar question was raised in comments on § 1.168(k)–1T regarding the rule stating that if the contract provided for a full refund of the purchase price in lieu of any damages allowable by law in the event of breach or cancellation, the contract is not considered binding. At that time, the Treasury Department and the IRS decided that the limitations should fall on both parties, the purchaser and the seller. The same should apply in the E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations instant case. Accordingly, the Treasury Department and the IRS decline to adopt this comment. The Treasury Department and the IRS are aware that taxpayers and practitioners have questioned how to apply the 5-percent liquidated damages rule in the August Proposed Regulations when the contract has multiple damage provisions. The Treasury Department and the IRS intended that only the provision with the highest damages be taken into account in determining whether the contract limits damages. The final regulations clarify this intention. 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). If some, but not all, of the costs are eligible, or if the costs are subject to the different applicable percentages, the commenter also requested that a basis allocation rule be provided. This comment is related to the comment discussed in part II(D)(3) of this Summary of Comments and Explanation of Revisions section regarding the election provided in section 3.02(2)(b) of Rev. Proc. 2011–26 (2011–16 I.R.B. 664). Concurrently with the publication of these final regulations, the Treasury Department and the IRS are publishing elsewhere in this issue of the Federal Register proposed regulations under section 168(k) (REG–106808–19) that address these comments. 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. The Treasury Department and the IRS also are aware that, in some cases, a taxpayer did not acquire property pursuant to a written binding contract. Concurrently with the publication of these final regulations, the Treasury Department and the IRS are publishing elsewhere in this issue of the Federal Register proposed regulations under section 168(k) (REG– 106808–19) that address these issues. 3. Self-Constructed Property If a taxpayer manufactures, constructs, or produces property for its VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 own use, the Treasury Department and the IRS recognize that the written binding contract rule in section 13201(h)(1) of the Act does not apply. In such case, the August Proposed Regulations and these final regulations provide that the acquisition rules in section 13201(h)(1) of the Act are treated as met if the taxpayer begins manufacturing, constructing, or producing the property after September 27, 2017. As stated in part II(D)(1) of this Summary of Comments and Explanation of Revisions section, the final regulations provide that property that is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract that is entered into prior to the manufacture, construction, or production of the property is selfconstructed property by the taxpayer. In this case, these final regulations also provide that the acquisition rules in section 13201(h)(1) of the Act are treated as met if the taxpayer begins manufacturing, constructing, or producing such property after September 27, 2017. The August Proposed Regulations and these final regulations provide rules similar to those in § 1.168(k)–1(b)(4)(iii)(B) for defining when manufacturing, construction, or production begins, including the safe harbor, and in § 1.168(k)–1(b)(4)(iii)(C) for a contract to acquire, or for the manufacture, construction, or production of, a component of the larger self-constructed property. Two commenters requested clarification on whether the cost of a component of a larger self-constructed property that is acquired under a binding contract entered into before September 28, 2017, is included in the safe harbor for determining when manufacturing, construction, or production of the larger self-constructed property begins. Consistent with § 1.168(k)–1(b)(4)(iii)(B)(2), the safe harbor in the August Proposed Regulations and these final regulations do not provide a date restriction for calculation of the 10 percent. Accordingly, examples in § 1.168(k)– 2(d)(3)(iv), which has the same safe harbor as in § 1.168(k)–2(b)(5)(iv), illustrate that the cost of such component is taken into account for determining whether the taxpayer has 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 or designing, securing financing, exploring, or researching) under the safe harbor. If the cost of the acquired PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 50117 component is more than 10 percent of the total cost of the property (excluding the cost of any land and preliminary activities such as planning or designing, securing financing, exploring, or researching), the manufacture, construction, or production of the larger self-constructed property begins on the date on which the taxpayer paid or incurred the cost of such component. A commenter requested clarification on whether the 100-percent additional first year depreciation deduction is allowable for self-constructed property owned by a trade or business described in section 163(j)(7)(A)(iv) (regulated public utility) where the construction of such property begins after September 27, 2017, and the property is placed in service in a taxable year beginning after 2017. In such case, the property is not eligible for the 100-percent additional first year depreciation deduction pursuant to section 168(k)(9)(A). Example 11 is provided in § 1.168(k)– 2(b)(5)(viii)(K) of these final regulations to illustrate this point. Multiple commenters requested that the final regulations provide an election similar to the one provided in section 3.02(2)(b) of Rev. Proc. 2011–26 for components acquired or selfconstructed after September 27, 2017, of larger self-constructed property when the manufacture, construction, or production of the larger self-constructed property begins before September 28, 2017. Concurrently with the publication of these final regulations, the Treasury Department and the IRS are publishing elsewhere in this issue of the Federal Register proposed regulations under section 168(k) (REG–106808–19) that address these comments. III. Computation of Additional First Year Depreciation Deduction and Elections Under Section 168(k) A. Computation of Additional First Year Depreciation Deduction Pursuant to section 168(k)(1)(A), the August Proposed Regulations and these final regulations provide that the allowable additional first year depreciation deduction for qualified property is equal to the applicable percentage (as defined in section 168(k)(6)) of the unadjusted depreciable basis (as defined in § 1.168(b)–1(a)(3)) of the property. For qualified property described in section 168(k)(2)(B), the unadjusted depreciable basis (as defined in § 1.168(b)–1(a)(3)) of the property is limited to the property’s basis attributable to manufacture, construction, or production of the property before January 1, 2027, as provided in section 168(k)(2)(B)(ii). E:\FR\FM\24SER2.SGM 24SER2 50118 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 Pursuant to section 168(k)(2)(G), the August Proposed Regulations and these final regulations also provide that the additional first year depreciation deduction is allowed for both regular tax and alternative minimum tax (AMT) purposes. The August Proposed Regulations and these final regulations provide rules similar to those in § 1.168(k)–1(d)(2) for determining the amount of depreciation otherwise allowable for qualified property. A commenter requested clarification on whether the deduction under section 181 for a qualified film, television, or live theatrical production is taken before the additional first year depreciation deduction for the same production. Section 181(b) provides that with respect to the basis of any qualified film or television production or any qualified live theatrical production to which an election under section 181(a) is made, no other depreciation or amortization deduction shall be allowable. Consequently, if the owner of the qualified film, television, or live theatrical production makes an election under section 181(a), the basis of the production is reduced by the amount of the section 181 deduction before the additional first year depreciation deduction is computed. Accordingly, the final regulations revise the definition of unadjusted depreciable basis in § 1.168(b)–1(a)(3) to reflect the reduction in basis for the amount the taxpayer elects to treat as an expense under section 181. B. Elections Under Section 168(k) The August Proposed Regulations and these final regulations provide rules for making the election out of the additional first year depreciation deduction pursuant to section 168(k)(7) and for making the election to apply section 168(k)(5) to a specified plant. Additionally, the August Proposed Regulations and these final regulations provide rules for making the election under section 168(k)(10) to deduct 50 percent, instead of 100 percent, additional first year depreciation for qualified property acquired after September 27, 2017, by the taxpayer and placed in service or planted or grafted, as applicable, by the taxpayer during its taxable year that includes September 28, 2017. Several commenters requested relief to make late elections under section 168(k)(7) or (10) for property placed in service during the taxpayer’s taxable year that includes September 28, 2017, because some taxpayers already filed their Federal tax returns for that taxable year before the proposed regulations were issued. The commenters also noted VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 that a taxpayer with a due date, with extensions, of September 15, 2018, or October 15, 2018, for its Federal tax return for the taxable year that includes September 28, 2017, may not have had sufficient time to analyze the proposed regulations to make a timely election under section 168(k)(7) or (10). The IRS issued Revenue Procedure 2019–33 (2019–34 I.R.B. 662) to address this request by providing an additional period of time for taxpayers to make an election, or revoke an election, under section 168(k)(5), (7), or (10) for property acquired after September 27, 2017, and placed in service during the taxpayer’s taxable year that includes September 28, 2017. IV. Special Rules The August Proposed Regulations and these final regulations provide special rules similar to those in § 1.168(k)–1(f) for the following situations: (1) Qualified property placed in service or planted or grafted, as applicable, and disposed of in the same taxable year; (2) redetermination of basis of qualified property; (3) recapture of additional first year depreciation for purposes of section 1245 and section 1250; (4) a certified pollution control facility that is qualified property; (5) like-kind exchanges and involuntary conversions of qualified property; (6) a change in use of qualified property; (7) the computation of earnings and profits; (8) the increase in the limitation of the amount of depreciation for passenger automobiles; (9) the rehabilitation credit under section 47; and (10) computation of depreciation for purposes of section 514(a)(3). The August Proposed Regulations and these final regulations provide a special rule for qualified property that is placed in service in a taxable year and then contributed to a partnership under section 721(a) in the same taxable year when one of the other partners previously had a depreciable interest in the property. Situation 1 of Rev. Rul. 99–5 (1999–1 C.B. 434) is an example of such a fact pattern. In this situation, the August Proposed Regulations provide that the additional first year depreciation deduction with respect to the contributed property is not allocated under the general rules of § 1.168(d)– 1(b)(7)(ii). Instead, the additional first year depreciation deduction is allocated entirely to the contributing partner prior to the section 721(a) transaction and not to the partnership. In the fact pattern described in the preceding paragraph, a commenter requested clarification on whether the property is placed in service by the contributing partner prior to the section PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 721(a) transaction. Another commenter requested clarification on whether the contributing partner deducts the additional first year depreciation for the qualified property or the partnership allocates the additional first year depreciation deduction for the qualified property to the contributing partner. The final regulations provide that the contributing partner is deemed to place in service the qualified property prior to the section 721(a) transaction, and that the contributing partner deducts the entire additional first year depreciation for such property. The contributing partner will contribute the property to the partnership with a zero basis, and the contributed property will be section 704(c) property in the hands of the partnership. Several commenters questioned how the August Proposed Regulations apply to a section 743(b) adjustment when there is a purchase of a partnership interest followed by a subsequent transfer of that partnership interest. Under the August Proposed Regulations, if qualified property is placed into service or planted or grafted, as applicable, and disposed of in the same taxable year, the additional first year depreciation deduction generally is not allowed. However, there is an exception to this rule in the case of nonrecognition transfers under section 168(i)(7). These rules in the August Proposed Regulations apply only to transfers of qualified property and not to section 743(b) adjustments resulting from transfers of partnership interests. Several commenters recommended that parallel rules should apply to transfers of partnership interests. The Treasury Department and the IRS agree with this comment. These final regulations provide that, if a partnership interest is acquired and disposed of during the same taxable year, the additional first year depreciation deduction is not allowed for any section 743(b) adjustment arising from the initial acquisition. However, if a partnership interest is purchased and disposed of in a section 168(i)(7) transaction in the same taxable year, the section 743(b) adjustment is allowable, provided all of the requirements of section 168(k) are satisfied. The section 743(b) adjustment is apportioned between the purchaser/ transferor and the transferee under the same rules that apply to transfers of qualified property. A commenter requested a rule allowing dealerships that purchase replacement vehicles for use in their fleet of rental or leased vehicles to deduct the additional first year depreciation deduction in transactions E:\FR\FM\24SER2.SGM 24SER2 50119 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations that are similar to like-kind exchanges when at least 10 vehicles are traded in during the same taxable year. The treatment requested is similar to that given to like-kind exchanges under section 1031 as in effect before the enactment of the Act. The Treasury Department and the IRS decline to adopt this comment because it is outside the scope of these final regulations. The Treasury Department and the IRS are aware that taxpayers and practitioners have questioned whether the unadjusted 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. Consistent with the definition of depreciable basis in § 1.168(d)–1(b)(4), the basis is not reduced by the allowed or allowable additional first year depreciation deduction in determining whether the mid-quarter convention applies for the taxable year. Concurrently with the publication of these final regulations, the Treasury Department and the IRS are publishing elsewhere in this issue of the Federal Register proposed regulations under section 168(k) (REG– 106808–19) that provide this proposed rule. khammond on DSKJM1Z7X2PROD with RULES2 Statement of Availability of IRS Documents The IRS Revenue Procedures and Revenue Rulings cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov. Effective/Applicability Date These final regulations 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 September 24, 2019. However, a taxpayer may choose to apply these final 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, provided the taxpayer consistently applies all rules in these final regulations. Additionally, a taxpayer may rely on the proposed regulations under section 168(k) in regulation project REG–104397–18 (2018–41 I.R.B. 558), to qualified property acquired and placed in service VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 or planted or grafted, as applicable, after September 27, 2017, by the taxpayer during taxable years ending on or after September 28, 2017, and ending before September 24, 2019. 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 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 regulations as economically significant under section 1(c) of the MOA. Accordingly, the OMB has reviewed these regulations. A. Background 1. Bonus Depreciation Generally In general, section 167 allows taxpayers to claim a ‘‘reasonable allowance for the exhaustion, wear and tear’’ of property used in a trade or business or held for the production of income. For most tangible property, the amount of the deduction is determined under section 168, which effectively provides schedules of deductions (as a share of the initial basis) for different types of assets. The baseline schedule generally provides for the deduction to be spread over a number of years. In the Job Creation and Worker Assistance Act of 2002, Congress put in place section 168(k), creating what is colloquially known as ‘‘bonus depreciation.’’ Under this initial legislation, firms were allowed to take a deduction equal to 30 percent of the initial basis of qualified property in the year in which it was placed in service; the remaining 70 percent was depreciated according to the usual schedule. Broadly speaking, ‘‘qualified property’’ included personal property that had a class life of 20 years or less; additionally, the property was required PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 to be ‘‘new,’’ meaning that the original use of the property must have commenced with the taxpayer in question. By shifting depreciation deductions forward in time, section 168(k) generally increased the present value of the depreciation deductions attributable to a given piece of property, increasing the incentive to invest in new property. Since 2001, Congress has changed the ‘‘bonus percentage’’ several times, in accordance with the following table, including the 2005–2007 period when bonus depreciation was not in effect for most property. TABLE 1—PERCENT ADDITIONAL DEPRECIATION (FOR MOST QUALIFIED PROPERTY), BY DATE PLACED IN SERVICE [Property placed in service] Beginning date 9/11/2001 .................... 5/5/2003 ...................... 1/1/2005 ...................... 1/1/2008 ...................... 9/9/2010 ...................... 1/1/2012 ...................... End date Bonus percentage 5/4/2003 12/31/2004 12/31/2007 9/8/2010 12/31/2011 12/31/2017 30 50 0 50 100 50 2. Bonus Depreciation Under the Act The Act changed section 168(k) in several ways. First, the Act increased the bonus percentage. Under the pre-Act section 168(k), the bonus percentage for most property was 50 percent in 2017, 40 percent in 2018, 30 percent in 2019, and zero thereafter. The Act amended these percentages to 100 percent for most property placed in service between September 28, 2017 and the end of 2022, 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, 20 percent in 2026, and 0 thereafter. The Act also removed the ‘‘original use’’ requirement, meaning that taxpayers 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). Similarly, section 168(g)(1)(G) provides that certain property used by real property and agricultural businesses that make an election to be excluded from the section 163(j) limitation are required to use the Alternative Depreciation System (ADS) for certain property which does not qualify for bonus depreciation. Furthermore, section 168(k)(2)(a)(ii)(IV) and (V) allowed qualified film, television, and live theatrical E:\FR\FM\24SER2.SGM 24SER2 50120 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations productions (as defined under section 181) to qualify for bonus depreciation. khammond on DSKJM1Z7X2PROD with RULES2 3. Proposed and Final Regulations The August Proposed Regulations and these final regulations create § 1.168(k)– 2 which applies generally to property acquired and placed in service after September 27, 2017. The August Proposed Regulations and these final regulations largely draw upon language in existing § 1.168(k)–1, which generally continues to apply to property acquired or placed in service prior to September 27, 2017, with minor edits being made to conform to changes made by the Act. For provisions of section 168 that were generally unchanged by the Act, § 1.168(k)–2 predominantly follows § 1.168(k)–1 directly, with only minor changes. Additionally, § 1.168(k)–2 provides rules that clarify how the changes to section 168 made by the Act apply to property acquired after September 27, 2017. In some instances the final regulations repeat unambiguous rules provided in the statute. However, there were a number of areas where clarification was necessary, and the analysis below focuses on these substantive portions of the regulation. These final regulations finalize certain provisions of the August Proposed Regulations with no change. In addition, these final regulations include provisions from the August Proposed Regulations that were modified to take into account comments received. The provisions discussed in this special analysis include (1) rules regarding film, television, and live theatrical performances, (2) clarifications regarding property depreciated under ADS for purposes other than section 168, (3) the eligibility of partnership basis adjustments under section 743(b) for bonus depreciation, (4) the treatment of tax-exempt use property, as defined by section 168(h)(6), (5) the definition of ‘‘prior use’’ for determining whether ‘‘used’’ property is eligible for bonus depreciation, and (6) clarifications regarding the date at which property is considered to be acquired in the case of self-constructed property. B. No-Action Baseline The Treasury Department and the IRS have assessed the benefits and costs of these final regulations relative to a noaction baseline reflecting anticipated Federal income tax-related behavior in the absence of these final regulations. C. Economic Analysis of Regulation This section describes the main provisions of these final regulations, (including those finalized with no VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 change from the August Proposed Regulations) and analyzes the economic effects of each one. 1. Film, Television, and Live Theatrical Performances Sections 168(k)(2)(A)(i)(IV) and (V) provide that a qualified film or television production, or a qualified live theatrical production, is eligible for bonus depreciation, borrowing definitions from section 181. There was ambiguity in determining whether ‘‘used’’ film, television, and theatrical performances were eligible—i.e., those properties whose production began under a different taxpayer. Following existing rules under section 181, these final regulations provide that direct production costs and acquisition costs are eligible for bonus depreciation in the hands of the owner, so long as the production was acquired before the initial date of release (or initial live staged performance). The Treasury Department and the IRS have determined that this is the proper interpretation of the statute, and that other statutory readings were not legally supportable. Nevertheless, this result provides a middle ground between two extreme positions: One in which only the initial owner was eligible for bonus depreciation, and one in which all acquisition costs of film, television, or live theatrical performances were eligible for section 168(k) under nearly all circumstances. Thus, the incentives for investment—and therefore the potential link to economic growth and efficiency—created by this interpretation are also in the middle of these two extremes. The Treasury Department and IRS expect that most taxpayers would have come to a similar interpretation of the treatment of used television, film, and theatrical performances in the absence of these final regulations. Therefore, the Treasury Department and IRS project that this clarification will have only small economic effects. Additionally, while section 181 and the regulations thereunder provide a definition for when a film or television production is placed in service, they do not do so for live theatrical performances. The August Proposed Regulations and these final regulations provide such a definition for live theatrical performances, directly adapting the rules for film and television productions to live theatrical performances. Specifically, a live theatrical performance is considered placed in service when it begins commercial exhibition (i.e., performances in front of paying audiences); an exhibition designed to PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 attract further funding, or to determine whether the production should proceed, does not qualify as a commercial exhibition. This rule delays the placed in service date relative to the alternative choice (in which such an earlier exhibition would cause a live theatrical performance to be placed in service). This choice has two potential offsetting economic effects. First, this choice potentially delays the date in which the taxpayer could claim bonus depreciation for the performance, which could slightly reduce the incentive to invest in such a performance. Second, this choice increases the length of time over which a potential buyer could acquire the performance and remain eligible to claim bonus depreciation (since the acquisition of a production is only eligible until the date of its initial live staged performance); this could slightly increase the incentive to invest in such productions by increasing resale opportunities. The Treasury Department and the IRS project that these offsetting effects will have only small net effects on investment in live theatrical performances. 2. Depreciation Using ADS for Purposes Other Than Section 168 In general, property that is required to be depreciated under the ADS is not eligible for bonus depreciation. Additionally, some provisions of the code (such as sections 250(b)(2)(B) and 951A(d)(3)) require the use of ADS to determine aggregate basis for the purpose of that provision (but not for the purpose of calculating depreciation deductions under section 168). These final regulations clarifies that such a requirement does not cause a property to be ineligible for bonus depreciation. The Treasury Department and the IRS project that most taxpayers would have come to this interpretation in the absence of this final regulation, so this provision is likely to have modest economic effects. Nevertheless, this decision might give certainty to a small number of taxpayers that their property is, in fact, eligible for bonus depreciation despite interactions with other Code provisions, potentially creating a small incentive for additional investment. 3. Eligibility of Partnership Basis Adjustments Under Section 743(b) Under the August Proposed Regulations, basis increases under section 743(b) (which generally occur when partnership interests are transferred) are generally eligible for bonus depreciation. These final regulations generally finalize this rule with only minor clarifications. E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations The effect of allowing a section 743(b) adjustment to be eligible for bonus depreciation can best be explained by the following example. Suppose taxpayers A and B contribute $100,000 each in cash to start Partnership X. Partnership X purchases a $150,000 piece of equipment Y (of a character that is eligible for bonus depreciation) and holds a $50,000 non-depreciable asset. After some number of years, the basis of Partnership X in Y (that is, the ‘‘inside basis’’ of Y in the hands of Partnership X) has been adjusted down to 0 through depreciation, but the fair market value (FMV) of Y is $60,000. Assume no other earnings of the partnership or fluctuations in asset FMV. At this point, total FMV of the assets held by Partnership X are $110,000, and A and B each have a $25,000 basis in their interest in Partnership X. Suppose, at this point, that B sells her interest to C, an unrelated party, for $55,000 (equal to half of the FMV of the assets held by the partnership). As a result, C has basis of $55,000 in his interest in Partnership X, and B realizes a gain of $30,000 (equal to $55,000 minus her basis of $25,000). Under the usual rules of partnership taxation, this would cause a disconnect between C’s outside basis—that is, the basis of C in Partnership X, which in this case is $55,000—and C’s inside basis in the assets held by Partnership X, which in this case equals $25,000. This disconnect can produce undesired results, such as a certain gain being converted from capital to ordinary, or being taxed sooner than economically realized. Therefore, section 754 allows taxpayers to make certain adjustments, if elected. Assuming that a section 754 election is in place for Partnership X, section 743(b) causes the basis of Y to be increased by $30,000, equal to the gain recognized by B, and this basis adjustment would explicitly be assigned to C (meaning that any future cost recovery, through depreciation or otherwise, would be allocated to C). This causes C’s inside basis and outside basis to come back into alignment, at $55,000 in this example. Under section 168(k) prior to the Act, such section 743(b) adjustments were determined to be ineligible for bonus depreciation, since the tangible property acquired was, by construction, not ‘‘new.’’ Economically, this meant that the transfer of the partnership interest caused an immediate realization of gain by the seller, and a deferred realization of deduction items by the buyer. This created a modest incentive for sellers to hold onto their assets for longer periods of time, in order to defer tax payments. As has been well studied, this incentive VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 can lead to portfolio misallocation, hindering the allocation of capital to its most efficient use. (This problem is often referred to as ‘‘lock-in.’’) The Treasury Department and the IRS concluded that the Act’s allowance of ‘‘used’’ property to qualify for bonus depreciation (subject to the other restrictions discussed in detail in the August Proposed Regulations and these final regulations) should extend to section 743(b) adjustments as well. This has the economic effect of mitigating the lock-in problem for transfers of certain partnership interests with built-in gains (to the extent that the section 743(b) adjustment is attributable to property that is of a character that qualifies for bonus depreciation). In the previous example discussed in this part I(C)(3) of this Special Analysis section, this would have the effect of allowing Partnership X to claim an immediate $30,000 deduction (which would be allocated to C) for its $30,000 section 743(b) adjustment. This $30,000 deduction precisely equals the $30,000 in gain realized by B. Therefore, the aggregate tax consequences faced by B and C cancel out, eliminating the lockin effect in this simple example. Reducing the lock-in effect for transfers of partnership interests can improve the efficiency of capital allocations throughout the economy. The Treasury Department and the IRS engaged in an analysis of the potential increase in output due to this potential increase in allocative efficiency. Based on projections regarding which partnerships will make adjustments under section 743(b) and assumptions about frictions to adjusting the capital stock, the Treasury Department and the IRS have concluded that the total economy-wide gain to output caused by this reduction in lock-in would be less than $5 million per year. Relatedly, allowing section 743(b) adjustments to be eligible for bonus depreciation increases the incentive for a new partner to acquire an interest in a partnership from another partner, potentially increasing the value of the partnership slightly. This can have the effect of making a previous investment in tangible property more attractive, which has an effect similar to a small reduction in the cost of capital for such partnerships. Based on an analysis of tax data, and applying estimates of the elasticity of capital with respect to the cost of capital, the Treasury Department and the IRS project that this effect will increase investment by no more than $20 million in any year, with smaller effects in most years. PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 50121 4. Property Owned by Partnerships Treated as Tax-Exempt Use Property Section 168(h)(6) provides that property held by a partnership in which one partner is a tax-exempt entity and another partner is not is ‘‘tax-exempt use property.’’ Section 168(g)(1)(B) requires tax-exempt use property to be depreciated according to the ADS, which renders tax-exempt use property ineligible for bonus depreciation. These final regulations clarify that only the tax-exempt entity’s proportional share of the property is ineligible for bonus depreciation, which is consistent with other rules in the August Proposed Regulations and these final regulations providing that partners have a depreciable interest in only their proportionate share of assets held by a partnership. Relative to an interpretation defining all property held by such a partnership with a tax-exempt partner to be ineligible, this provision will generally have the effect of increasing the amount of property eligible for bonus depreciation, which will slightly increase the incentive for such partnerships to invest in physical capital. Based on entities filing Form 990 (for certain tax-exempt entities) and Form 5500 (for certain pension plans), the Treasury Department and the IRS have determined that there were approximately 100,000 partnerships in 2015 (out of nearly 4 million partnerships total) that were owned directly by at least one tax-exempt partner and at least one taxable partner. This figure could potentially be an underestimate, as it will not count partnerships that have a common structure in which the tax-exempt partner owns the partnership through a ‘‘blocker’’ C corporation (which could be treated tax-exempt under the rules of section 168(h)(6)(F)). Furthermore, this estimate does not take account of multitiered partnership structures. On the other hand, not all such partnerships would make depreciable investments that are affected by this final regulation. 5. New and Used Property In order for a property to be eligible for bonus depreciation, it must generally satisfy one of two conditions: (1) The original use of the property begins with the taxpayer, or (2) ‘‘such property was not used by the taxpayer at any time prior to such acquisition’’ (section 168(k)(2)(E)(ii)(I)). Neither the August Proposed Regulations nor these final regulations make any substantial changes to the ‘‘original use’’ rules in § 1.168(k)–1(b)(3). However, clarification was needed regarding the E:\FR\FM\24SER2.SGM 24SER2 50122 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 determination of whether ‘‘such property was . . . used by the taxpayer . . . prior to such acquisition’’. One common circumstance in which this could be ambiguous is when a lessee uses (but does not own) a piece of property and then purchases that property upon the expiration of the lease. These final regulations follow the intent of Congress (as indicated by the Joint Committee on Taxation, General Explanation of Public Law 115–97 (JCS– 1–18) at 125 fn. 542 (Dec. 20, 2018)) to define ‘‘used’’ as meaning that the taxpayer previously held a ‘‘depreciable interest’’ in the property. In general, this would allow the former lessee in such an example to claim bonus depreciation upon the subsequent purchase of the property in question (assuming all other requirements are met). These final regulations make several additional clarifications regarding what is meant by ‘‘prior depreciable interest.’’ First, these final regulations provide that a taxpayer will be considered to have had a prior depreciable interest in a piece of property if his/her predecessor had such a prior depreciable interest; likewise, these final regulations provide a definition of ‘‘predecessor,’’ as requested by commenters. Second, these final regulations provide a safe harbor lookback period of five calendar years for determining whether a taxpayer had a prior depreciable interest. The Treasury Department and the IRS chose a fiveyear period because the vast majority of bonus-eligible assets have General Depreciation Schedule (GDS) lives of 5 years or more (3-year property is uncommon), and thus taxpayers will tend to have readily accessible records for these assets. These rules will help ease administrative and compliance burdens: Taxpayers will be able to more clearly identify their predecessors, if any, and the limited look-back period will mitigate the infeasibility of the implicit infinite lookback period some might interpret as a requirement of the statute. Both of these rules should help provide clarity and help reassure taxpayers that they will not accidentally run afoul of the prior depreciable interest rules, potentially encouraging more firms to take advantage of the investment incentives created by section 168(k). Third, these final regulations provide that ‘‘substantially renovated property’’ can be eligible for bonus depreciation, even if the taxpayer had a prior depreciable interest in the property prior to the renovation. For this purpose, a property is a ‘‘substantially renovated property’’ if the cost of the used parts is less than or equal to 20 percent of the total cost of the (postrenovation) property, whether acquired or self-constructed. The Treasury Department and the IRS project that this provision will have limited economic effects, as it will come into play only in the relatively rare circumstance in which a taxpayer is purchasing substantially renovated property and held a prior depreciable interest in the pre-renovation property. Nevertheless, this provision will generally increase the amount of property eligible for bonus depreciation, increasing the incentive to invest. 6. Date of Acquisition The Act provides that property must be acquired by the taxpayer after September 27, 2017, or acquired by the taxpayer pursuant to a ‘‘written binding contract’’ entered into after September 27, 2017, in order for the property to be eligible for the 100 percent bonus depreciation rate. There was some ambiguity regarding whether third-party constructed property—that is, property that is produced for the taxpayer by a third party under a written binding contract—is acquired ‘‘pursuant to a written binding contract’’ or whether it is considered self-constructed property. The August Proposed Regulations reflected the interpretation that third party constructed property is not selfconstructed property and the contract for such property must have been entered into after September 27, 2017, in order to be eligible for 100 percent bonus depreciation. However, the final regulations under § 1.168(k)–1 took a different interpretation, such that the acquisition date of all self-constructed property (including third party constructed property) is equal to the (usually later) date when substantial construction begins. These final regulations provide for the latter interpretation: Third-party constructed property is treated as selfconstructed property, meaning that more taxpayers will be eligible for 100 percent bonus depreciation for property where contracts were entered into prior to September 27, 2017, but for which substantial construction began after that date. Given that this provision affects only investment that has already been made, the Treasury Department and the IRS expect it to have virtually no effect on economic growth or efficiency going forward, except to the extent that it changes taxpayers’ expectations about future policy. II. Paperwork Reduction Act These final regulations do not impose any additional information collection requirements in the form of reporting, recordkeeping requirements, or thirdparty disclosure requirements. However, taxpayers that want to make or revoke the election under section 168(k)(5), (7), or (10), are required to attach a statement to their Federal tax returns pursuant to the instructions for Form 4562, ‘‘Depreciation and Amortization (Including Information on Listed Property)’’. Also, pursuant to Rev. Proc. 2019–33 (2019–34 I.R.B. 662), taxpayers may make or revoke the election under section 168(k)(5), (7), or (10) by filing, within a specified time period, amended Federal tax returns, or Form 3115, ‘‘Application for Change in Accounting Method,’’ with their Federal tax returns and submit a copy of the Form 3115 to the IRS office in Ogden, Utah. For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) (PRA), the reporting burden associated with these collections of information 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 (see chart at the end of this part II for OMB control numbers). The estimate for the number of impacted filers with respect to the collection of information described in this part is 0 to 141,550 respondents. Historical data was not available to directly estimate the number of impacted filers. This estimate assumes that no more than 5 percent of income tax return filers with a Form 4562 and relevant activity on lines 14 and/or 19(a–f) will make these elections, due to the limited scope of the elections. 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(f)(1) Election not to deduct additional first year depreciation. VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 PO 00000 Frm 00016 Fmt 4701 0–41,685 Sfmt 4700 Forms to which the information may be attached Form 1120 series, Form 1040 series, Form 1041 series, and Form 1065 series. E:\FR\FM\24SER2.SGM 24SER2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations 50123 TAX FORMS IMPACTED—Continued Number of respondents (estimated) Collection of information Section 1.168(k)–2(f)(2) Election to apply section 168(k)(5) for specified plants. Section 1.168(k)–2(f)(3) Election for qualified property placed in service during the 2017 taxable year. Section 1.168(k)–2(f)(5)(ii) (Revocation of election—Automatic 6-month extension) and § 1.168(k)–2(f)(6) (Special rules for 2016 and 2017 returns). 0–790 0–90,275 0–8,800 Forms to which the information may be attached Form 1120 series, Form 1040 series, Form 1041 series, and Form 1065 series. Form 1120 series, Form 1040 series, Form 1041 series, and Form 1065 series. Form 1120 series, Form 1040 series, Form 1041 series, and Form 1065 series. Source: IRS:RAAS:KDA (CDW 6–1–19). If the time under Rev. Proc. 2019–33 for filing amended returns or Form 3115 has expired to revoke the election under section 168(k)(5), (7), or (10), taxpayers then are required to submit a request for a private letter ruling to revoke such election in accordance with Rev. Proc. 2019–1 (2019–1 I.R.B. 1) (or its successors). For purposes of the PRA, the reporting burden associated with these collections of information will be reflected in the PRA submission associated with income tax returns in the Form 1120 series and Form 1065 series (see chart at the end of this part II for OMB control numbers). The estimate for the number of impacted filers with respect to the collection of information described in this part is 0 to 10 respondents. This estimate is based on the number of private letter ruling requests filed by taxpayers from 2005 through 2018 to revoke elections under section 168(k). 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(f)(5)(i) Revocation of election .................................... 0–10 Forms to which the information may be attached Form 1120 series and Form 1065 series. khammond on DSKJM1Z7X2PROD with RULES2 Source: IRS:CC:ITA (CASE–MIS 5–21–19). The current status of the PRA submissions related to the tax forms and the revenue procedure that will be revised as a result of the information collections in these final 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 in the preceding paragraph for the OMB control numbers below are VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 aggregate amounts that relate to the entire package of forms or revenue procedure, as applicable, associated with the applicable OMB control number and will in the future include, but not isolate, the estimated burden of the tax forms or the revenue procedure, as applicable, 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 estimated the burden, including that of any new information collections, related to the requirements under the PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 regulations. For the OMB control numbers discussed in the preceding paragraphs, the Treasury Department and the IRS estimate PRA burdens on a taxpayer-type basis rather than a provision-specific basis. Those estimates would capture both changes made by the Act and those that arise out of discretionary authority exercised in these final 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 or revenue procedure, as applicable, 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. E:\FR\FM\24SER2.SGM 24SER2 50124 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations Form Type of filer Form 1040 .................. OMB No.(s) Individual (NEW Model). 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-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-form1041 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-forforms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd Form 3115 .................. All other Filers (mainly trusts and estates) (Legacy system). 1545–2070 Published in the Federal Register on 2/15/17 by IRS. Public Comment period closed on 4/17/17. Link: https://www.federalregister.gov/documents/2017/02/15/2017-02985/proposed-information-collection-comment-request 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-forforms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd 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 Revenue Procedure 2019–1 (previously 2018–1). 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-forforms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd khammond on DSKJM1Z7X2PROD with RULES2 III. Regulatory Flexibility Act It is hereby certified that these final 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 burdens in § 1.168(k)–2(f)(1), (2), and (3), (f)(5)(i) and (ii), and (f)(6) generally affect taxpayers that elect to make or revoke certain elections under section 168(k). For purposes of the PRA, the Treasury Department and the IRS estimate that there are 0 to 141,550 respondents of all sizes that are likely to Form Gross receipts of $25 million or less Form 1040 .............. Form 1065 .............. Form 1120 .............. Form 1120S ............ Total ................ 0–59,000 Respondents (estimated) ....................................... 0–30,125 Respondents (estimated) ....................................... 0–11,400 Respondents (estimated) ....................................... 0–35,900 Respondents (estimated) ....................................... 0–136,425 Respondents (estimated) ..................................... be impacted by these collections of information. Most 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 § 1.168(k)–2(f)(1), (2), and (3), (f)(5)(i) and (ii), and (f)(6) to be the following: Gross receipts over $25 million 0–70 Respondents (estimated). 0–935 Respondents (estimated). 0–1,560 Respondents (estimated). 0–2,560 Respondents (estimated). 0–5,125 Respondents (estimated). Source: IRS:RAAS:KDA (CDW 6–1–19). Regardless of the number of small entities potentially affected by these final regulations, the Treasury Department and the IRS have concluded VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 that § 1.168(k)–2(f)(1), (2), and (3), (f)(5)(i) and (ii), and (f)(6) will not have a significant economic impact on a substantial number of small entities. PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 This conclusion is based on the fact that: (1) Many small businesses are not required to capitalize under section 263(a) the amount paid or incurred for E:\FR\FM\24SER2.SGM 24SER2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations 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). Further, § 1.168(k)–2(f)(1), (2), and (3), (f)(5)(i) and (ii), and (f)(6) apply only if the taxpayer chooses to make an election or revoke an election under section 168(k). Finally, no comments regarding the economic impact of these regulations on small entities were received. Consequently, the Treasury Department and the IRS hereby certify that these final regulations will not have a significant economic impact on a substantial number of small entities. Pursuant to section 7805(f) of the Code, the proposed rule preceding this final rule was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. khammond on DSKJM1Z7X2PROD with RULES2 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 final 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 VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. These final 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. VI. Congressional Review Act The Administrator of the Office of Information and Regulatory Affairs of the OMB has determined that this Treasury decision is a major rule for purposes of the Congressional Review Act (5 U.S.C. 801 et seq.) (‘‘CRA’’). Under section 801(3) of the CRA, a major rule takes effect 60 days after the rule is published in the Federal Register. Notwithstanding this requirement, section 808(2) of the CRA allows agencies to dispense with the requirements of section 801 of the CRA when the agency for good cause finds that such procedure would be impracticable, unnecessary, or contrary to the public interest and that the rule shall take effect at such time as the agency promulgating the rule determines. Pursuant to section 808(2) of the CRA, the Treasury Department and the IRS find, for good cause, that a 60-day delay in the effective date is unnecessary and contrary to the public interest. The statutory provisions to which these rules relate were enacted on December 22, 2017 and apply to property acquired and placed in service after September 27, 2017. In most cases, two taxable years in which such property may have been placed in service have ended. This means that the statutory provisions are currently effective, and taxpayers may be subject to Federal income tax liability for their 2017 or 2018 taxable years reflecting these provisions. In many cases, taxpayers may be required to file returns reflecting this Federal income liability during the 60-day period that begins after this rule is published in the Federal Register. These final regulations provide crucial guidance for taxpayers on how to apply the relevant statutory rules, compute their tax liability and accurately file their Federal income tax returns. These final regulations resolve statutory ambiguity, prevent abuse and grant taxpayer relief that would not be available based solely on the statute. Because taxpayers must already comply with the statute, a 60-day delay in the effective date of the final regulations is unnecessary and contrary to the public interest. A delay would place certain taxpayers in the unusual position of having to determine whether to file tax PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 50125 returns during the pre-effective date period based on final regulations that are not yet effective. If taxpayers chose not to follow the final regulations and did not amend their returns after the regulations became effective, it would place significant strain on the IRS to ensure that taxpayers correctly calculated their tax liabilities. For example, in cases where taxpayers selfconstruct property, a delayed effective date may hamper the IRS’ ability to determine if such property was acquired after September 27, 2017. Moreover, a delayed effective date could create uncertainty and possible restatements with respect to financial statement audits. Therefore, the rules in this Treasury decision are effective on the date of publication in the Federal Register and taxpayers may apply these rules to qualified property acquired and placed in service after September 27, 2017 in a taxable year ending on or after September 28, 2017. The foregoing good cause statement only applies to the 60-day delayed effective date provision of section 801(3) of the CRA and is permitted under section 808(2) of the CRA. The Treasury Department and the IRS hereby comply with all aspects of the CRA and the Administrative Procedure Act (5 U.S.C. 551 et seq.). Drafting Information The principal authors of these final 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. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.48–12 is amended: 1. In the last sentence in paragraph (a)(2)(i), by removing ‘‘The last sentence’’ and adding ‘‘The next to last sentence’’ in its place; ■ 2. By adding three sentences at the end of paragraph (a)(2)(i); and ■ 3. By adding a sentence to the end of paragraph (c)(8)(i). ■ ■ E:\FR\FM\24SER2.SGM 24SER2 50126 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations The additions read as follows: § 1.48–12 Qualified rehabilitated building; expenditures incurred after December 31, 1981. khammond on DSKJM1Z7X2PROD with RULES2 (a) * * * (2) * * * (i) * * * The last sentence of paragraph (c)(8)(i) of this section applies to qualified rehabilitation expenditures that are qualified property under section 168(k)(2) and placed in service by a taxpayer during or after the taxpayer’s taxable year that includes September 24, 2019. However, a taxpayer may choose to apply the last sentence in paragraph (c)(8)(i) of this section for qualified rehabilitation expenditures that are qualified property under section 168(k)(2) and acquired and placed in service after September 27, 2017, by the taxpayer during taxable years ending on or after September 28, 2017. A taxpayer may rely on the last sentence in paragraph (c)(8)(i) of this section in regulation project REG–104397–18 (2018–41 I.R.B. 558) (see § 601.601(d)(2)(ii)(b) of this chapter) for qualified rehabilitation expenditures that are qualified property under section 168(k)(2) and acquired and placed in service after September 27, 2017, by the taxpayer during taxable years ending on or after September 28, 2017, and ending before the taxpayer’s taxable year that includes September 24, 2019. * * * * * (c) * * * (8) * * * (i) * * * Further, see § 1.168(k)– 2(g)(9) if the qualified rehabilitation expenditures are qualified property under section 168(k), as amended by the Tax Cuts and Jobs Act, Public Law 115– 97 (131 Stat. 2054 (December 22, 2017)). * * * * * ■ Par. 3. Section 1.167(a)–14 is amended: ■ 1. In the third sentence in paragraph (b)(1), by removing ‘‘under section 168(k)(2) or § 1.168(k)–1,’’ and adding ‘‘under section 168(k)(2) and § 1.168(k)– 1 or § 1.168(k)–2, as applicable,’’ in its place; ■ 2. In the last sentence in paragraph (e)(3), by removing ‘‘and before 2010’’; and ■ 3. By adding three sentences at the end of paragraph (e)(3). The additions read as follows: § 1.167(a)–14 Treatment of certain intangible property excluded from section 197. * * * * * (e) * * * (3) * * * The language ‘‘or § 1.168(k)–2, as applicable,’’ in the third sentence in paragraph (b)(1) of this VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 section applies to computer software that is qualified property under section 168(k)(2) and placed in service by a taxpayer during or after the taxpayer’s taxable year that includes September 24, 2019. However, a taxpayer may choose to apply the language ‘‘or § 1.168(k)–2, as applicable,’’ in the third sentence in paragraph (b)(1) of this section for computer software that is qualified property under section 168(k)(2) and acquired and placed in service after September 27, 2017, by the taxpayer during taxable years ending on or after September 28, 2017. A taxpayer may rely on the language ‘‘or § 1.168(k)–2, as applicable,’’ in the third sentence in paragraph (b)(1) of this section in regulation project REG–104397–18 (2018–41 I.R.B. 558) (see § 601.601(d)(2)(ii)(b) of this chapter) for computer software that is qualified property under section 168(k)(2) and acquired and placed in service after September 27, 2017, by the taxpayer during taxable years ending on or after September 28, 2017, and ending before the taxpayer’s taxable year that includes September 24, 2019. ■ Par. 4. Section 1.168(b)–1 is amended: ■ 1. In the second sentence in paragraph (a)(3), by removing ‘‘under section 179, section 179C, or any similar provision,’’ and adding ‘‘under section 179, section 179C, section 181, or any similar provision,’’ in its place; ■ 2. By adding paragraph (a)(5); and ■ 3. By revising paragraph (b). The addition and revision read as follows: § 1.168(b)–1 Definitions. (a) * * * (5) Qualified improvement property. (i) Is any improvement that is section 1250 property to an interior portion of a building, as defined in § 1.48–1(e)(1), that is nonresidential real property, as defined in section 168(e)(2)(B), if the improvement is placed in service by the taxpayer after the date the building was first placed in service by any person and if— (A) For purposes of section 168(e)(6), the improvement is placed in service by the taxpayer after December 31, 2017; (B) For purposes of section 168(k)(3) as in effect on the day before amendment by section 13204(a)(4)(B) of the Tax Cuts and Jobs Act, Public Law 115–97 (131 Stat. 2054 (December 22, 2017)) (‘‘Act’’), the improvement is acquired by the taxpayer before September 28, 2017, the improvement is placed in service by the taxpayer before January 1, 2018, and the improvement meets the original use requirement in section 168(k)(2)(A)(ii) as in effect on PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 the day before amendment by section 13201(c)(1) of the Act; or (C) For purposes of section 168(k)(3) as in effect on the day before amendment by section 13204(a)(4)(B) of the Act, the improvement is acquired by the taxpayer after September 27, 2017; the improvement is placed in service by the taxpayer after September 27, 2017, and before January 1, 2018; and the improvement meets the requirements in section 168(k)(2)(A)(ii) as amended by section 13201(c)(1) of the Act; and (ii) Does not include any qualified improvement for which an expenditure is attributable to— (A) The enlargement, as defined in § 1.48–12(c)(10), of the building; (B) Any elevator or escalator, as defined in § 1.48–1(m)(2); or (C) The internal structural framework, as defined in § 1.48–12(b)(3)(iii), of the building. (b) Applicability date—(1) In general. Except as provided in paragraph (b)(2) of this section, this section is applicable on or after February 27, 2004. (2) Application of paragraph (a)(5) of this section and addition of ‘‘section 181’’ in paragraph (a)(3) of this section—(i) In general. Except as provided in paragraphs (b)(2)(ii) and (iii) of this section, paragraph (a)(5) of this section and the language ‘‘section 181,’’ in the second sentence in paragraph (a)(3) of this section are applicable on or after September 24, 2019. (ii) Early application of paragraph (a)(5) of this section and addition of ‘‘section 181’’ in paragraph (a)(3) of this section. A taxpayer may choose to apply paragraph (a)(5) of this section and the language ‘‘section 181,’’ in the second sentence in paragraph (a)(3) of this section for the taxpayer’s taxable years ending on or after September 28, 2017. (iii) Early application of regulation project REG–104397–18. A taxpayer may rely on the provisions of paragraph (a)(5) of this section in regulation project REG–104397–18 (2018–41 I.R.B 558) (see § 601.601(d)(2)(ii)(b) of this chapter) for the taxpayer’s taxable years ending on or after September 28, 2017, and ending before the taxpayer’s taxable year that includes September 24, 2019. ■ Par. 5. Section 1.168(d)–1 is amended by adding a sentence at the end of paragraphs (b)(3)(ii) and (b)(7)(ii) and adding three sentences at the end of paragraph (d)(2) to read as follows: § 1.168(d)–1 Applicable conventions—halfyear and mid-quarter conventions. * * * (b) * * * (3) * * * E:\FR\FM\24SER2.SGM 24SER2 * * khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations (ii) * * * Further, see § 1.168(k)– 2(g)(1) for rules relating to qualified property under section 168(k), as amended by the Tax Cuts and Jobs Act, Public Law 115–97 (131 Stat. 2054 (December 22, 2017)), that is placed in service by the taxpayer in the same taxable year in which either a partnership is terminated as a result of a technical termination under section 708(b)(1)(B) or the property is transferred in a transaction described in section 168(i)(7). * * * * * (7) * * * (ii) * * * However, see § 1.168(k)– 2(g)(1)(iii) for a special rule regarding the allocation of the additional first year depreciation deduction in the case of certain contributions of property to a partnership under section 721. * * * * * (d) * * * (2) * * * The last sentences in paragraphs (b)(3)(ii) and (b)(7)(ii) of this section apply to qualified property under section 168(k)(2) placed in service by a taxpayer during or after the taxpayer’s taxable year that includes September 24, 2019. However, a taxpayer may choose to apply the last sentences in paragraphs (b)(3)(ii) and (b)(7)(ii) of this section to qualified property under section 168(k)(2) acquired and placed in service after September 27, 2017, by the taxpayer during taxable years ending on or after September 28, 2017. A taxpayer may rely on the last sentences in paragraphs (b)(3)(ii) and (b)(7)(ii) of this section in regulation project REG–104397–18 (2018–41 I.R.B. 558) (see § 601.601(d)(2)(ii)(b) of this chapter) for qualified property under section 168(k)(2) acquired and placed in service after September 27, 2017, by the taxpayer during taxable years ending on or after September 28, 2017, and ending before the taxpayer’s taxable year that includes September 24, 2019. * * * * * ■ Par. 6. Section 1.168(i)–4 is amended: ■ 1. In the penultimate sentence in paragraph (b)(1), by removing ‘‘§§ 1.168(k)–1T(f)(6)(iii) and 1.1400L(b)–1T(f)(6)’’ and adding ‘‘§ 1.168(k)–1(f)(6)(iii) or 1.168(k)– 2(g)(6)(iii), as applicable, and § 1.1400L(b)–1(f)(6)’’ in its place; ■ 2. In the fifth sentence in paragraph (c), by removing ‘‘§§ 1.168(k)–1T(f)(6)(ii) and 1.1400L(b)–1T(f)(6)’’ and adding ‘‘§ 1.168(k)–1(f)(6)(ii) or 1.168(k)– 2(g)(6)(ii), as applicable, and § 1.1400L(b)–1(f)(6)’’ in its place; ■ 3. In the second sentence in paragraph (d)(3)(i)(C), by removing ‘‘§§ 1.168(k)– 1T(f)(6)(iv) and 1.400L(b)–1T(f)(6)’’ and VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 adding ‘‘§ 1.168(k)–1(f)(6)(iv) or 1.168(k)–2(g)(6)(iv), as applicable, and § 1.400L(b)–1(f)(6)’’ in its place; ■ 4. In the last sentence in paragraph (d)(4)(i), by removing ‘‘§§ 1.168(k)– 1T(f)(6)(iv) and 1.1400L(b)–1T(f)(6)’’ and adding ‘‘§ 1.168(k)–1(f)(6)(iv) or 1.168(k)–2(g)(6)(iv), as applicable, and § 1.400L(b)–1(f)(6)’’ in its place; ■ 5. By revising the first sentence in paragraph (g)(1); and ■ 6. By redesignating paragraph (g)(2) as paragraph (g)(3) and adding new paragraph (g)(2). The revision and addition read as follows: § 1.168(i)–4 Changes in use. * * * * * (g) * * * (1) * * * Except as provided in paragraph (g)(2) of this section, this section applies to any change in the use of MACRS property in a taxable year ending on or after June 17, 2004. * * * (2) Qualified property under section 168(k) acquired and placed in service after September 27, 2017—(i) In general. The language ‘‘or § 1.168(k)–2(g)(6)(iii), as applicable’’ in paragraph (b)(1) of this section, the language ‘‘or § 1.168(k)– 2(g)(6)(ii), as applicable’’ in paragraph (c) of this section, and the language ‘‘or § 1.168(k)–2(g)(6)(iv), as applicable’’ in paragraphs (d)(3)(i)(C) and (d)(4)(i) of this section applies to any change in use of MACRS property, which is qualified property under section 168(k)(2), by a taxpayer during or after the taxpayer’s taxable year that includes September 24, 2019. (ii) Early application. A taxpayer may choose to apply the language ‘‘or § 1.168(k)–2(g)(6)(iii), as applicable’’ in paragraph (b)(1) of this section, the language ‘‘or § 1.168(k)–2(g)(6)(ii), as applicable’’ in paragraph (c) of this section, and the language ‘‘or § 1.168(k)– 2(g)(6)(iv), as applicable’’ in paragraphs (d)(3)(i)(C) and (d)(4)(i) of this section for any change in use of MACRS property, which is qualified property under section 168(k)(2) and acquired and placed in service after September 27, 2017, by the taxpayer during taxable years ending on or after September 28, 2017. (iii) Early application of regulation project REG–104397–18. A taxpayer may rely on the language ‘‘or § 1.168(k)– 2(f)(6)(iii), as applicable’’ in paragraph (b)(1) of this section, the language ‘‘or § 1.168(k)–2(f)(6)(ii), as applicable’’ in paragraph (c) of this section, and the language ‘‘or § 1.168(k)–2(f)(6)(iv), as applicable’’ in paragraphs (d)(3)(i)(C) and (d)(4)(i) of this section in regulation project REG–104397–18 (2018–41 I.R.B. 558) (see § 601.601(d)(2)(ii)(b) of this PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 50127 chapter) for any change in use of MACRS property, which is qualified property under section 168(k)(2) and acquired and placed in service after September 27, 2017, by the taxpayer during taxable years ending on or after September 28, 2017, and ending before the taxpayer’s taxable year that includes September 24, 2019. * * * * * ■ Par. 7. Section 1.168(i)–6 is amended: ■ 1. In paragraph (d)(3)(ii)(B), by removing ‘‘1.168(k)–1(f)(5) or § 1.1400L(b)–1(f)(5)’’ wherever it appears and adding ‘‘1.168(k)–1(f)(5), § 1.168(k)–2(g)(5), or § 1.1400L(b)– 1(f)(5)’’ in its place; ■ 2. In paragraph (d)(3)(ii)(E), by removing ‘‘1.168(k)–1(f)(5) or § 1.1400L(b)–1(f)(5)’’ and adding ‘‘1.168(k)–1(f)(5), § 1.168(k)–2(g)(5), or § 1.1400L(b)–1(f)(5)’’ in its place; ■ 3. By adding a sentence at the end of paragraph (d)(4); ■ 4. By adding a sentence at the end of paragraph (h); ■ 5. By revising paragraph (k)(1); and ■ 6. By adding paragraph (k)(4). The additions and revision read as follows: § 1.168(i)–6 Like-kind exchanges and involuntary conversions. * * * * * (d) * * * (4) * * * Further, see § 1.168(k)– 2(g)(5)(iv) for replacement MACRS property that is qualified property under section 168(k), as amended by the Tax Cuts and Jobs Act, Public Law 115–97 (131 Stat. 2054 (December 22, 2017)). * * * * * (h) * * * Further, see § 1.168(k)– 2(g)(5) for qualified property under section 168(k), as amended by the Tax Cuts and Jobs Act, Public Law 115–97 (131 Stat. 2054 (December 22, 2017)). * * * * * (k) * * * (1) In general. Except as provided in paragraphs (k)(3) and (4) of this section, this section applies to a like-kind exchange or an involuntary conversion of MACRS property for which the time of disposition and the time of replacement both occur after February 27, 2004. * * * * * (4) Qualified property under section 168(k) acquired and placed in service after September 27, 2017—(i) In general. The language ‘‘1.168(k)–2(g)(5),’’ in paragraphs (d)(3)(ii)(B) and (E) of this section and the final sentence in paragraphs (d)(4) and (h) of this section apply to a like-kind exchange or an involuntary conversion of MACRS property, which is qualified property E:\FR\FM\24SER2.SGM 24SER2 50128 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations under section 168(k)(2), for which the time of replacement occurs on or after September 24, 2019. (ii) Early application. A taxpayer may choose to apply the language ‘‘1.168(k)– 2(g)(5),’’ in paragraphs (d)(3)(ii)(B) and (E) of this section and the final sentence in paragraphs (d)(4) and (h) of this section to a like-kind exchange or an involuntary conversion of MACRS property, which is qualified property under section 168(k)(2), for which the time of replacement occurs on or after September 28, 2017. (iii) Early application of regulation project REG–104397–18. A taxpayer may rely on the language ‘‘1.168(k)–2(f)(5),’’ in paragraphs (d)(3)(ii)(B) and (E) of this section and the final sentence in paragraphs (d)(4) and (h) of this section in regulation project REG–104397–18 (2018–41 I.R.B. 558) (see § 601.601(d)(2)(ii)(b) of this chapter) for a like-kind exchange or an involuntary conversion of MACRS property, which is qualified property under section 168(k)(2), for which the time of replacement occurs on or after September 28, 2017, and occurs before September 24, 2019. ■ Par. 8. Section 1.168(k)–0 is amended by revising the introductory text and adding an entry for § 1.168(k)–2 in numerical order to the table of contents to read as follows: § 1.168(k)–0 Table of contents. khammond on DSKJM1Z7X2PROD with RULES2 This section lists the major paragraphs contained in §§ 1.168(k)–1 and 1.168(k)–2. * * * * * § 1.168(k)–2 Additional first year depreciation deduction for property acquired and placed in service after September 27, 2017. (a) Scope and definitions. (1) Scope. (2) Definitions. (b) Qualified property. (1) In general. (2) Description of qualified property. (i) In general. (ii) Property not eligible for additional first year depreciation deduction. (iii) Examples. (3) Original use or used property acquisition requirements. (i) In general. (ii) Original use. (A) In general. (B) Conversion to business or incomeproducing use. (C) Fractional interests in property. (iii) Used property acquisition requirements. (A) In general. (B) Property was not used by the taxpayer at any time prior to acquisition. (C) [Reserved] (iv) Application to partnerships. VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 (A) Section 704(c) remedial allocations. (B) Basis determined under section 732. (C) Section 734(b) adjustments. (D) Section 743(b) adjustments. (v) [Reserved] (vi) Syndication transaction. (vii) Examples. (4) Placed-in-service date. (i) In general. (ii) Specified plant. (iii) Qualified film, television, or live theatrical production. (A) Qualified film or television production. (B) Qualified live theatrical production. (iv) Syndication transaction. (v) Technical termination of a partnership. (vi) Section 168(i)(7) transactions. (5) Acquisition of property. (i) In general. (ii) Acquisition date. (A) In general. (B) Determination of acquisition date for property acquired pursuant to a written binding contract. (iii) Definition of binding contract. (A) In general. (B) Conditions. (C) Options. (D) Letter of intent. (E) Supply agreements. (F) Components. (G) [Reserved] (iv) Self-constructed property. (A) In general. (B) When does manufacture, construction, or production begin. (C) Components of self-constructed property. (v) [Reserved] (vi) Qualified film, television, or live theatrical production. (A) Qualified film or television production. (B) Qualified live theatrical production. (vii) Specified plant. (viii) Examples. (c) [Reserved] (d) Property described in section 168(k)(2)(B) or (C). (1) In general. (2) Definition of binding contract. (3) Self-constructed property. (i) In general. (ii) When does manufacture, construction, or production begin. (A) In general. (B) Safe harbor. (iii) Components of self-constructed property. (A) Acquired components. (B) Self-constructed components. (iv) Examples. (e) Computation of depreciation deduction for qualified property. (1) Additional first year depreciation deduction. (i) Allowable taxable year. (ii) Computation. (iii) Property described in section 168(k)(2)(B). (iv) Alternative minimum tax. (A) In general. (B) Special rules. (2) Otherwise allowable depreciation deduction. (i) In general. (ii) Alternative minimum tax. PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 (3) Examples. (f) Elections under section 168(k). (1) Election not to deduct additional first year depreciation. (i) In general. (ii) Definition of class of property. (iii) Time and manner for making election. (A) Time for making election. (B) Manner of making election. (iv) Failure to make election. (2) Election to apply section 168(k)(5) for specified plants. (i) In general. (ii) Time and manner for making election. (A) Time for making election. (B) Manner of making election. (iii) Failure to make election. (3) Election for qualified property placed in service during the 2017 taxable year. (i) In general. (ii) Time and manner for making election. (A) Time for making election. (B) Manner of making election. (iii) Failure to make election. (4) Alternative minimum tax. (5) Revocation of election. (i) In general. (ii) Automatic 6-month extension. (6) Special rules for 2016 and 2017 returns. (g) Special rules. (1) Property placed in service and disposed of in the same taxable year. (i) In general. (ii) Technical termination of a partnership. (iii) Section 168(i)(7) transactions. (iv) Examples. (2) Redetermination of basis. (i) Increase in basis. (ii) Decrease in basis. (iii) Definitions. (iv) Examples. (3) Sections 1245 and 1250 depreciation recapture. (4) Coordination with section 169. (5) Like-kind exchanges and involuntary conversions. (i) Scope. (ii) Definitions. (iii) Computation. (A) In general. (B) Year of disposition and year of replacement. (C) Property described in section 168(k)(2)(B). (D) Effect of § 1.168(i)-6(i)(1) election. (E) Alternative minimum tax. (iv) Replacement MACRS property or replacement computer software that is acquired and placed in service before disposition of relinquished MACRS property or relinquished computer software. (v) Examples. (6) Change in use. (i) Change in use of MACRS property. (ii) Conversion to personal use. (iii) Conversion to business or incomeproducing use. (A) During the same taxable year. (B) Subsequent to the acquisition year. (iv) Depreciable property changes use subsequent to the placed-in-service year. (v) Examples. (7) Earnings and profits. (8) Limitation of amount of depreciation for certain passenger automobiles. (9) Coordination with section 47. E:\FR\FM\24SER2.SGM 24SER2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations (i) In general. (ii) Example. (10) Coordination with section 514(a)(3). (11) [Reserved] (h) Applicability dates. (1) In general. (2) Early application of this section. (3) Early application of regulation project REG–104397–18. Par. 9. Section 1.168(k)–2 is added to read as follows: ■ khammond on DSKJM1Z7X2PROD with RULES2 § 1.168(k)–2 Additional first year depreciation deduction for property acquired and placed in service after September 27, 2017. (a) Scope and definitions—(1) Scope. This section provides rules for determining the additional first year depreciation deduction allowable under section 168(k) for qualified property acquired and placed in service after September 27, 2017. (2) Definitions. For purposes of this section— (i) Act is the Tax Cuts and Jobs Act, Public Law 115–97 (131 Stat. 2054 (December 22, 2017)); (ii) Applicable percentage is the percentage provided in section 168(k)(6); (iii) Initial live staged performance is the first commercial exhibition of a production to an audience. However, the term initial live staged performance does not include limited exhibition prior to commercial exhibition to general audiences if the limited exhibition is primarily for purposes of publicity, determining the need for further production activity, or raising funds for the completion of production. For example, an initial live staged performance does not include a preview of the production if the preview is primarily to determine the need for further production activity; and (iv) Predecessor includes— (A) A transferor of an asset to a transferee in a transaction to which section 381(a) applies; (B) A transferor of an asset to a transferee in a transaction in which the transferee’s basis in the asset is determined, in whole or in part, by reference to the basis of the asset in the hands of the transferor; (C) A partnership that is considered as continuing under section 708(b)(2) and § 1.708–1; (D) The decedent in the case of an asset acquired by the estate; or (E) A transferor of an asset to a trust. (b) Qualified property—(1) In general. Qualified property is depreciable property, as defined in § 1.168(b)– 1(a)(1), that meets all the following requirements in the first taxable year in which the property is subject to depreciation by the taxpayer whether or VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 not depreciation deductions for the property are allowable: (i) The requirements in § 1.168(k)– 2(b)(2) (description of qualified property); (ii) The requirements in § 1.168(k)– 2(b)(3) (original use or used property acquisition requirements); (iii) The requirements in § 1.168(k)– 2(b)(4) (placed-in-service date); and (iv) The requirements in § 1.168(k)– 2(b)(5) (acquisition of property). (2) Description of qualified property— (i) In general. Depreciable property will meet the requirements of this paragraph (b)(2) if the property is— (A) MACRS property, as defined in § 1.168(b)–1(a)(2), that has a recovery period of 20 years or less. For purposes of this paragraph (b)(2)(i)(A) and section 168(k)(2)(A)(i)(I), the recovery period is determined in accordance with section 168(c) regardless of any election made by the taxpayer under section 168(g)(7). This paragraph (b)(2)(i)(A) includes the following MACRS property that is acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer after September 27, 2017, and before January 1, 2018: (1) Qualified leasehold improvement property as defined in section 168(e)(6) as in effect on the day before amendment by section 13204(a)(1) of the Act; (2) Qualified restaurant property, as defined in section 168(e)(7) as in effect on the day before amendment by section 13204(a)(1) of the Act, that is qualified improvement property as defined in § 1.168(b)–1(a)(5)(i)(C) and (a)(5)(ii); and (3) Qualified retail improvement property as defined in section 168(e)(8) as in effect on the day before amendment by section 13204(a)(1) of the Act; (B) Computer software as defined in, and depreciated under, section 167(f)(1) and § 1.167(a)–14; (C) Water utility property as defined in section 168(e)(5) and depreciated under section 168; (D) Qualified improvement property as defined in § 1.168(b)–1(a)(5)(i)(C) and (a)(5)(ii) and depreciated under section 168; (E) A qualified film or television production, as defined in section 181(d) and § 1.181–3, for which a deduction would have been allowable under section 181 and §§ 1.181–1 through 1.181–6 without regard to section 181(a)(2) and (g), § 1.181–1(b)(1)(i) and (ii), and (b)(2)(i), or section 168(k). Only production costs of a qualified film or television production are allowable as a deduction under section 181 and §§ 1.181–1 through 1.181–6 without regard, for purposes of section 168(k), to PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 50129 section 181(a)(2) and (g), § 1.181– 1(b)(1)(i) and (ii), and (b)(2)(i). The taxpayer that claims the additional first year depreciation deduction under this section for the production costs of a qualified film or television production must be the owner, as defined in § 1.181–1(a)(2), of the qualified film or television production. See § 1.181– 1(a)(3) for the definition of production costs; (F) A qualified live theatrical production, as defined in section 181(e), for which a deduction would have been allowable under section 181 and §§ 1.181–1 through 1.181–6 without regard to section 181(a)(2) and (g), § 1.181–1(b)(1)(i) and (ii), and (b)(2)(i), or section 168(k). Only production costs of a qualified live theatrical production are allowable as a deduction under section 181 and §§ 1.181–1 through 1.181–6 without regard, for purposes of section 168(k), to section 181(a)(2) and (g), § 1.181–1(b)(1)(i) and (ii), and (b)(2)(i). The taxpayer that claims the additional first year depreciation deduction under this section for the production costs of a qualified live theatrical production must be the owner, as defined in § 1.181–1(a)(2), of the qualified live theatrical production. In applying § 1.181–1(a)(2)(ii) to a person that acquires a finished or partially-finished qualified live theatrical production, such person is treated as an owner of that production, but only if the production is acquired prior to its initial live staged performance. Rules similar to the rules in § 1.181–1(a)(3) for the definition of production costs of a qualified film or television production apply for defining production costs of a qualified live theatrical production; or (G) A specified plant, as defined in section 168(k)(5)(B), for which the taxpayer has properly made an election to apply section 168(k)(5) for the taxable year in which the specified plant is planted, or grafted to a plant that has already been planted, by the taxpayer in the ordinary course of the taxpayer’s farming business, as defined in section 263A(e)(4) (for further guidance, see paragraph (f) of this section). (ii) Property not eligible for additional first year depreciation deduction. Depreciable property will not meet the requirements of this paragraph (b)(2) if the property is— (A) Described in section 168(f) (for example, automobiles for which the taxpayer uses the optional business standard mileage rate); (B) Required to be depreciated under the alternative depreciation system of section 168(g) pursuant to section 168(g)(1)(A), (B), (C), (D), (F), or (G), or E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 50130 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations other provisions of the Internal Revenue Code (for example, property described in section 263A(e)(2)(A) if the taxpayer or any related person, as defined in section 263A(e)(2)(B), has made an election under section 263A(d)(3), or property described in section 280F(b)(1)). If section 168(h)(6) applies to the property, only the tax-exempt entity’s proportionate share of the property, as determined under section 168(h)(6), is treated as tax-exempt use property described in section 168(g)(1)(B) and in this paragraph (b)(2)(ii)(B). This paragraph (b)(2)(ii)(B) does not apply to property for which the adjusted basis is required to be determined using the alternative depreciation system of section 168(g) pursuant to section 250(b)(2)(B) or 951A(d)(3), as applicable, or to property for which the adjusted basis is required to be determined using the alternative depreciation system of section 168(g) for allocating business interest expense between excepted and non-excepted trades or businesses under section 163(j), but only if the property is not required to be depreciated under the alternative depreciation system of section 168(g) pursuant to section 168(g)(1)(A), (B), (C), (D), (F), or (G), or other provisions of the Code, other than section 163(j), 250(b)(2)(B), or 951A(d)(3), as applicable; (C) Included in any class of property for which the taxpayer elects not to deduct the additional first year depreciation (for further guidance, see paragraph (f) of this section); (D) A specified plant that is placed in service by the taxpayer during the taxable year and for which the taxpayer made an election to apply section 168(k)(5) for a prior taxable year; (E) Included in any class of property for which the taxpayer elects to apply section 168(k)(4). This paragraph (b)(2)(ii)(E) applies to property placed in service by the taxpayer in any taxable year beginning before January 1, 2018; (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; or (G) 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. Such property also must be placed in service by the taxpayer in any taxable year beginning after December 31, 2017. (iii) Examples. The application of this paragraph (b)(2) is illustrated by the VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 following examples. Unless the facts specifically indicate otherwise, assume that the parties are not related within the meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c), and are not described in section 163(j)(3): (A) Example 1. On February 8, 2018, A finishes the production of a qualified film, as defined in § 1.181–3. On June 4, 2018, B acquires this finished production from A. The initial release or broadcast, as defined in § 1.181–1(a)(7), of this qualified film is on July 28, 2018. Because B acquired the qualified film before its initial release or broadcast, B is treated as the owner of the qualified film for purposes of section 181 and § 1.181–1(a)(2). Assuming all other requirements of this section are met and all requirements of section 181 and §§ 1.181–1 through 1.181–6, other than section 181(a)(2) and (g), and § 1.181–1(b)(1)(i) and (ii), and (b)(2)(i), are met, B’s acquisition cost of the qualified film qualifies for the additional first year depreciation deduction under this section. (B) Example 2. The facts are the same as in Example 1 of paragraph (b)(2)(iii)(A) of this section, except that B acquires a limited license or right to release the qualified film in Europe. As a result, B is not treated as the owner of the qualified film pursuant to § 1.181–1(a)(2). Accordingly, paragraph (b)(2)(i)(E) of this section is not satisfied, and B’s acquisition cost of the license or right does not qualify for the additional first year depreciation deduction. (C) Example 3. C owns a film library. All of the films in this film library are completed and have been released or broadcasted. In 2018, D buys this film library from C. Because D acquired the films after their initial release or broadcast, D’s acquisition cost of the film library does not qualify for a deduction under section 181. As a result, paragraph (b)(2)(i)(E) of this section is not satisfied, and D’s acquisition cost of the film library does not qualify for the additional first year depreciation deduction. (D) Example 4. During 2019, E Corporation, a domestic corporation, acquired new equipment for use in its manufacturing trade or business in Mexico. To determine its qualified business asset investment for purposes of section 250, E Corporation must determine the adjusted basis of the new equipment using the alternative depreciation system of section 168(g) pursuant to sections 250(b)(2)(B) and 951A(d)(3). E Corporation also is required to depreciate the new equipment under the alternative depreciation system of section 168(g) pursuant to section 168(g)(1)(A). As a result, the new equipment does not qualify for the additional first year depreciation deduction pursuant to paragraph (b)(2)(ii)(B) of this section. (E) Example 5. The facts are the same as in Example 4 of paragraph (b)(2)(iii)(D) of this section, except E Corporation acquired the new equipment for use in its manufacturing trade or business in California. The new equipment is not described in section 168(g)(1)(A), (B), (C), (D), (F), or (G). No other provision of the Internal Revenue Code, other than section 250(b)(2)(B) or 951A(d)(3), requires the new PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 equipment to be depreciated using the alternative depreciation system of section 168(g). To determine its qualified business asset investment for purposes of section 250, E Corporation must determine the adjusted basis of the new equipment using the alternative depreciation system of section 168(g) pursuant to sections 250(b)(2)(B) and 951A(d)(3). Because E Corporation is not required to depreciate the new equipment under the alternative depreciation system of section 168(g), paragraph (b)(2)(ii)(B) of this section does not apply to this new equipment. Assuming all other requirements are met, the new equipment qualifies for the additional first year depreciation deduction under this section. (3) Original use or used property acquisition requirements—(i) In general. Depreciable property will meet the requirements of this paragraph (b)(3) if the property meets the original use requirements in paragraph (b)(3)(ii) of this section or if the property meets the used property acquisition requirements in paragraph (b)(3)(iii) of this section. (ii) Original use—(A) In general. Depreciable property will meet the requirements of this paragraph (b)(3)(ii) if the original use of the property commences with the taxpayer. Except as provided in paragraphs (b)(3)(ii)(B) and (C) of this section, original use means the first use to which the property is put, whether or not that use corresponds to the use of the property by the taxpayer. Additional capital expenditures paid or incurred by a taxpayer to recondition or rebuild property acquired or owned by the taxpayer satisfy the original use requirement. However, the cost of reconditioned or rebuilt property does not satisfy the original use requirement (but may satisfy the used property acquisition requirements in paragraph (b)(3)(iii) of this section). The question of whether property is reconditioned or rebuilt property is a question of fact. For purposes of this paragraph (b)(3)(ii)(A), property that contains used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20 percent of the total cost of the property, whether acquired or selfconstructed. (B) Conversion to business or incomeproducing use—(1) Personal use to business or income-producing use. If a taxpayer initially acquires new property for personal use and subsequently uses the property in the taxpayer’s trade or business or for the taxpayer’s production of income, the taxpayer is considered the original user of the property. If a person initially acquires new property for personal use and a taxpayer subsequently acquires the property from the person for use in the taxpayer’s trade or business or for the E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations taxpayer’s production of income, the taxpayer is not considered the original user of the property. (2) Inventory to business or incomeproducing use. If a taxpayer initially acquires new property and holds the property primarily for sale to customers in the ordinary course of the taxpayer’s business and subsequently withdraws the property from inventory and uses the property primarily in the taxpayer’s trade or business or primarily for the taxpayer’s production of income, the taxpayer is considered the original user of the property. If a person initially acquires new property and holds the property primarily for sale to customers in the ordinary course of the person’s business and a taxpayer subsequently acquires the property from the person for use primarily in the taxpayer’s trade or business or primarily for the taxpayer’s production of income, the taxpayer is considered the original user of the property. For purposes of this paragraph (b)(3)(ii)(B)(2), the original use of the property by the taxpayer commences on the date on which the taxpayer uses the property primarily in the taxpayer’s trade or business or primarily for the taxpayer’s production of income. (C) Fractional interests in property. If, in the ordinary course of its business, a taxpayer sells fractional interests in new property to third parties unrelated to the taxpayer, each first fractional owner of the property is considered as the original user of its proportionate share of the property. Furthermore, if the taxpayer uses the property before all of the fractional interests of the property are sold but the property continues to be held primarily for sale by the taxpayer, the original use of any fractional interest sold to a third party unrelated to the taxpayer subsequent to the taxpayer’s use of the property begins with the first purchaser of that fractional interest. For purposes of this paragraph (b)(3)(ii)(C), persons are not related if they do not have a relationship described in section 267(b) and § 1.267(b)–1, or section 707(b) and § 1.707–1. (iii) Used property acquisition requirements—(A) In general. Depreciable property will meet the requirements of this paragraph (b)(3)(iii) if the acquisition of the used property meets the following requirements: (1) Such property was not used by the taxpayer or a predecessor at any time prior to such acquisition; (2) The acquisition of such property meets the requirements of section 179(d)(2)(A), (B), and (C), and § 1.179– 4(c)(1)(ii), (iii), and (iv); or § 1.179– 4(c)(2) (property is acquired by purchase); and VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 (3) The acquisition of such property meets the requirements of section 179(d)(3) and § 1.179–4(d) (cost of property) (for further guidance regarding like-kind exchanges and involuntary conversions, see paragraph (g)(5) of this section). (B) Property was not used by the taxpayer at any time prior to acquisition—(1) In general. Solely for purposes of paragraph (b)(3)(iii)(A)(1) of this section, the property is treated as used by the taxpayer or a predecessor at any time prior to acquisition by the taxpayer or predecessor if the taxpayer or the predecessor had a depreciable interest in the property at any time prior to such acquisition, whether or not the taxpayer or the predecessor claimed depreciation deductions for the property. To determine if the taxpayer or a predecessor had a depreciable interest in the property at any time prior to acquisition, only the five calendar years immediately prior to the taxpayer’s current placed-in-service year of the property is taken into account. If the taxpayer and a predecessor have not been in existence for this entire fiveyear period, only the number of calendar years the taxpayer and the predecessor have been in existence is taken into account. If a lessee has a depreciable interest in the improvements made to leased property and subsequently the lessee acquires the leased property of which the improvements are a part, the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of the acquired property that is eligible for the additional first year depreciation deduction, assuming all other requirements are met, must not include the unadjusted depreciable basis attributable to the improvements. (2) Taxpayer has a depreciable interest in a portion of the property. If a taxpayer initially acquires a depreciable interest in a portion of the property and subsequently acquires a depreciable interest in an additional portion of the same property, such additional depreciable interest is not treated as used by the taxpayer at any time prior to its acquisition by the taxpayer under paragraphs (b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of this section. This paragraph (b)(3)(iii)(B)(2) does not apply if the taxpayer or a predecessor previously had a depreciable interest in the subsequently acquired additional portion. For purposes of this paragraph (b)(3)(iii)(B)(2), a portion of the property is considered to be the percentage interest in the property. If a taxpayer holds a depreciable interest in a portion of the property, sells that portion or a PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 50131 part of that portion, and subsequently acquires a depreciable interest in another portion of the same property, the taxpayer will be treated as previously having a depreciable interest in the property up to the amount of the portion for which the taxpayer held a depreciable interest in the property before the sale. (3) Substantial renovation of property. If a taxpayer acquires and places in service substantially renovated property and the taxpayer or a predecessor previously had a depreciable interest in the property before it was substantially renovated, the taxpayer’s or predecessor’s depreciable interest in the property before it was substantially renovated is not taken into account for determining whether the substantially renovated property was used by the taxpayer or a predecessor at any time prior to its acquisition by the taxpayer under paragraphs (b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of this section. For purposes of this paragraph (b)(3)(iii)(B)(3), property is substantially renovated if the cost of the used parts is not more than 20 percent of the total cost of the substantially renovated property, whether acquired or selfconstructed. (C) [Reserved] (iv) Application to partnerships—(A) Section 704(c) remedial allocations. Remedial allocations under section 704(c) do not satisfy the requirements of paragraph (b)(3) of this section. See § 1.704–3(d)(2). (B) Basis determined under section 732. Any basis of distributed property determined under section 732 does not satisfy the requirements of paragraph (b)(3) of this section. (C) Section 734(b) adjustments. Any increase in basis of depreciable property under section 734(b) does not satisfy the requirements of paragraph (b)(3) of this section. (D) Section 743(b) adjustments—(1) In general. For purposes of determining whether the transfer of a partnership interest meets the requirements of paragraph (b)(3)(iii)(A) of this section, each partner is treated as having a depreciable interest in the partner’s proportionate share of partnership property. Any increase in basis of depreciable property under section 743(b) satisfies the requirements of paragraph (b)(3)(iii)(A) of this section if— (i) At any time prior to the transfer of the partnership interest that gave rise to such basis increase, neither the transferee partner nor a predecessor of the transferee partner had any depreciable interest in the portion of the property deemed acquired to which the E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 50132 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations section 743(b) adjustment is allocated under section 755 and § 1.755–1; and (ii) The transfer of the partnership interest that gave rise to such basis increase satisfies the requirements of paragraphs (b)(3)(iii)(A)(2) and (3) of this section. (2) Relatedness tested at partner level. Solely for purposes of paragraph (b)(3)(iv)(D)(1)(ii) of this section, whether the parties are related or unrelated is determined by comparing the transferor and the transferee of the transferred partnership interest. (v) [Reserved] (vi) Syndication transaction. If new property is acquired and placed in service by a lessor, or if used property is acquired and placed in service by a lessor and the lessor or a predecessor did not previously have a depreciable interest in the used property, and the property is sold by the lessor or any subsequent purchaser within three months after the date the property was originally placed in service by the lessor (or, in the case of multiple units of property subject to the same lease, within three months after the date the final unit is placed in service, so long as the period between the time the first unit is placed in service and the time the last unit is placed in service does not exceed 12 months), and the user of the property after the last sale during the three-month period remains the same as when the property was originally placed in service by the lessor, the purchaser of the property in the last sale during the three-month period is considered the taxpayer that acquired the property for purposes of applying paragraphs (b)(3)(ii) and (iii) of this section. The purchaser of the property in the last sale during the three-month period is treated, for purposes of applying paragraph (b)(3) of this section, as— (A) The original user of the property in this transaction if the lessor acquired and placed in service new property; or (B) The taxpayer having the depreciable interest in the property in this transaction if the lessor acquired and placed in service used property. (vii) Examples. The application of this paragraph (b)(3) is illustrated by the following examples. Unless the facts specifically indicate otherwise, assume that the parties are not related within the meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c), no corporation is a member of a consolidated or controlled group, and the parties do not have predecessors: (A) Example 1. (1) On August 1, 2018, A buys a new machine for $35,000 from an unrelated party for use in A’s trade or business. On July 1, 2020, B buys that VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 machine from A for $20,000 for use in B’s trade or business. On October 1, 2020, B makes a $5,000 capital expenditure to recondition the machine. B did not have any depreciable interest in the machine before B acquired it on July 1, 2020. (2) A’s purchase price of $35,000 satisfies the original use requirement of paragraph (b)(3)(ii) of this section and, assuming all other requirements are met, qualifies for the additional first year depreciation deduction under this section. (3) B’s purchase price of $20,000 does not satisfy the original use requirement of paragraph (b)(3)(ii) of this section, but it does satisfy the used property acquisition requirements of paragraph (b)(3)(iii) of this section. Assuming all other requirements are met, the $20,000 purchase price qualifies for the additional first year depreciation deduction under this section. Further, B’s $5,000 expenditure satisfies the original use requirement of paragraph (b)(3)(ii) of this section and, assuming all other requirements are met, qualifies for the additional first year depreciation deduction under this section, regardless of whether the $5,000 is added to the basis of the machine or is capitalized as a separate asset. (B) Example 2. C, an automobile dealer, uses some of its automobiles as demonstrators in order to show them to prospective customers. The automobiles that are used as demonstrators by C are held by C primarily for sale to customers in the ordinary course of its business. On November 1, 2017, D buys from C an automobile that was previously used as a demonstrator by C. D will use the automobile solely for business purposes. The use of the automobile by C as a demonstrator does not constitute a ‘‘use’’ for purposes of the original use requirement and, therefore, D will be considered the original user of the automobile for purposes of paragraph (b)(3)(ii) of this section. Assuming all other requirements are met, D’s purchase price of the automobile qualifies for the additional first year depreciation deduction for D under this section, subject to any limitation under section 280F. (C) Example 3. On April 1, 2015, E acquires a horse to be used in E’s thoroughbred racing business. On October 1, 2018, F buys the horse from E and will use the horse in F’s horse breeding business. F did not have any depreciable interest in the horse before F acquired it on October 1, 2018. The use of the horse by E in its racing business prevents F from satisfying the original use requirement of paragraph (b)(3)(ii) of this section. However, F’s acquisition of the horse satisfies the used property acquisition requirements of paragraph (b)(3)(iii) of this section. Assuming all other requirements are met, F’s purchase price of the horse qualifies for the additional first year depreciation deduction for F under this section. (D) Example 4. In the ordinary course of its business, G sells fractional interests in its aircraft to unrelated parties. G holds out for sale eight equal fractional interests in an aircraft. On October 1, 2017, G sells five of the eight fractional interests in the aircraft to H and H begins to use its proportionate share of the aircraft immediately upon purchase. PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 On February 1, 2018, G sells to I the remaining unsold 3⁄8 fractional interests in the aircraft. H is considered the original user as to its 5⁄8 fractional interest in the aircraft and I is considered the original user as to its 3⁄8 fractional interest in the aircraft. Thus, assuming all other requirements are met, H’s purchase price for its 5⁄8 fractional interest in the aircraft qualifies for the additional first year depreciation deduction under this section and I’s purchase price for its 3⁄8 fractional interest in the aircraft qualifies for the additional first year depreciation deduction under this section. (E) Example 5. On September 1, 2017, J, an equipment dealer, buys new tractors that are held by J primarily for sale to customers in the ordinary course of its business. On October 15, 2017, J withdraws the tractors from inventory and begins to use the tractors primarily for producing rental income. The holding of the tractors by J as inventory does not constitute a ‘‘use’’ for purposes of the original use requirement and, therefore, the original use of the tractors commences with J on October 15, 2017, for purposes of paragraph (b)(3)(ii) of this section. However, the tractors are not eligible for the additional first year depreciation deduction under this section because J acquired the tractors before September 28, 2017. (F) Example 6. K is in the trade or business of leasing equipment to others. During 2016, K buys a new machine (Machine #1) and then leases it to L for use in L’s trade or business. The lease between K and L for Machine #1 is a true lease for Federal income tax purposes. During 2018, L enters into a written binding contract with K to buy Machine #1 at its fair market value on May 15, 2018. L did not have any depreciable interest in Machine #1 before L acquired it on May 15, 2018. As a result, L’s acquisition of Machine #1 satisfies the used property acquisition requirements of paragraph (b)(3)(iii) of this section. Assuming all other requirements are met, L’s purchase price of Machine #1 qualifies for the additional first year depreciation deduction for L under this section. (G) Example 7. The facts are the same as in Example 6 of paragraph (b)(3)(vii)(F) of this section, except that K and L are related parties within the meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c). As a result, L’s acquisition of Machine #1 does not satisfy the used property acquisition requirements of paragraph (b)(3)(iii) of this section. Thus, Machine #1 is not eligible for the additional first year depreciation deduction for L. (H) Example 8. The facts are the same as in Example 6 of paragraph (b)(3)(vii)(F) of this section, except L incurred capital expenditures of $5,000 to improve Machine #1 on September 5, 2017, and has a depreciable interest in such improvements. L’s purchase price of $5,000 for the improvements to Machine #1 satisfies the original use requirement of § 1.168(k)– 1(b)(3)(i) and, assuming all other requirements are met, qualifies for the 50percent additional first year depreciation deduction. Because L had a depreciable interest only in the improvements to Machine #1, L’s acquisition of Machine #1, E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations excluding L’s improvements to such machine, satisfies the used property acquisition requirements of paragraph (b)(3)(iii) of this section. Assuming all other requirements are met, L’s unadjusted depreciable basis of Machine #1, excluding the amount of such unadjusted depreciable basis attributable to L’s improvements to Machine #1, qualifies for the additional first year depreciation deduction for L under this section. (I) Example 9. During 2016, M and N purchased used equipment for use in their trades or businesses and each own a 50 percent interest in such equipment. Prior to this acquisition, M and N did not have any depreciable interest in the equipment. Assume this ownership arrangement is not a partnership. During 2018, N enters into a written binding contract with M to buy M’s interest in the equipment. Pursuant to paragraph (b)(3)(iii)(B)(2) of this section, N is not treated as using M’s interest in the equipment prior to N’s acquisition of M’s interest. As a result, N’s acquisition of M’s interest in the equipment satisfies the used property acquisition requirements of paragraph (b)(3)(iii) of this section. Assuming all other requirements are met, N’s purchase price of M’s interest in the equipment qualifies for the additional first year depreciation deduction for N under this section. (J) Example 10. The facts are the same as in Example 9 of paragraph (b)(3)(vii)(I) of this section, except N had a 100-percent depreciable interest in the equipment during 2011 through 2015, and M purchased from N a 50-percent interest in the equipment during 2016. Pursuant to paragraph (b)(3)(iii)(B)(1) of this section, the lookback period is 2013 through 2017 to determine if N had a depreciable interest in M’s 50-percent interest in the equipment N acquired from M in 2018. Because N had a 100-percent depreciable interest in the equipment during 2013 through 2015, N had a depreciable interest in M’s 50-percent interest in the equipment during the lookback period. As a result, N’s acquisition of M’s interest in the equipment during 2018 does not satisfy the used property acquisition requirements of paragraphs (b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of this section. Paragraph (b)(3)(iii)(B)(2) of this section does not apply because N initially acquired a 100-percent depreciable interest in the equipment. Accordingly, N’s purchase price of M’s interest in the equipment during 2018 does not qualify for the additional first year depreciation deduction for N. (K) Example 11. The facts are the same as in Example 9 of paragraph (b)(3)(vii)(I) of this section, except N had a 100-percent depreciable interest in the equipment only during 2011, and M purchased from N a 50percent interest in the equipment during 2012. Pursuant to paragraph (b)(3)(iii)(B)(1) of this section, the lookback period is 2013 through 2017 to determine if N had a depreciable interest in M’s 50-percent interest in the equipment N acquired from M in 2018. Because N had a depreciable interest in only its 50-percent interest in the equipment during this lookback period, N’s acquisition of M’s interest in the equipment VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 during 2018 satisfies the used property acquisition requirements of paragraphs (b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of this section. Assuming all other requirements are met, N’s purchase price of M’s interest in the equipment during 2018 qualifies for the additional first year depreciation deduction for N under this section. (L) Example 12. The facts are the same as in Example 9 of paragraph (b)(3)(vii)(I) of this section, except during 2018, M also enters into a written binding contract with N to buy N’s interest in the equipment. Pursuant to paragraph (b)(3)(iii)(B)(2) of this section, both M and N are treated as previously having a depreciable interest in a 50-percent portion of the equipment. Accordingly, the acquisition by M of N’s 50-percent interest and the acquisition by N of M’s 50-percent interest in the equipment during 2018 do not qualify for the additional first year depreciation deduction. (M) Example 13. O and P form an equal partnership, OP, in 2018. O contributes cash to OP, and P contributes equipment to OP. OP’s basis in the equipment contributed by P is determined under section 723. Because OP’s basis in such equipment is determined in whole or in part by reference to P’s adjusted basis in such equipment, OP’s acquisition of such equipment does not satisfy section 179(d)(2)(C) and § 1.179– 4(c)(1)(iv) and, thus, does not satisfy the used property acquisition requirements of paragraph (b)(3)(iii) of this section. Accordingly, OP’s acquisition of such equipment is not eligible for the additional first year depreciation deduction. (N) Example 14. Q, R, and S form an equal partnership, QRS, in 2019. Each partner contributes $100, which QRS uses to purchase a retail motor fuels outlet for $300. Assume this retail motor fuels outlet is QRS’ only property and is qualified property under section 168(k)(2)(A)(i). QRS makes an election not to deduct the additional first year depreciation for all qualified property placed in service during 2019. QRS has a section 754 election in effect. QRS claimed depreciation of $15 for the retail motor fuels outlet for 2019. During 2020, when the retail motor fuels outlet’s fair market value is $600, Q sells all of its partnership interest to T in a fully taxable transaction for $200. T never previously had a depreciable interest in the retail motor fuels outlet. T takes an outside basis of $200 in the partnership interest previously owned by Q. T’s share of the partnership’s previously taxed capital is $95. Accordingly, T’s section 743(b) adjustment is $105 and is allocated entirely to the retail motor fuels outlet under section 755. Assuming all other requirements are met, T’s section 743(b) adjustment qualifies for the additional first year depreciation deduction under this section. (O) Example 15. The facts are the same as in Example 14 of paragraph (b)(3)(vii)(N) of this section, except that Q sells his partnership interest to U, a related person within the meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c). U’s section 743(b) adjustment does not qualify for the additional first year depreciation deduction. (P) Example 16. The facts are the same as in Example 14 of paragraph (b)(3)(vii)(N) of PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 50133 this section, except that Q dies and his partnership interest is transferred to V. V takes a basis in Q’s partnership interest under section 1014. As a result, section 179(d)(2)(C)(ii) and § 1.179–4(c)(1)(iv) are not satisfied, and V’s section 743(b) adjustment does not qualify for the additional first year depreciation deduction. (Q) Example 17. The facts are the same as in Example 14 of paragraph (b)(3)(vii)(N) of this section, except that QRS purchased the retail motor fuels outlet from T prior to T purchasing Q’s partnership interest in QRS. T had a depreciable interest in such retail motor fuels outlet. Because T had a depreciable interest in the retail motor fuels outlet before T acquired its interest in QRS, T’s section 743(b) adjustment does not qualify for the additional first year depreciation deduction. (R) Example 18. (1) W, a freight transportation company, acquires and places in service a used aircraft during 2019 (Airplane #1). Prior to this acquisition, W never had a depreciable interest in this aircraft. During September 2020, W enters into a written binding contract with a third party to renovate Airplane #1. The third party begins to renovate Airplane #1 in October 2020 and delivers the renovated aircraft (Airplane #2) to W in February 2021. To renovate Airplane #1, the third party used mostly new parts but also used parts from Airplane #1. The cost of the used parts is not more than 20 percent of the total cost of the renovated airplane, Airplane #2. W uses Airplane #2 in its trade or business. (2) Although Airplane #2 contains used parts, the cost of the used parts is not more than 20 percent of the total cost of Airplane #2. As a result, Airplane #2 is not treated as reconditioned or rebuilt property, and W is considered the original user of Airplane #2, pursuant to paragraph (b)(3)(ii)(A) of this section. Accordingly, assuming all other requirements are met, the amount paid or incurred by W for Airplane #2 qualifies for the additional first year depreciation deduction for W under this section. (S) Example 19. (1) X, a freight transportation company, acquires and places in service a new aircraft in 2019 (Airplane #1). During 2022, X sells Airplane #1 to AB and AB uses Airplane #1 in its trade or business. Prior to this acquisition, AB never had a depreciable interest in Airplane #1. During January 2023, AB enters into a written binding contract with a third party to renovate Airplane #1. The third party begins to renovate Airplane #1 in February 2023 and delivers the renovated aircraft (Airplane #2) to AB in June 2023. To renovate Airplane #1, the third party used mostly new parts but also used parts from Airplane #1. The cost of the used parts is not more than 20 percent of the total cost of the renovated airplane, Airplane #2. AB uses Airplane #2 in its trade or business. During 2025, AB sells Airplane #2 to X and X uses Airplane #2 in its trade or business. (2) With respect to X’s purchase of Airplane #1 in 2019, X is the original user of this airplane pursuant to paragraph (b)(3)(ii)(A) of this section. Accordingly, assuming all other requirements are met, X’s purchase price for Airplane #1 qualifies for E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 50134 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations the additional first year depreciation deduction for X under this section. (3) Because AB never had a depreciable interest in Airplane #1 prior to its acquisition in 2022, the requirements of paragraphs (b)(3)(iii)(A)(1) and (b)(3)(ii)(B)(1) of this section are satisfied. Accordingly, assuming all other requirements are met, AB’s purchase price for Airplane #1 qualifies for the additional first year depreciation deduction for AB under this section. (4) Although Airplane #2 contains used parts, the cost of the used parts is not more than 20 percent of the total cost of Airplane #2. As a result, Airplane #2 is not treated as reconditioned or rebuilt property, and AB is considered the original user of Airplane #2, pursuant to paragraph (b)(3)(ii)(A) of this section. Accordingly, assuming all other requirements are met, the amount paid or incurred by AB for Airplane #2 qualifies for the additional first year depreciation deduction for AB under this section. (5) With respect to X’s purchase of Airplane #2 in 2025, Airplane #2 is substantially renovated property pursuant to paragraph (b)(3)(iii)(B)(3) of this section. Also, pursuant to paragraph (b)(3)(iii)(B)(3) of this section, X’s depreciable interest in Airplane #1 is not taken into account for determining if X previously had a depreciable interest in Airplane #2 prior to its acquisition during 2025. As a result, Airplane #2 is not treated as used by X at any time before its acquisition of Airplane #2 in 2025 pursuant to paragraph (b)(3)(iii)(B)(3) of this section. Accordingly, assuming all other requirements are met, X’s purchase price of Airplane #2 qualifies for the additional first year depreciation deduction for X under this section. (T) Example 20. In November 2017, AA Corporation purchases a used drill press costing $10,000 and is granted a trade-in allowance of $2,000 on its old drill press. The used drill press is qualified property under section 168(k)(2)(A)(i). The old drill press had a basis of $1,200. Under sections 1012 and 1031(d), the basis of the used drill press is $9,200 ($1,200 basis of old drill press plus cash expended of $8,000). Only $8,000 of the basis of the used drill press satisfies the requirements of section 179(d)(3) and § 1.179–4(d) and, thus, satisfies the used property acquisition requirement of paragraph (b)(3)(iii) of this section. The remaining $1,200 of the basis of the used drill press does not satisfy the requirements of section 179(d)(3) and § 1.179–4(d) because it is determined by reference to the old drill press. Accordingly, assuming all other requirements are met, only $8,000 of the basis of the used drill press is eligible for the additional first year depreciation deduction under this section. (U) Example 21. (1) M Corporation acquires and places in service a used airplane on March 26, 2018. Prior to this acquisition, M Corporation never had a depreciable interest in this airplane. On March 26, 2018, M Corporation also leases the used airplane to N Corporation, an airline company. On May 27, 2018, M Corporation sells to O Corporation the used airplane subject to the lease with N Corporation. M Corporation and O Corporation are related parties within the VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c). As of May 27, 2018, N Corporation is still the lessee of the used airplane. Prior to this acquisition, O Corporation never had a depreciable interest in the used airplane. O Corporation is a calendar-year taxpayer. (2) The sale transaction of May 27, 2018, satisfies the requirements of a syndication transaction described in paragraph (b)(3)(vi) of this section. As a result, O Corporation is considered the taxpayer that acquired the used airplane for purposes of applying the used property acquisition requirements in paragraph (b)(3)(iii) of this section. In applying these rules, the fact that M Corporation and O Corporation are related parties is not taken into account because O Corporation, not M Corporation, is treated as acquiring the used airplane. Also, O Corporation, not M Corporation, is treated as having the depreciable interest in the used airplane. Further, pursuant to paragraph (b)(4)(iv) of this section, the used airplane is treated as originally placed in service by O Corporation on May 27, 2018. Because O Corporation never had a depreciable interest in the used airplane and assuming all other requirements are met, O Corporation’s purchase price of the used airplane qualifies for the additional first year depreciation deduction for O Corporation under this section. (V) Example 22. (1) The facts are the same as in Example 21 of paragraph (b)(3)(vii)(U)(1) of this section. Additionally, on September 5, 2018, O Corporation sells to P Corporation the used airplane subject to the lease with N Corporation. Prior to this acquisition, P Corporation never had a depreciable interest in the used airplane. (2) Because O Corporation, a calendar-year taxpayer, placed in service and disposed of the used airplane during 2018, the used airplane is not eligible for the additional first year depreciation deduction for O Corporation pursuant to paragraph (g)(1)(i) of this section. (3) Because P Corporation never had a depreciable interest in the used airplane and assuming all other requirements are met, P Corporation’s purchase price of the used airplane qualifies for the additional first year depreciation deduction for P Corporation under this section. (W) Example 23. (1) The facts are the same as in Example 21 of paragraph (b)(3)(vii)(U)(1) of this section, except M Corporation and O Corporation are not related parties within the meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c). Additionally, on March 26, 2020, O Corporation sells to M Corporation the used airplane subject to the lease with N Corporation. (2) The sale transaction of May 27, 2018, satisfies the requirements of a syndication transaction described in paragraph (b)(3)(vi) of this section. As a result, O Corporation is considered the taxpayer that acquired the used airplane for purposes of applying the used property acquisition requirements in paragraph (b)(3)(iii) of this section. Also, O Corporation, not M Corporation, is treated as having the depreciable interest in the used airplane. Further, pursuant to paragraph PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 (b)(4)(iv) of this section, the used airplane is treated as originally placed in service by O Corporation on May 27, 2018. Because O Corporation never had a depreciable interest in the used airplane before its acquisition in 2018 and assuming all other requirements are met, O Corporation’s purchase price of the used airplane qualifies for the additional first year depreciation deduction for O Corporation under this section. (3) Prior to its acquisition of the used airplane on March 26, 2020, M Corporation never had a depreciable interest in the used airplane pursuant to paragraph (b)(3)(vi) of this section. Assuming all other requirements are met, M Corporation’s purchase price of the used airplane on March 26, 2020, qualifies for the additional first year depreciation deduction for M Corporation under this section. (X) Example 24. (1) J, K, and L are corporations that are unrelated parties within the meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c). None of J, K, or L is a member of a consolidated group. J has a depreciable interest in Equipment #5. During 2018, J sells Equipment #5 to K. During 2020, J merges into L in a transaction described in section 368(a)(1)(A). In 2021, L acquires Equipment #5 from K. (2) Because J is the predecessor of L, and because J previously had a depreciable interest in Equipment #5, L’s acquisition of Equipment #5 does not satisfy paragraphs (b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of this section. Thus, L’s acquisition of Equipment #5 does not satisfy the used property acquisition requirements of paragraph (b)(3)(iii) of this section. Accordingly, L’s acquisition of Equipment #5 is not eligible for the additional first year depreciation deduction. (4) Placed-in-service date—(i) In general. Depreciable property will meet the requirements of this paragraph (b)(4) if the property is placed in service by the taxpayer for use in its trade or business or for production of income after September 27, 2017; and, except as provided in paragraphs (b)(2)(i)(A) and (D) of this section, before January 1, 2027, or, in the case of property described in section 168(k)(2)(B) or (C), before January 1, 2028. (ii) Specified plant. If the taxpayer has properly made an election to apply section 168(k)(5) for a specified plant, the requirements of this paragraph (b)(4) are satisfied only if the specified plant is planted before January 1, 2027, or is grafted before January 1, 2027, to a plant that has already been planted, by the taxpayer in the ordinary course of the taxpayer’s farming business, as defined in section 263A(e)(4). (iii) Qualified film, television, or live theatrical production—(A) Qualified film or television production. For purposes of this paragraph (b)(4), a qualified film or television production is treated as placed in service at the time of initial release or broadcast as defined E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations under § 1.181–1(a)(7). The taxpayer that places in service a qualified film or television production must be the owner, as defined in § 1.181–1(a)(2), of the qualified film or television production. (B) Qualified live theatrical production. For purposes of this paragraph (b)(4), a qualified live theatrical production is treated as placed in service at the time of the initial live staged performance. The taxpayer that places in service a qualified live theatrical production must be the owner, as defined in paragraph (b)(2)(i)(F) of this section and in § 1.181–1(a)(2), of the qualified live theatrical production. (iv) Syndication transaction. If new property is acquired and placed in service by a lessor, or if used property is acquired and placed in service by a lessor and the lessor and any predecessor did not previously have a depreciable interest in the used property, and the property is sold by the lessor or any subsequent purchaser within three months after the date the property was originally placed in service by the lessor (or, in the case of multiple units of property subject to the same lease, within three months after the date the final unit is placed in service, so long as the period between the time the first unit is placed in service and the time the last unit is placed in service does not exceed 12 months), and the user of the property after the last sale during this threemonth period remains the same as when the property was originally placed in service by the lessor, the property is treated as originally placed in service by the purchaser of the property in the last sale during the three-month period but not earlier than the date of the last sale for purposes of sections 167 and 168, and §§ 1.46–3(d) and 1.167(a)–11(e)(1). (v) Technical termination of a partnership. For purposes of this paragraph (b)(4), in the case of a technical termination of a partnership under section 708(b)(1)(B) occurring in a taxable year beginning before January 1, 2018, qualified property placed in service by the terminated partnership during the taxable year of termination is treated as originally placed in service by the new partnership on the date the qualified property is contributed by the terminated partnership to the new partnership. (vi) Section 168(i)(7) transactions. For purposes of this paragraph (b)(4), if qualified property is transferred in a transaction described in section 168(i)(7) in the same taxable year that the qualified property is placed in service by the transferor, the transferred VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 property is treated as originally placed in service on the date the transferor placed in service the qualified property. In the case of multiple transfers of qualified property in multiple transactions described in section 168(i)(7) in the same taxable year, the placed-in-service date of the transferred property is deemed to be the date on which the first transferor placed in service the qualified property. (5) Acquisition of property—(i) In general. This paragraph (b)(5) provides rules for the acquisition requirements in section 13201(h) of the Act. These rules apply to all property, including selfconstructed property or property described in section 168(k)(2)(B) or (C). (ii) Acquisition date—(A) In general. Except as provided in paragraph (b)(5)(vi) of this section, depreciable property will meet the requirements of this paragraph (b)(5) if the property is acquired by the taxpayer after September 27, 2017, or is acquired by the taxpayer pursuant to a written binding contract entered into by the taxpayer after September 27, 2017. Property that is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract that is entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in its trade or business or for its production of income is not acquired pursuant to a written binding contract but is considered to be self-constructed property under this paragraph (b)(5). For determination of acquisition date, see paragraph (b)(5)(ii)(B) of this section for property acquired pursuant to a written binding contract and paragraph (b)(5)(iv) of this section for selfconstructed property. (B) Determination of acquisition date for property acquired pursuant to a written binding contract. Except as provided in paragraphs (b)(5)(vi) and (vii) of this section, the acquisition date of property that the taxpayer acquired pursuant to a written binding contract is the later of— (1) The date on which the contract was entered into; (2) The date on which the contract is enforceable under State law; (3) If the contract has one or more cancellation periods, the date on which all cancellation periods end. For purposes of this paragraph (b)(5)(ii)(B)(3), a cancellation period is the number of days stated in the contract for any party to cancel the contract without penalty; or (4) If the contract has one or more contingency clauses, the date on which all conditions subject to such clauses PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 50135 are satisfied. For purposes of this paragraph (b)(5)(ii)(B)(4), a contingency clause is one that provides for a condition (or conditions) or action (or actions) that is within the control of any party or a predecessor. (iii) Definition of binding contract— (A) In general. A contract is binding only if it is enforceable under State law against the taxpayer or a predecessor, and does not limit damages to a specified amount (for example, by use of a liquidated damages provision). For this purpose, any contractual provision that limits damages to an amount equal to at least 5 percent of the total contract price will not be treated as limiting damages to a specified amount. If a contract has multiple provisions that limit damages, only the provision with the highest damages is taken into account in determining whether the contract limits damages. Also, in determining whether a contract limits damages, the fact that there may be little or no damages because the contract price does not significantly differ from fair market value will not be taken into account. For example, if a taxpayer entered into an irrevocable written contract to purchase an asset for $100 and the contract did not contain a provision for liquidated damages, the contract is considered binding notwithstanding the fact that the asset had a fair market value of $99 and under local law the seller would only recover the difference in the event the purchaser failed to perform. If the contract provided for a full refund of the purchase price in lieu of any damages allowable by law in the event of breach or cancellation, the contract is not considered binding. (B) Conditions. A contract is binding even if subject to a condition, as long as the condition is not within the control of either party or a predecessor. A contract will continue to be binding if the parties make insubstantial changes in its terms and conditions or if any term is to be determined by a standard beyond the control of either party. A contract that imposes significant obligations on the taxpayer or a predecessor will be treated as binding notwithstanding the fact that certain terms remain to be negotiated by the parties to the contract. (C) Options. An option to either acquire or sell property is not a binding contract. (D) Letter of intent. A letter of intent for an acquisition is not a binding contract. (E) Supply agreements. A binding contract does not include a supply or similar agreement if the amount and design specifications of the property to E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 50136 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations be purchased have not been specified. The contract will not be a binding contract for the property to be purchased until both the amount and the design specifications are specified. For example, if the provisions of a supply or similar agreement state the design specifications of the property to be purchased, a purchase order under the agreement for a specific number of assets is treated as a binding contract. (F) Components. A binding contract to acquire one or more components of a larger property will not be treated as a binding contract to acquire the larger property. If a binding contract to acquire the component does not satisfy the requirements of this paragraph (b)(5), the component does not qualify for the additional first year depreciation deduction under this section. (G) [Reserved] (iv) Self-constructed property—(A) In general. If a taxpayer manufactures, constructs, or produces property for use by the taxpayer in its trade or business or for its production of income, the acquisition rules in paragraph (b)(5)(ii) of this section are treated as met for the property if the taxpayer begins manufacturing, constructing, or producing the property after September 27, 2017. Property that is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract, as defined in paragraph (b)(5)(iii) of this section, that is entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in its trade or business or for its production of income is considered to be manufactured, constructed, or produced by the taxpayer. If a taxpayer enters into a written binding contract, as defined in paragraph (b)(5)(iii) of this section, before September 28, 2017, with another person to manufacture, construct, or produce property and the manufacture, construction, or production of this property begins after September 27, 2017, the acquisition rules in paragraph (b)(5)(ii) of this section are met. (B) When does manufacture, construction, or production begin—(1) In general. For purposes of paragraph (b)(5)(iv)(A) of this section, manufacture, construction, or production of property begins when physical work of a significant nature begins. Physical work does not include preliminary activities such as planning or designing, securing financing, exploring, or researching. The determination of when physical work of a significant nature begins depends on the facts and circumstances. For example, if a retail motor fuels outlet is to be constructed on-site, construction VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 begins when physical work of a significant nature commences at the site; that is, when work begins on the excavation for footings, pouring the pads for the outlet, or the driving of foundation pilings into the ground. Preliminary work, such as clearing a site, test drilling to determine soil condition, or excavation to change the contour of the land (as distinguished from excavation for footings) does not constitute the beginning of construction. However, if a retail motor fuels outlet is to be assembled on-site from modular units manufactured off-site and delivered to the site where the outlet will be used, manufacturing begins when physical work of a significant nature commences at the off-site location. (2) Safe harbor. For purposes of paragraph (b)(5)(iv)(B)(1) of this section, a taxpayer may choose to determine when physical work of a significant nature begins in accordance with this paragraph (b)(5)(iv)(B)(2). Physical work of a significant nature will be considered to begin at the time the taxpayer incurs (in the case of an accrual basis taxpayer) or pays (in the case of a cash basis taxpayer) more than 10 percent of the total cost of the property, excluding the cost of any land and preliminary activities such as planning or designing, securing financing, exploring, or researching. When property is manufactured, constructed, or produced for the taxpayer by another person, this safe harbor test must be satisfied by the taxpayer. For example, if a retail motor fuels outlet or other facility is to be constructed for an accrual basis taxpayer by another person for the total cost of $200,000, excluding the cost of any land and preliminary activities such as planning or designing, securing financing, exploring, or researching, construction is deemed to begin for purposes of this paragraph (b)(5)(iv)(B)(2) when the taxpayer has incurred more than 10 percent (more than $20,000) of the total cost of the property. A taxpayer chooses to apply this paragraph (b)(5)(iv)(B)(2) by filing a Federal income tax return for the placed-in-service year of the property that determines when physical work of a significant nature begins consistent with this paragraph (b)(5)(iv)(B)(2). (C) Components of self-constructed property—(1) Acquired components. If a binding contract, as defined in paragraph (b)(5)(iii) of this section, to acquire a component does not satisfy the requirements of paragraph (b)(5)(ii) of this section, the component does not qualify for the additional first year depreciation deduction under this PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 section. A binding contract described in the preceding sentence to acquire one or more components of a larger selfconstructed property will not preclude the larger self-constructed property from satisfying the acquisition rules in paragraph (b)(5)(iv)(A) of this section. Accordingly, the unadjusted depreciable basis of the larger self-constructed property that is eligible for the additional first year depreciation deduction under this section, assuming all other requirements are met, must not include the unadjusted depreciable basis of any component that does not satisfy the requirements of paragraph (b)(5)(ii) of this section. If the manufacture, construction, or production of the larger self-constructed property begins before September 28, 2017, the larger self-constructed property and any acquired components related to the larger self-constructed property do not qualify for the additional first year depreciation deduction under this section. If a binding contract to acquire the component is entered into after September 27, 2017, but the manufacture, construction, or production of the larger self-constructed property does not begin before January 1, 2027, the component qualifies for the additional first year depreciation deduction under this section, assuming all other requirements are met, but the larger self-constructed property does not. (2) Self-constructed components. If the manufacture, construction, or production of a component does not satisfy the requirements of this paragraph (b)(5)(iv), the component does not qualify for the additional first year depreciation deduction under this section. However, if the manufacture, construction, or production of a component does not satisfy the requirements of this paragraph (b)(5)(iv), but the manufacture, construction, or production of the larger self-constructed property satisfies the requirements of this paragraph (b)(5)(iv), the larger selfconstructed property qualifies for the additional first year depreciation deduction under this section, assuming all other requirements are met, even though the component does not qualify for the additional first year depreciation deduction under this section. Accordingly, the unadjusted depreciable basis of the larger self-constructed property that is eligible for the additional first year depreciation deduction under this section, assuming all other requirements are met, must not include the unadjusted depreciable basis of any component that does not E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations qualify for the additional first year depreciation deduction under this section. If the manufacture, construction, or production of the larger self-constructed property began before September 28, 2017, the larger selfconstructed property and any selfconstructed components related to the larger self-constructed property do not qualify for the additional first year depreciation deduction under this section. If the manufacture, construction, or production of a component begins after September 27, 2017, but the manufacture, construction, or production of the larger selfconstructed property does not begin before January 1, 2027, the component qualifies for the additional first year depreciation deduction under this section, assuming all other requirements are met, but the larger self-constructed property does not. (v) [Reserved] (vi) Qualified film, television, or live theatrical production—(A) Qualified film or television production. For purposes of section 13201(h)(1)(A) of the Act, a qualified film or television production is treated as acquired on the date principal photography commences. (B) Qualified live theatrical production. For purposes of section 13201(h)(1)(A) of the Act, a qualified live theatrical production is treated as acquired on the date when all of the necessary elements for producing the live theatrical production are secured. These elements may include a script, financing, actors, set, scenic and costume designs, advertising agents, music, and lighting. (vii) Specified plant. If the taxpayer has properly made an election to apply section 168(k)(5) for a specified plant, the requirements of this paragraph (b)(5) are satisfied if the specified plant is planted after September 27, 2017, or is grafted after September 27, 2017, to a plant that has already been planted, by the taxpayer in the ordinary course of the taxpayer’s farming business, as defined in section 263A(e)(4). (viii) Examples. The application of this paragraph (b)(5) is illustrated by the following examples. Unless the facts specifically indicate otherwise, assume that the parties are not related within the meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c), and the parties do not have predecessors: (A) Example 1. On September 1, 2017, BB, a corporation, entered into a written agreement with CC, a manufacturer, to purchase 20 new lamps for $100 each within the next two years. Although the agreement specifies the number of lamps to be purchased, the agreement does not specify the design of the lamps to be purchased. VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 Accordingly, the agreement is not a binding contract pursuant to paragraph (b)(5)(iii)(E) of this section. (B) Example 2. The facts are the same as in Example 1 of paragraph (b)(5)(viii)(A) of this section. On December 1, 2017, BB placed a purchase order with CC to purchase 20 new model XPC5 lamps for $100 each for a total amount of $2,000. Because the agreement specifies the number of lamps to be purchased and the purchase order specifies the design of the lamps to be purchased, the purchase order placed by BB with CC on December 1, 2017, is a binding contract pursuant to paragraph (b)(5)(iii)(E) of this section. Accordingly, assuming all other requirements are met, the cost of the 20 lamps qualifies for the 100-percent additional first year depreciation deduction. (C) Example 3. The facts are the same as in Example 1 of paragraph (b)(5)(viii)(A) of this section, except that the written agreement between BB and CC is to purchase 100 model XPC5 lamps for $100 each within the next two years. Because this agreement specifies the amount and design of the lamps to be purchased, the agreement is a binding contract pursuant to paragraph (b)(5)(iii)(E) of this section. However, because the agreement was entered into before September 28, 2017, no lamp acquired by BB under this contract qualifies for the 100-percent additional first year depreciation deduction. (D) Example 4. On September 1, 2017, DD began constructing a retail motor fuels outlet for its own use. On November 1, 2018, DD ceases construction of the retail motor fuels outlet prior to its completion. Between September 1, 2017, and November 1, 2018, DD incurred $3,000,000 of expenditures for the construction of the retail motor fuels outlet. On May 1, 2019, DD resumed construction of the retail motor fuels outlet and completed its construction on August 31, 2019. Between May 1, 2019, and August 31, 2019, DD incurred another $1,600,000 of expenditures to complete the construction of the retail motor fuels outlet and, on September 1, 2019, DD placed the retail motor fuels outlet in service. None of DD’s total expenditures of $4,600,000 qualify for the 100-percent additional first year depreciation deduction because, pursuant to paragraph (b)(5)(iv)(A) of this section, DD began constructing the retail motor fuels outlet before September 28, 2017. (E) Example 5. The facts are the same as in Example 4 of paragraph (b)(5)(viii)(D) of this section except that DD began constructing the retail motor fuels outlet for its own use on October 1, 2017, and DD incurred the $3,000,000 between October 1, 2017, and November 1, 2018. DD’s total expenditures of $4,600,000 qualify for the 100-percent additional first year depreciation deduction because, pursuant to paragraph (b)(5)(iv)(A) of this section, DD began constructing the retail motor fuels outlet after September 27, 2017, and DD placed the retail motor fuels outlet in service on September 1, 2019. Accordingly, assuming all other requirements are met, the additional first year depreciation deduction for the retail motor fuels outlet will be $4,600,000, computed as $4,600,000 multiplied by 100 percent. PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 50137 (F) Example 6. On August 15, 2017, EE, an accrual basis taxpayer, entered into a written binding contract with FF to manufacture an aircraft described in section 168(k)(2)(C) for use in EE’s trade or business. FF begins to manufacture the aircraft on October 1, 2017. The completed aircraft is delivered to EE on February 15, 2018, at which time EE incurred the total cost of the aircraft. EE places the aircraft in service on March 1, 2018. Pursuant to paragraphs (b)(5)(ii)(A) and (b)(5)(iv)(A) of this section, the aircraft is considered to be manufactured by EE. Because EE began manufacturing the aircraft after September 27, 2017, the aircraft qualifies for the 100percent additional first year depreciation deduction, assuming all other requirements are met. (G) Example 7. On June 1, 2017, HH entered into a written binding contract with GG to acquire a new component part of property that is being constructed by HH for its own use in its trade or business. HH commenced construction of the property in November 2017, and placed the property in service in November 2018. Because HH entered into a written binding contract to acquire a component part prior to September 28, 2017, pursuant to paragraphs (b)(5)(ii) and (b)(5)(iv)(C)(1) of this section, the component part does not qualify for the 100percent additional first year depreciation deduction. However, pursuant to paragraphs (b)(5)(iv)(A) and (b)(5)(iv)(C)(1) of this section, the property constructed by HH will qualify for the 100-percent additional first year depreciation deduction, because construction of the property began after September 27, 2017, assuming all other requirements are met. Accordingly, the unadjusted depreciable basis of the property that is eligible for the 100-percent additional first year depreciation deduction must not include the unadjusted depreciable basis of the component part. (H) Example 8. The facts are the same as in Example 7 of paragraph (b)(5)(viii)(G) of this section except that HH entered into the written binding contract with GG to acquire the new component part on September 30, 2017, and HH commenced construction of the property on August 1, 2017. Pursuant to paragraphs (b)(5)(iv)(A) and (C) of this section, neither the property constructed by HH nor the component part will qualify for the 100-percent additional first year depreciation deduction, because HH began construction of the property prior to September 28, 2017. (I) Example 9. On September 1, 2017, II acquired and placed in service equipment. On January 15, 2018, II sells the equipment to JJ and leases the property back from JJ in a sale-leaseback transaction. Pursuant to paragraph (b)(5)(ii) of this section, II’s cost of the equipment does not qualify for the 100percent additional first year depreciation deduction because II acquired the equipment prior to September 28, 2017. However, JJ acquired used equipment from an unrelated party after September 27, 2017, and, assuming all other requirements are met, JJ’s cost of the used equipment qualifies for the 100-percent additional first year depreciation deduction for JJ. (J) Example 10. On July 1, 2017, KK began constructing property for its own use in its E:\FR\FM\24SER2.SGM 24SER2 50138 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 trade or business. KK placed this property in service on September 15, 2017. On January 15, 2018, KK sells the property to LL and leases the property back from LL in a saleleaseback transaction. Pursuant to paragraph (b)(5)(iv) of this section, KK’s cost of the property does not qualify for the 100-percent additional first year depreciation deduction because KK began construction of the property prior to September 28, 2017. However, LL acquired used property from an unrelated party after September 27, 2017, and, assuming all other requirements are met, LL’s cost of the used property qualifies for the 100-percent additional first year depreciation deduction for LL. (K) Example 11. MM, a calendar year taxpayer, is engaged in a trade or business described in section 163(j)(7)(A)(iv). In December 2018, MM began constructing a new electric generation power plant for its own use. MM placed in service this new power plant, including all component parts, in 2020. Even though MM began constructing the power plant after September 27, 2017, none of MM’s total expenditures of the power plant qualify for the additional first year depreciation deduction under this section because, pursuant to paragraph (b)(2)(ii)(F) of this section, the power plant is property that is primarily used in a trade or business described in section 163(j)(7)(A)(iv) and the power plant was placed in service in MM’s taxable year beginning after 2017. (c) [Reserved] (d) Property described in section 168(k)(2)(B) or (C)—(1) In general. Property described in section 168(k)(2)(B) or (C) will meet the acquisition requirements of section 168(k)(2)(B)(i)(III) or (k)(2)(C)(i) if the property is acquired by the taxpayer before January 1, 2027, or acquired by the taxpayer pursuant to a written binding contract that is entered into before January 1, 2027. Property described in section 168(k)(2)(B) or (C), including its components, also must meet the acquisition requirement in section 13201(h)(1)(A) of the Act (for further guidance, see paragraph (b)(5) of this section). (2) Definition of binding contract. For purposes of this paragraph (d), the rules in paragraph (b)(5)(iii) of this section for a binding contract apply. (3) Self-constructed property—(i) In general. If a taxpayer manufactures, constructs, or produces property for use by the taxpayer in its trade or business or for its production of income, the acquisition rules in paragraph (d)(1) of this section are treated as met for the property if the taxpayer begins manufacturing, constructing, or producing the property before January 1, 2027. Property that is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract, as defined in paragraph (b)(5)(iii) of this section, that is entered into prior to the manufacture, VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 construction, or production of the property for use by the taxpayer in its trade or business or for its production of income is considered to be manufactured, constructed, or produced by the taxpayer. If a taxpayer enters into a written binding contract, as defined in paragraph (b)(5)(iii) of this section, before January 1, 2027, with another person to manufacture, construct, or produce property described in section 168(k)(2)(B) or (C) and the manufacture, construction, or production of this property begins after December 31, 2026, the acquisition rule in paragraph (d)(1) of this section is met. (ii) When does manufacture, construction, or production begin—(A) In general. For purposes of this paragraph (d)(3), manufacture, construction, or production of property begins when physical work of a significant nature begins. Physical work does not include preliminary activities such as planning or designing, securing financing, exploring, or researching. The determination of when physical work of a significant nature begins depends on the facts and circumstances. For example, if a retail motor fuels outlet is to be constructed on-site, construction begins when physical work of a significant nature commences at the site; that is, when work begins on the excavation for footings, pouring the pads for the outlet, or the driving of foundation pilings into the ground. Preliminary work, such as clearing a site, test drilling to determine soil condition, or excavation to change the contour of the land (as distinguished from excavation for footings) does not constitute the beginning of construction. However, if a retail motor fuels outlet is to be assembled on-site from modular units manufactured off-site and delivered to the site where the outlet will be used, manufacturing begins when physical work of a significant nature commences at the off-site location. (B) Safe harbor. For purposes of paragraph (d)(3)(ii)(A) of this section, a taxpayer may choose to determine when physical work of a significant nature begins in accordance with this paragraph (d)(3)(ii)(B). Physical work of a significant nature will be considered to begin at the time the taxpayer incurs (in the case of an accrual basis taxpayer) or pays (in the case of a cash basis taxpayer) more than 10 percent of the total cost of the property, excluding the cost of any land and preliminary activities such as planning or designing, securing financing, exploring, or researching. When property is manufactured, constructed, or produced for the taxpayer by another person, this PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 safe harbor test must be satisfied by the taxpayer. For example, if a retail motor fuels outlet is to be constructed for an accrual basis taxpayer by another person for the total cost of $200,000, excluding the cost of any land and preliminary activities such as planning or designing, securing financing, exploring, or researching, construction is deemed to begin for purposes of this paragraph (d)(3)(ii)(B) when the taxpayer has incurred more than 10 percent (more than $20,000) of the total cost of the property. A taxpayer chooses to apply this paragraph (d)(3)(ii)(B) by filing a Federal income tax return for the placed-in-service year of the property that determines when physical work of a significant nature begins consistent with this paragraph (d)(3)(ii)(B). (iii) Components of self-constructed property—(A) Acquired components. If a binding contract, as defined in paragraph (b)(5)(iii) of this section, to acquire a component does not satisfy the requirements of paragraph (d)(1) of this section, the component does not qualify for the additional first year depreciation deduction under this section. A binding contract described in the preceding sentence to acquire one or more components of a larger selfconstructed property will not preclude the larger self-constructed property from satisfying the acquisition rules in paragraph (d)(3)(i) of this section. Accordingly, the unadjusted depreciable basis of the larger self-constructed property that is eligible for the additional first year depreciation deduction under this section, assuming all other requirements are met, must not include the unadjusted depreciable basis of any component that does not satisfy the requirements of paragraph (d)(1) of this section. If a binding contract to acquire the component is entered into before January 1, 2027, but the manufacture, construction, or production of the larger self-constructed property does not begin before January 1, 2027, the component qualifies for the additional first year depreciation deduction under this section, assuming all other requirements are met, but the larger self-constructed property does not. (B) Self-constructed components. If the manufacture, construction, or production of a component by the taxpayer does not satisfy the requirements of paragraph (d)(3)(i) of this section, the component does not qualify for the additional first year depreciation deduction under this section. However, if the manufacture, construction, or production of a component does not satisfy the requirements of paragraph (d)(3)(i) of E:\FR\FM\24SER2.SGM 24SER2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 this section, but the manufacture, construction, or production of the larger self-constructed property satisfies the requirements of paragraph (d)(3)(i) of this section, the larger self-constructed property qualifies for the additional first year depreciation deduction under this section, assuming all other requirements are met, even though the component does not qualify for the additional first year depreciation deduction under this section. Accordingly, the unadjusted depreciable basis of the larger selfconstructed property that is eligible for the additional first year depreciation deduction under this section, assuming all other requirements are met, must not include the unadjusted depreciable basis of any component that does not qualify for the additional first year depreciation deduction under this section. If the manufacture, construction, or production of a component begins before January 1, 2027, but the manufacture, construction, or production of the larger selfconstructed property does not begin before January 1, 2027, the component qualifies for the additional first year depreciation deduction under this section, assuming all other requirements are met, but the larger self-constructed property does not. (iv) Examples. The application of this paragraph (d) is illustrated by the following examples: (A) Example 1. (1) On June 1, 2016, NN decided to construct property described in section 168(k)(2)(B) for its own use. However, one of the component parts of the property had to be manufactured by another person for NN. On August 15, 2016, NN entered into a written binding contract with OO to acquire this component part of the property for $100,000. OO began manufacturing the component part on November 1, 2016, and delivered the completed component part to NN on September 1, 2017, at which time NN incurred $100,000 for the cost of the component. The cost of this component part is 9 percent of the total cost of the property to be constructed by NN. NN did not incur any other cost of the property to be constructed before NN began construction. NN began constructing the property described in section 168(k)(2)(B) on October 15, 2017, and placed in service this property, including all component parts, on November 1, 2020. NN uses the safe harbor test in paragraph (d)(3)(ii)(B) of this section to determine when physical work of a significant nature begins for the property described in section 168(k)(2)(B). (2) Because the component part of $100,000 that was manufactured by OO for NN is not more than 10 percent of the total cost of the property described in section 168(k)(2)(B), physical work of a significant nature for the property described in section 168(k)(2)(B) did not begin before September 28, 2017. VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 (3) Pursuant to paragraphs (b)(5)(iv)(C)(2) and (d)(1) of this section, the self-constructed component part of $100,000 manufactured by OO for NN is not eligible for the 100-percent additional first year depreciation deduction because the manufacturing of such component part began before September 28, 2017. However, pursuant to paragraph (d)(3)(i) of this section, the cost of the property described in section 168(k)(2)(B), excluding the cost of the component part of $100,000 manufactured by OO for NN, is eligible for the 100-percent additional first year depreciation deduction, assuming all other requirements are met, because construction of the property began after September 27, 2017, and before January 1, 2027, and the property described in section 168(k)(2)(B) was placed in service by NN during 2020. (B) Example 2. (1) On June 1, 2026, PP decided to construct property described in section 168(k)(2)(B) for its own use. However, one of the component parts of the property had to be manufactured by another person for PP. On August 15, 2026, PP entered into a written binding contract with XP to acquire this component part of the property for $100,000. XP began manufacturing the component part on September 1, 2026, and delivered the completed component part to PP on February 1, 2027, at which time PP incurred $100,000 for the cost of the component. The cost of this component part is 9 percent of the total cost of the property to be constructed by PP. PP did not incur any other cost of the property to be constructed before PP began construction. PP began constructing the property described in section 168(k)(2)(B) on January 15, 2027, and placed this property, including all component parts, in service on November 1, 2027. (2) Pursuant to paragraph (d)(3)(iii)(B) of this section, the self-constructed component part of $100,000 manufactured by XP for PP is eligible for the additional first year depreciation deduction under this section, assuming all other requirements are met, because the manufacturing of the component part began before January 1, 2027, and the property described in section 168(k)(2)(B), the larger self-constructed property, was placed in service by PP before January 1, 2028. However, pursuant to paragraph (d)(3)(i) of this section, the cost of the property described in section 168(k)(2)(B), excluding the cost of the self-constructed component part of $100,000 manufactured by XP for PP, is not eligible for the additional first year depreciation deduction under this section because construction of the property began after December 31, 2026. (C) Example 3. On December 1, 2026, QQ entered into a written binding contract, as defined in paragraph (b)(5)(iii) of this section, with RR to manufacture an aircraft described in section 168(k)(2)(C) for use in QQ’s trade or business. RR begins to manufacture the aircraft on February 1, 2027. QQ places the aircraft in service on August 1, 2027. Pursuant to paragraph (d)(3)(i) of this section, the aircraft meets the requirements of paragraph (d)(1) of this section because the aircraft was acquired by QQ pursuant to a written binding contract entered into before PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 50139 January 1, 2027. Further, the aircraft was placed in service by QQ before January 1, 2028. Thus, assuming all other requirements are met, QQ’s cost of the aircraft is eligible for the additional first year depreciation deduction under this section. (e) Computation of depreciation deduction for qualified property—(1) Additional first year depreciation deduction—(i) Allowable taxable year. The additional first year depreciation deduction is allowable— (A) Except as provided in paragraph (e)(1)(i)(B) or (g) of this section, in the taxable year in which the qualified property is placed in service by the taxpayer for use in its trade or business or for the production of income; or (B) In the taxable year in which the specified plant is planted, or grafted to a plant that has already been planted, by the taxpayer in the ordinary course of the taxpayer’s farming business, as defined in section 263A(e)(4), if the taxpayer properly made the election to apply section 168(k)(5) (for further guidance, see paragraph (f) of this section). (ii) Computation. Except as provided in paragraph (g)(5) of this section, the allowable additional first year depreciation deduction for qualified property is determined by multiplying the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of the qualified property by the applicable percentage. Except as provided in paragraph (g)(1) of this section, the additional first year depreciation deduction is not affected by a taxable year of less than 12 months. See paragraph (g)(1) of this section for qualified property placed in service or planted or grafted, as applicable, and disposed of during the same taxable year. See paragraph (g)(5) of this section for qualified property acquired in a likekind exchange or as a result of an involuntary conversion. (iii) Property described in section 168(k)(2)(B). For purposes of paragraph (e)(1)(ii) of this section, the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of qualified property described in section 168(k)(2)(B) is limited to the property’s unadjusted depreciable basis attributable to the property’s manufacture, construction, or production before January 1, 2027. (iv) Alternative minimum tax—(A) In general. The additional first year depreciation deduction is allowable for alternative minimum tax purposes— (1) Except as provided in paragraph (e)(1)(iv)(A)(2) of this section, in the taxable year in which the qualified property is placed in service by the taxpayer; or E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 50140 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations (2) In the taxable year in which a specified plant is planted by the taxpayer, or grafted by the taxpayer to a plant that was previously planted, if the taxpayer properly made the election to apply section 168(k)(5) (for further guidance, see paragraph (f) of this section). (B) Special rules. In general, the additional first year depreciation deduction for alternative minimum tax purposes is based on the unadjusted depreciable basis of the property for alternative minimum tax purposes. However, see paragraph (g)(5)(iii)(E) of this section for qualified property acquired in a like-kind exchange or as a result of an involuntary conversion. (2) Otherwise allowable depreciation deduction—(i) In general. Before determining the amount otherwise allowable as a depreciation deduction for the qualified property for the placedin-service year and any subsequent taxable year, the taxpayer must determine the remaining adjusted depreciable basis of the qualified property. This remaining adjusted depreciable basis is equal to the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of the qualified property reduced by the amount of the additional first year depreciation allowed or allowable, whichever is greater. The remaining adjusted depreciable basis of the qualified property is then depreciated using the applicable depreciation provisions under the Internal Revenue Code for the qualified property. The remaining adjusted depreciable basis of the qualified property that is MACRS property is also the basis to which the annual depreciation rates in the optional depreciation tables apply (for further guidance, see section 8 of Rev. Proc. 87–57 (1987–2 C.B. 687) and § 601.601(d)(2)(ii)(b) of this chapter). The depreciation deduction allowable for the remaining adjusted depreciable basis of the qualified property is affected by a taxable year of less than 12 months. (ii) Alternative minimum tax. For alternative minimum tax purposes, the depreciation deduction allowable for the remaining adjusted depreciable basis of the qualified property is based on the remaining adjusted depreciable basis for alternative minimum tax purposes. The remaining adjusted depreciable basis of the qualified property for alternative minimum tax purposes is depreciated using the same depreciation method, recovery period (or useful life in the case of computer software), and convention that apply to the qualified property for regular tax purposes. VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 (3) Examples. This paragraph (e) is illustrated by the following examples: (i) Example 1. On March 1, 2023, SS, a calendar-year taxpayer, purchased and placed in service qualified property that costs $1 million and is 5-year property under section 168(e). SS depreciates its 5-year property placed in service in 2023 using the optional depreciation table that corresponds with the general depreciation system, the 200-percent declining balance method, a 5year recovery period, and the half-year convention. For 2023, SS is allowed an 80percent additional first year depreciation deduction of $800,000 (the unadjusted depreciable basis of $1 million multiplied by 0.80). Next, SS must reduce the unadjusted depreciable basis of $1 million by the additional first year depreciation deduction of $800,000 to determine the remaining adjusted depreciable basis of $200,000. Then, SS’ depreciation deduction allowable in 2023 for the remaining adjusted depreciable basis of $200,000 is $40,000 (the remaining adjusted depreciable basis of $200,000 multiplied by the annual depreciation rate of 0.20 for recovery year 1). (ii) Example 2. On June 1, 2023, TT, a calendar-year taxpayer, purchased and placed in service qualified property that costs $1,500,000. The property qualifies for the expensing election under section 179 and is 5-year property under section 168(e). TT did not purchase any other section 179 property in 2023. TT makes the election under section 179 for the property and depreciates its 5year property placed in service in 2023 using the optional depreciation table that corresponds with the general depreciation system, the 200-percent declining balance method, a 5-year recovery period, and the half-year convention. Assume the maximum section 179 deduction for 2023 is $1,000,000. For 2023, TT is first allowed a $1,000,000 deduction under section 179. Next, TT must reduce the cost of $1,500,000 by the section 179 deduction of $1,000,000 to determine the unadjusted depreciable basis of $500,000. Then, for 2023, TT is allowed an 80-percent additional first year depreciation deduction of $400,000 (the unadjusted depreciable basis of $500,000 multiplied by 0.80). Next, TT must reduce the unadjusted depreciable basis of $500,000 by the additional first year depreciation deduction of $400,000 to determine the remaining adjusted depreciable basis of $100,000. Then, TT’s depreciation deduction allowable in 2023 for the remaining adjusted depreciable basis of $100,000 is $20,000 (the remaining adjusted depreciable basis of $100,000 multiplied by the annual depreciation rate of 0.20 for recovery year 1). (f) Elections under section 168(k)—(1) Election not to deduct additional first year depreciation—(i) In general. A taxpayer may make an election not to deduct the additional first year depreciation for any class of property that is qualified property placed in service during the taxable year. If this election is made, the election applies to all qualified property that is in the same class of property and placed in service in the same taxable year, and no PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 additional first year depreciation deduction is allowable for the property placed in service during the taxable year in the class of property, except as provided in § 1.743–1(j)(4)(i)(B)(1). (ii) Definition of class of property. For purposes of this paragraph (f)(1), the term class of property means: (A) Except for the property described in paragraphs (f)(1)(ii)(B) and (D), and (f)(2) of this section, each class of property described in section 168(e) (for example, 5-year property); (B) Water utility property as defined in section 168(e)(5) and depreciated under section 168; (C) Computer software as defined in, and depreciated under, section 167(f)(1) and § 1.167(a)–14(b); (D) Qualified improvement property as defined in § 1.168(b)–1(a)(5)(i)(C) and (a)(5)(ii), and depreciated under section 168; (E) Each separate production, as defined in § 1.181–3(b), of a qualified film or television production; (F) Each separate production, as defined in section 181(e)(2), of a qualified live theatrical production; or (G) A partner’s basis adjustment in partnership assets under section 743(b) for each class of property described in paragraphs (f)(1)(ii)(A) through (F), and (f)(2) of this section (for further guidance, see § 1.743–1(j)(4)(i)(B)(1)). (iii) Time and manner for making election—(A) Time for making election. Except as provided in paragraph (f)(6) of this section, any election specified in paragraph (f)(1)(i) of this section must be made by the due date, including extensions, of the Federal tax return for the taxable year in which the qualified property is placed in service by the taxpayer. (B) Manner of making election. Except as provided in paragraph (f)(6) of this section, any election specified in paragraph (f)(1)(i) of this section must be made in the manner prescribed on Form 4562, ‘‘Depreciation and Amortization,’’ and its instructions. The election is made separately by each person owning qualified property (for example, for each member of a consolidated group by the common parent of the group, by the partnership (including a lower-tier partnership; also including basis adjustments in the partnership assets under section 743(b)), or by the S corporation). If Form 4562 is revised or renumbered, any reference in this section to that form shall be treated as a reference to the revised or renumbered form. (iv) Failure to make election. If a taxpayer does not make the election specified in paragraph (f)(1)(i) of this section within the time and in the E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations manner prescribed in paragraph (f)(1)(iii) of this section, the amount of depreciation allowable for that property under section 167 or 168, as applicable, must be determined for the placed-inservice year and for all subsequent taxable years by taking into account the additional first year depreciation deduction. Thus, any election specified in paragraph (f)(1)(i) of this section shall not be made by the taxpayer in any other manner (for example, the election cannot be made through a request under section 446(e) to change the taxpayer’s method of accounting). (2) Election to apply section 168(k)(5) for specified plants—(i) In general. A taxpayer may make an election to apply section 168(k)(5) to one or more specified plants that are planted, or grafted to a plant that has already been planted, by the taxpayer in the ordinary course of the taxpayer’s farming business, as defined in section 263A(e)(4). If this election is made for a specified plant, such plant is not treated as qualified property under section 168(k) and this section in its placed-in-service year. (ii) Time and manner for making election—(A) Time for making election. Except as provided in paragraph (f)(6) of this section, any election specified in paragraph (f)(2)(i) of this section must be made by the due date, including extensions, of the Federal tax return for the taxable year in which the taxpayer planted or grafted the specified plant to which the election applies. (B) Manner of making election. Except as provided in paragraph (f)(6) of this section, any election specified in paragraph (f)(2)(i) of this section must be made in the manner prescribed on Form 4562, ‘‘Depreciation and Amortization,’’ and its instructions. The election is made separately by each person owning specified plants (for example, for each member of a consolidated group by the common parent of the group, by the partnership (including a lower-tier partnership), or by the S corporation). If Form 4562 is revised or renumbered, any reference in this section to that form shall be treated as a reference to the revised or renumbered form. (iii) Failure to make election. If a taxpayer does not make the election specified in paragraph (f)(2)(i) of this section for a specified plant within the time and in the manner prescribed in paragraph (f)(2)(ii) of this section, the specified plant is treated as qualified property under section 168(k), assuming all requirements are met, in the taxable year in which such plant is placed in service by the taxpayer. Thus, any election specified in paragraph (f)(2)(i) VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 of this section shall not be made by the taxpayer in any other manner (for example, the election cannot be made through a request under section 446(e) to change the taxpayer’s method of accounting). (3) Election for qualified property placed in service during the 2017 taxable year—(i) In general. A taxpayer may make an election to deduct 50 percent, instead of 100 percent, additional first year depreciation for all qualified property acquired after September 27, 2017, by the taxpayer and placed in service by the taxpayer during its taxable year that includes September 28, 2017. If a taxpayer makes an election to apply section 168(k)(5) for its taxable year that includes September 28, 2017, the taxpayer also may make an election to deduct 50 percent, instead of 100 percent, additional first year depreciation for all specified plants that are planted, or grafted to a plant that has already been planted, after September 27, 2017, by the taxpayer in the ordinary course of the taxpayer’s farming business during such taxable year. (ii) Time and manner for making election—(A) Time for making election. Except as provided in paragraph (f)(6) of this section, any election specified in paragraph (f)(3)(i) of this section must be made by the due date, including extensions, of the Federal tax return for the taxpayer’s taxable year that includes September 28, 2017. (B) Manner of making election. Except as provided in paragraph (f)(6) of this section, any election specified in paragraph (f)(3)(i) of this section must be made in the manner prescribed on the 2017 Form 4562, ‘‘Depreciation and Amortization,’’ and its instructions. The election is made separately by each person owning qualified property (for example, for each member of a consolidated group by the common parent of the group, by the partnership (including a lower-tier partnership), or by the S corporation). (iii) Failure to make election. If a taxpayer does not make the election specified in paragraph (f)(3)(i) of this section within the time and in the manner prescribed in paragraph (f)(3)(ii) of this section, the amount of depreciation allowable for qualified property under section 167 or 168, as applicable, acquired and placed in service, or planted or grafted, as applicable, by the taxpayer after September 27, 2017, must be determined for the taxable year that includes September 28, 2017, and for all subsequent taxable years by taking into account the 100-percent additional first year depreciation deduction, unless the taxpayer makes the election specified in PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 50141 paragraph (f)(1)(i) of this section within the time and in the manner prescribed in paragraph (f)(1)(iii) of this section for the class of property in which the qualified property is included. Thus, any election specified in paragraph (f)(3)(i) of this section shall not be made by the taxpayer in any other manner (for example, the election cannot be made through a request under section 446(e) to change the taxpayer’s method of accounting). (4) Alternative minimum tax. If a taxpayer makes an election specified in paragraph (f)(1) of this section for a class of property or in paragraph (f)(2) of this section for a specified plant, the depreciation adjustments under section 56 and the regulations in this part under section 56 do not apply to the property or specified plant, as applicable, to which that election applies for purposes of computing the taxpayer’s alternative minimum taxable income. If a taxpayer makes an election specified in paragraph (f)(3) of this section for all qualified property, see paragraphs (e)(1)(iv) and (e)(2)(ii) of this section. (5) Revocation of election–(i) In general. Except as provided in paragraphs (f)(5)(ii) and (f)(6) of this section, an election specified in this paragraph (f), once made, may be revoked only by filing a request for a private letter ruling and obtaining the Commissioner of Internal Revenue’s written consent to revoke the election. The Commissioner may grant a request to revoke the election if the taxpayer acted reasonably and in good faith, and the revocation will not prejudice the interests of the Government. See generally § 301.9100–3 of this chapter. An election specified in this paragraph (f) may not be revoked through a request under section 446(e) to change the taxpayer’s method of accounting. (ii) Automatic 6-month extension. If a taxpayer made an election specified in this paragraph (f), an automatic extension of 6 months from the due date of the taxpayer’s Federal tax return, excluding extensions, for the placed-inservice year or the taxable year in which the specified plant is planted or grafted, as applicable, is granted to revoke that election, provided the taxpayer timely filed the taxpayer’s Federal tax return for the placed-in-service year or the taxable year in which the specified plant is planted or grafted, as applicable, and, within this 6-month extension period, the taxpayer, and all taxpayers whose tax liability would be affected by the election, file an amended Federal tax return for the placed-inservice year or the taxable year in which the specified plant is planted or grafted, as applicable, in a manner that is E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 50142 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations consistent with the revocation of the election. (6) Special rules for 2016 and 2017 returns. For an election specified in this paragraph (f) for qualified property placed in service, or for a specified plant that is planted, or grafted to a plant that has already been planted, by the taxpayer during its taxable year that included September 28, 2017, the taxpayer should refer to Rev. Proc. 2019–33 (2019–34 I.R.B. 662) (see § 601.601(d)(2)(ii)(b) of this chapter) for the time and manner of making the election on the 2016 or 2017 Federal tax return. (g) Special rules—(1) Property placed in service and disposed of in the same taxable year—(i) In general. Except as provided in paragraphs (g)(1)(ii) and (iii) of this section, the additional first year depreciation deduction is not allowed for qualified property placed in service or planted or grafted, as applicable, and disposed of during the same taxable year. If a partnership interest is acquired and disposed of during the same taxable year, the additional first year depreciation deduction is not allowed for any section 743(b) adjustment arising from the initial acquisition. Also, if qualified property is placed in service and disposed of during the same taxable year and then reacquired and again placed in service in a subsequent taxable year, the additional first year depreciation deduction is not allowable for the property in the subsequent taxable year. (ii) Technical termination of a partnership. In the case of a technical termination of a partnership under section 708(b)(1)(B) in a taxable year beginning before January 1, 2018, the additional first year depreciation deduction is allowable for any qualified property placed in service or planted or grafted, as applicable, by the terminated partnership during the taxable year of termination and contributed by the terminated partnership to the new partnership. The allowable additional first year depreciation deduction for the qualified property shall not be claimed by the terminated partnership but instead shall be claimed by the new partnership for the new partnership’s taxable year in which the qualified property was contributed by the terminated partnership to the new partnership. However, if qualified property is both placed in service or planted or grafted, as applicable, and contributed to a new partnership in a transaction described in section 708(b)(1)(B) by the terminated partnership during the taxable year of termination, and if such property is disposed of by the new partnership in VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 the same taxable year the new partnership received such property from the terminated partnership, then no additional first year depreciation deduction is allowable to either partnership. (iii) Section 168(i)(7) transactions. If any qualified property is transferred in a transaction described in section 168(i)(7) in the same taxable year that the qualified property is placed in service or planted or grafted, as applicable, by the transferor, the additional first year depreciation deduction is allowable for the qualified property. If a partnership interest is purchased and transferred in a transaction described in section 168(i)(7) in the same taxable year, the additional first year depreciation deduction is allowable for any section 743(b) adjustment that arises from the initial acquisition with respect to qualified property held by the partnership, provided the requirements of paragraph (b)(3)(iv)(D) of this section and all other requirements of section 168(k) and this section are satisfied. The allowable additional first year depreciation deduction for the qualified property for the transferor’s taxable year in which the property is placed in service or planted or grafted, as applicable, is allocated between the transferor and the transferee on a monthly basis. The allowable additional first year depreciation deduction for a section 743(b) adjustment with respect to qualified property held by the partnership is allocated between the transferor and the transferee on a monthly basis notwithstanding that under § 1.743–1(f) a transferee’s section 743(b) adjustment is determined without regard to a transferors section 743(b) adjustment. These allocations shall be made in accordance with the rules in § 1.168(d)–1(b)(7)(ii) for allocating the depreciation deduction between the transferor and the transferee. However, solely for purposes of this section, if the qualified property is transferred in a section 721(a) transaction to a partnership that has as a partner a person, other than the transferor, who previously had a depreciable interest in the qualified property, in the same taxable year that the qualified property is acquired or planted or grafted, as applicable, by the transferor, the qualified property is deemed to be placed in service or planted or grafted, as applicable, by the transferor during that taxable year, and the allowable additional first year depreciation deduction is allocated entirely to the transferor and not to the partnership. Additionally, if qualified PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 property is both placed in service or planted or grafted, as applicable, and transferred in a transaction described in section 168(i)(7) by the transferor during the same taxable year, and if such property is disposed of by the transferee, other than by a transaction described in section 168(i)(7), during the same taxable year the transferee received such property from the transferor, then no additional first year depreciation deduction is allowable to either party. (iv) Examples. The application of this paragraph (g)(1) is illustrated by the following examples: (A) Example 1. UU and VV are equal partners in Partnership JL, a general partnership. Partnership JL is a calendar-year taxpayer. On October 1, 2017, Partnership JL purchased and placed in service qualified property at a cost of $30,000. On November 1, 2017, UU sells its entire 50 percent interest to WW in a transfer that terminates the partnership under section 708(b)(1)(B). As a result, terminated Partnership JL is deemed to have contributed the qualified property to new Partnership JL. Pursuant to paragraph (g)(1)(ii) of this section, new Partnership JL, not terminated Partnership JL, is eligible to claim the 100-percent additional first year depreciation deduction allowable for the qualified property for the taxable year 2017, assuming all other requirements are met. (B) Example 2. On January 5, 2018, XX purchased and placed in service qualified property for a total amount of $9,000. On August 20, 2018, XX transferred this qualified property to Partnership BC in a transaction described in section 721(a). No other partner of Partnership BC has ever had a depreciable interest in the qualified property. XX and Partnership BC are calendar-year taxpayers. Because the transaction between XX and Partnership BC is a transaction described in section 168(i)(7), pursuant to paragraph (g)(1)(iii) of this section, the 100-percent additional first year depreciation deduction allowable for the qualified property is allocated between XX and Partnership BC in accordance with the rules in § 1.168(d)–1(b)(7)(ii) for allocating the depreciation deduction between the transferor and the transferee. Accordingly, the 100-percent additional first year depreciation deduction allowable of $9,000 for the qualified property for 2018 is allocated between XX and Partnership BC based on the number of months that XX and Partnership BC held the qualified property in service during 2018. Thus, because the qualified property was held in service by XX for 7 of 12 months, which includes the month in which XX placed the qualified property in service but does not include the month in which the qualified property was transferred, XX is allocated $5,250 (7⁄12 × $9,000 additional first year depreciation deduction). Partnership BC is allocated $3,750, the remaining 5⁄12 of the $9,000 additional first year depreciation deduction allowable for the qualified property. (2) Redetermination of basis. If the unadjusted depreciable basis, as defined E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations in § 1.168(b)–1(a)(3), of qualified property is redetermined (for example, due to contingent purchase price or discharge of indebtedness) before January 1, 2027, or in the case of property described in section 168(k)(2)(B) or (C), is redetermined before January 1, 2028, the additional first year depreciation deduction allowable for the qualified property is redetermined as follows: (i) Increase in basis. For the taxable year in which an increase in basis of qualified property occurs, the taxpayer shall claim an additional first year depreciation deduction for qualified property by multiplying the amount of the increase in basis for this property by the applicable percentage for the taxable year in which the underlying property was placed in service by the taxpayer. For purposes of this paragraph (g)(2)(i), the additional first year depreciation deduction applies to the increase in basis only if the underlying property is qualified property. To determine the amount otherwise allowable as a depreciation deduction for the increase in basis of qualified property, the amount of the increase in basis of the qualified property must be reduced by the additional first year depreciation deduction allowed or allowable, whichever is greater, for the increase in basis and the remaining increase in basis of— (A) Qualified property, except for computer software described in paragraph (b)(2)(i)(B) of this section, a qualified film or television production described in paragraph (b)(2)(i)(E) of this section, or a qualified live theatrical production described in paragraph (b)(2)(i)(F) of this section, is depreciated over the recovery period of the qualified property remaining as of the beginning of the taxable year in which the increase in basis occurs, and using the same depreciation method and convention applicable to the qualified property that applies for the taxable year in which the increase in basis occurs; and (B) Computer software, as defined in paragraph (b)(2)(i)(B) of this section, that is qualified property is depreciated ratably over the remainder of the 36month period, the useful life under section 167(f)(1), as of the beginning of the first day of the month in which the increase in basis occurs. (ii) Decrease in basis. For the taxable year in which a decrease in basis of qualified property occurs, the taxpayer shall reduce the total amount otherwise allowable as a depreciation deduction for all of the taxpayer’s depreciable property by the excess additional first year depreciation deduction previously claimed for the qualified property. If, for VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 such taxable year, the excess additional first year depreciation deduction exceeds the total amount otherwise allowable as a depreciation deduction for all of the taxpayer’s depreciable property, the taxpayer shall take into account a negative depreciation deduction in computing taxable income. The excess additional first year depreciation deduction for qualified property is determined by multiplying the amount of the decrease in basis for this property by the applicable percentage for the taxable year in which the underlying property was placed in service by the taxpayer. For purposes of this paragraph (g)(2)(ii), the additional first year depreciation deduction applies to the decrease in basis only if the underlying property is qualified property. Also, if the taxpayer establishes by adequate records or other sufficient evidence that the taxpayer claimed less than the additional first year depreciation deduction allowable for the qualified property before the decrease in basis, or if the taxpayer claimed more than the additional first year depreciation deduction allowable for the qualified property before the decrease in basis, the excess additional first year depreciation deduction is determined by multiplying the amount of the decrease in basis by the additional first year depreciation deduction percentage actually claimed by the taxpayer for the qualified property before the decrease in basis. To determine the amount to reduce the total amount otherwise allowable as a depreciation deduction for all of the taxpayer’s depreciable property for the excess depreciation previously claimed, other than the additional first year depreciation deduction, resulting from the decrease in basis of the qualified property, the amount of the decrease in basis of the qualified property must be adjusted by the excess additional first year depreciation deduction that reduced the total amount otherwise allowable as a depreciation deduction, as determined under this paragraph (g)(2)(ii), and the remaining decrease in basis of— (A) Qualified property, except for computer software described in paragraph (b)(2)(i)(B) of this section, a qualified film or television production described in paragraph (b)(2)(i)(E) of this section, or a qualified live theatrical production described in paragraph (b)(2)(i)(F) of this section, reduces the amount otherwise allowable as a depreciation deduction over the recovery period of the qualified property remaining as of the beginning of the taxable year in which the PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 50143 decrease in basis occurs, and using the same depreciation method and convention of the qualified property that applies in the taxable year in which the decrease in basis occurs. If, for any taxable year, the reduction to the amount otherwise allowable as a depreciation deduction, as determined under this paragraph (g)(2)(ii)(A), exceeds the total amount otherwise allowable as a depreciation deduction for all of the taxpayer’s depreciable property, the taxpayer shall take into account a negative depreciation deduction in computing taxable income; and (B) Computer software, as defined in paragraph (b)(2)(i)(B) of this section, that is qualified property reduces the amount otherwise allowable as a depreciation deduction over the remainder of the 36-month period, the useful life under section 167(f)(1), as of the beginning of the first day of the month in which the decrease in basis occurs. If, for any taxable year, the reduction to the amount otherwise allowable as a depreciation deduction, as determined under this paragraph (g)(2)(ii)(B), exceeds the total amount otherwise allowable as a depreciation deduction for all of the taxpayer’s depreciable property, the taxpayer shall take into account a negative depreciation deduction in computing taxable income. (iii) Definitions. Except as otherwise expressly provided by the Internal Revenue Code (for example, section 1017(a)), the regulations under the Internal Revenue Code, or other guidance published in the Internal Revenue Bulletin for purposes of this paragraph (g)(2)— (A) An increase in basis occurs in the taxable year an amount is taken into account under section 461; and (B) A decrease in basis occurs in the taxable year an amount would be taken into account under section 451. (iv) Examples. The application of this paragraph (g)(2) is illustrated by the following examples: (A) Example 1. (1) On May 15, 2023, YY, a cash-basis taxpayer, purchased and placed in service qualified property that is 5-year property at a cost of $200,000. In addition to the $200,000, YY agrees to pay the seller 25 percent of the gross profits from the operation of the property in 2023. On May 15, 2024, YY paid to the seller an additional $10,000. YY depreciates the 5-year property placed in service in 2023 using the optional depreciation table that corresponds with the general depreciation system, the 200-percent declining balance method, a 5-year recovery period, and the half-year convention. (2) For 2023, YY is allowed an 80-percent additional first year depreciation deduction of $160,000 (the unadjusted depreciable basis E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 50144 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations of $200,000 multiplied by 0.80). In addition, YY’s depreciation deduction for 2023 for the remaining adjusted depreciable basis of $40,000 (the unadjusted depreciable basis of $200,000 reduced by the additional first year depreciation deduction of $160,000) is $8,000 (the remaining adjusted depreciable basis of $40,000 multiplied by the annual depreciation rate of 0.20 for recovery year 1). (3) For 2024, YY’s depreciation deduction for the remaining adjusted depreciable basis of $40,000 is $12,800 (the remaining adjusted depreciable basis of $40,000 multiplied by the annual depreciation rate of 0.32 for recovery year 2). In addition, pursuant to paragraph (g)(2)(i) of this section, YY is allowed an additional first year depreciation deduction for 2024 for the $10,000 increase in basis of the qualified property. Consequently, YY is allowed an additional first year depreciation deduction of $8,000 (the increase in basis of $10,000 multiplied by 0.80, the applicable percentage for 2023). Also, YY is allowed a depreciation deduction for 2024 attributable to the remaining increase in basis of $2,000 (the increase in basis of $10,000 reduced by the additional first year depreciation deduction of $8,000). The depreciation deduction allowable for 2024 attributable to the remaining increase in basis of $2,000 is $889 (the remaining increase in basis of $2,000 multiplied by 0.4444, which is equal to 1/remaining recovery period of 4.5 years at January 1, 2024, multiplied by 2). Accordingly, for 2024, YY’s total depreciation deduction allowable for the qualified property is $21,689 ($12,800 plus $8,000 plus $889). (B) Example 2. (1) On May 15, 2023, ZZ, a calendar-year taxpayer, purchased and placed in service qualified property that is 5year property at a cost of $400,000. To purchase the property, ZZ borrowed $250,000 from Bank1. On May 15, 2024, Bank1 forgives $50,000 of the indebtedness. ZZ makes the election provided in section 108(b)(5) to apply any portion of the reduction under section 1017 to the basis of the depreciable property of the taxpayer. ZZ depreciates the 5-year property placed in service in 2023 using the optional depreciation table that corresponds with the general depreciation system, the 200-percent declining balance method, a 5-year recovery period, and the half-year convention. (2) For 2023, ZZ is allowed an 80-percent additional first year depreciation deduction of $320,000 (the unadjusted depreciable basis of $400,000 multiplied by 0.80). In addition, ZZ’s depreciation deduction allowable for 2023 for the remaining adjusted depreciable basis of $80,000 (the unadjusted depreciable basis of $400,000 reduced by the additional first year depreciation deduction of $320,000) is $16,000 (the remaining adjusted depreciable basis of $80,000 multiplied by the annual depreciation rate of 0.20 for recovery year 1). (3) For 2024, ZZ’s deduction for the remaining adjusted depreciable basis of $80,000 is $25,600 (the remaining adjusted depreciable basis of $80,000 multiplied by the annual depreciation rate 0.32 for recovery year 2). Although Bank1 forgave the indebtedness in 2024, the basis of the property is reduced on January 1, 2025, VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 pursuant to sections 108(b)(5) and 1017(a) under which basis is reduced at the beginning of the taxable year following the taxable year in which the discharge of indebtedness occurs. (4) For 2025, ZZ’s deduction for the remaining adjusted depreciable basis of $80,000 is $15,360 (the remaining adjusted depreciable basis of $80,000 multiplied by the annual depreciation rate 0.192 for recovery year 3). However, pursuant to paragraph (g)(2)(ii) of this section, ZZ must reduce the amount otherwise allowable as a depreciation deduction for 2025 by the excess depreciation previously claimed for the $50,000 decrease in basis of the qualified property. Consequently, ZZ must reduce the amount of depreciation otherwise allowable for 2025 by the excess additional first year depreciation of $40,000 (the decrease in basis of $50,000 multiplied by 0.80, the applicable percentage for 2023). Also, ZZ must reduce the amount of depreciation otherwise allowable for 2025 by the excess depreciation attributable to the remaining decrease in basis of $10,000 (the decrease in basis of $50,000 reduced by the excess additional first year depreciation of $40,000). The reduction in the amount of depreciation otherwise allowable for 2025 for the remaining decrease in basis of $10,000 is $5,714 (the remaining decrease in basis of $10,000 multiplied by 0.5714, which is equal to (1/remaining recovery period of 3.5 years at January 1, 2025, multiplied by 2). Accordingly, assuming the qualified property is the only depreciable property owned by ZZ, for 2025, ZZ has a negative depreciation deduction for the qualified property of $30,354 ($15,360 minus $40,000 minus $5,714). (3) Sections 1245 and 1250 depreciation recapture. For purposes of section 1245 and §§ 1.1245–1 through –6, the additional first year depreciation deduction is an amount allowed or allowable for depreciation. Further, for purposes of section 1250(b) and § 1.1250–2, the additional first year depreciation deduction is not a straight line method. (4) Coordination with section 169. The additional first year depreciation deduction is allowable in the placed-inservice year of a certified pollution control facility, as defined in § 1.169– 2(a), that is qualified property even if the taxpayer makes the election to amortize the certified pollution control facility under section 169 and §§ 1.169– 1 through –4 in the certified pollution control facility’s placed-in-service year. (5) Like-kind exchanges and involuntary conversions—(i) Scope. The rules of this paragraph (g)(5) apply to replacement MACRS property or replacement computer software that is qualified property at the time of replacement provided the time of replacement is after September 27, 2017, and before January 1, 2027; or, in the case of replacement MACRS property or PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 replacement computer software that is qualified property described in section 168(k)(2)(B) or (C), the time of replacement is after September 27, 2017, and before January 1, 2028. (ii) Definitions. For purposes of this paragraph (g)(5), the following definitions apply: (A) Replacement MACRS property has the same meaning as that term is defined in § 1.168(i)–6(b)(1). (B) Relinquished MACRS property has the same meaning as that term is defined in § 1.168(i)–6(b)(2). (C) Replacement computer software is computer software, as defined in paragraph (b)(2)(i)(B) of this section, in the hands of the acquiring taxpayer that is acquired for other computer software in a like-kind exchange or in an involuntary conversion. (D) Relinquished computer software is computer software that is transferred by the taxpayer in a like-kind exchange or in an involuntary conversion. (E) Time of disposition has the same meaning as that term is defined in § 1.168(i)–6(b)(3) for relinquished MACRS property. For relinquished computer software, time of disposition is when the disposition of the relinquished computer software takes place under the convention determined under § 1.167(a)–14(b). (F) Except as provided in paragraph (g)(5)(iv) of this section, the time of replacement has the same meaning as that term is defined in § 1.168(i)–6(b)(4) for replacement MACRS property. For replacement computer software, the time of replacement is, except as provided in paragraph (g)(5)(iv) of this section, the later of— (1) When the replacement computer software is placed in service under the convention determined under § 1.167(a)–14(b); or (2) The time of disposition of the relinquished property. (G) Exchanged basis has the same meaning as that term is defined in § 1.168(i)–6(b)(7) for MACRS property, as defined in § 1.168(b)–1(a)(2). For computer software, the exchanged basis is determined after the amortization deductions for the year of disposition are determined under § 1.167(a)–14(b) and is the lesser of— (1) The basis in the replacement computer software, as determined under section 1031(d) and § 1.1031(d)–1, 1.1031(d)–2, 1.1031(j)–1, or 1.1031(k)–1; or section 1033(b) and § 1.1033(b)–1; or (2) The adjusted depreciable basis of the relinquished computer software. (H) Excess basis has the same meaning as that term is defined in § 1.168(i)–6(b)(8) for replacement MACRS property. For replacement E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations computer software, the excess basis is any excess of the basis in the replacement computer software, as determined under section 1031(d) and § 1.1031(d)–1, 1.1031(d)–2, 1.1031(j)–1, or 1.1031(k)–1; or section 1033(b) and § 1.1033(b)–1, over the exchanged basis as determined under paragraph (g)(5)(ii)(G) of this section. (I) Remaining exchanged basis is the exchanged basis as determined under paragraph (g)(5)(ii)(G) of this section reduced by— (1) The percentage of such basis attributable to the taxpayer’s use of property for the taxable year other than in the taxpayer’s trade or business or for the production of income; and (2) Any adjustments to basis provided by other provisions of the Code and the regulations under the Code (including section 1016(a)(2) and (3)) for periods prior to the disposition of the relinquished property. (J) Remaining excess basis is the excess basis as determined under paragraph (g)(5)(ii)(H) of this section reduced by— (1) The percentage of such basis attributable to the taxpayer’s use of property for the taxable year other than in the taxpayer’s trade or business or for the production of income; (2) Any portion of the basis the taxpayer properly elects to treat as an expense under section 179 or 179C; and (3) Any adjustments to basis provided by other provisions of the Code and the regulations under the Code. (K) Year of disposition has the same meaning as that term is defined in § 1.168(i)–6(b)(5). (L) Year of replacement has the same meaning as that term is defined in § 1.168(i)–6(b)(6). (M) Like-kind exchange has the same meaning as that term is defined in § 1.168(i)–6(b)(11). (N) Involuntary conversion has the same meaning as that term is defined in § 1.168(i)–6(b)(12). (iii) Computation—(A) In general. If the replacement MACRS property or the replacement computer software, as applicable, meets the original use requirement in paragraph (b)(3)(ii) of this section and all other requirements of section 168(k) and this section, the remaining exchanged basis for the year of replacement and the remaining excess basis, if any, for the year of replacement for the replacement MACRS property or the replacement computer software, as applicable, are eligible for the additional first year depreciation deduction under this section. If the replacement MACRS property or the replacement computer software, as applicable, meets the used VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 property acquisition requirements in paragraph (b)(3)(iii) of this section and all other requirements of section 168(k) and this section, only the remaining excess basis for the year of replacement for the replacement MACRS property or the replacement computer software, as applicable, is eligible for the additional first year depreciation deduction under this section. See paragraph (b)(3)(iii)(A)(3) of this section. The additional first year depreciation deduction applies to the remaining exchanged basis and any remaining excess basis, as applicable, of the replacement MACRS property or the replacement computer software, as applicable, if the time of replacement is after September 27, 2017, and before January 1, 2027; or, in the case of replacement MACRS property or replacement computer software, as applicable, described in section 168(k)(2)(B) or (C), the time of replacement is after September 27, 2017, and before January 1, 2028. The additional first year depreciation deduction is computed separately for the remaining exchanged basis and any remaining excess basis, as applicable. (B) Year of disposition and year of replacement. The additional first year depreciation deduction is allowable for the replacement MACRS property or replacement computer software in the year of replacement. However, the additional first year depreciation deduction is not allowable for the relinquished MACRS property or the relinquished computer software, as applicable, if the relinquished MACRS property or the relinquished computer software, as applicable, is placed in service and disposed of in a like-kind exchange or in an involuntary conversion in the same taxable year. (C) Property described in section 168(k)(2)(B). For purposes of paragraph (g)(5)(iii)(A) of this section, the total of the remaining exchanged basis and the remaining excess basis, if any, of the replacement MACRS property that is qualified property described in section 168(k)(2)(B) and meets the original use requirement in paragraph (b)(3)(ii) of this section is limited to the total of the property’s remaining exchanged basis and remaining excess basis, if any, attributable to the property’s manufacture, construction, or production after September 27, 2017, and before January 1, 2027. For purposes of paragraph (g)(5)(iii)(A) of this section, the remaining excess basis, if any, of the replacement MACRS property that is qualified property described in section 168(k)(2)(B) and meets the used property acquisition requirements in paragraph (b)(3)(iii) of PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 50145 this section is limited to the property’s remaining excess basis, if any, attributable to the property’s manufacture, construction, or production after September 27, 2017, and before January 1, 2027. (D) Effect of § 1.168(i)–6(i)(1) election. If a taxpayer properly makes the election under § 1.168(i)–6(i)(1) not to apply § 1.168(i)–6 for any MACRS property, as defined in § 1.168(b)– 1(a)(2), involved in a like-kind exchange or involuntary conversion, then: (1) If the replacement MACRS property meets the original use requirement in paragraph (b)(3)(ii) of this section and all other requirements of section 168(k) and this section, the total of the exchanged basis, as defined in § 1.168(i)–6(b)(7), and the excess basis, as defined in § 1.168(i)–6(b)(8), if any, in the replacement MACRS property is eligible for the additional first year depreciation deduction under this section; or (2) If the replacement MACRS property meets the used property acquisition requirements in paragraph (b)(3)(iii) of this section and all other requirements of section 168(k) and this section, only the excess basis, as defined in § 1.168(i)–6(b)(8), if any, in the replacement MACRS property is eligible for the additional first year depreciation deduction under this section. (E) Alternative minimum tax. The additional first year depreciation deduction is allowed for alternative minimum tax purposes for the year of replacement of replacement MACRS property or replacement computer software, as applicable, that is qualified property. If the replacement MACRS property or the replacement computer software, as applicable, meets the original use requirement in paragraph (b)(3)(ii) of this section and all other requirements of section 168(k) and this section, the additional first year depreciation deduction for alternative minimum tax purposes is based on the remaining exchanged basis and the remaining excess basis, if any, of the replacement MACRS property or the replacement computer software, as applicable, for alternative minimum tax purposes. If the replacement MACRS property or the replacement computer software, as applicable, meets the used property acquisition requirements in paragraph (b)(3)(iii) of this section and all other requirements of section 168(k) and this section, the additional first year depreciation deduction for alternative minimum tax purposes is based on the remaining excess basis, if any, of the replacement MACRS property or the replacement computer software, as E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 50146 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations applicable, for alternative minimum tax purposes. (iv) Replacement MACRS property or replacement computer software that is acquired and placed in service before disposition of relinquished MACRS property or relinquished computer software. If, in an involuntary conversion, a taxpayer acquires and places in service the replacement MACRS property or the replacement computer software, as applicable, before the time of disposition of the involuntarily converted MACRS property or the involuntarily converted computer software, as applicable; and the time of disposition of the involuntarily converted MACRS property or the involuntarily converted computer software, as applicable, is after December 31, 2026, or, in the case of property described in service 168(k)(2)(B) or (C), after December 31, 2027, then— (A) The time of replacement for purposes of this paragraph (g)(5) is when the replacement MACRS property or replacement computer software, as applicable, is placed in service by the taxpayer, provided the threat or imminence of requisition or condemnation of the involuntarily converted MACRS property or involuntarily converted computer software, as applicable, existed before January 1, 2027, or, in the case of property described in section 168(k)(2)(B) or (C), existed before January 1, 2028; and (B) The taxpayer depreciates the replacement MACRS property or replacement computer software, as applicable, in accordance with paragraph (e) of this section. However, at the time of disposition of the involuntarily converted MACRS property, the taxpayer determines the exchanged basis, as defined in § 1.168(i)–6(b)(7), and the excess basis, as defined in § 1.168(i)–6(b)(8), of the replacement MACRS property and begins to depreciate the depreciable exchanged basis, as defined in § 1.168(i)–6(b)(9), of the replacement MACRS property in accordance with § 1.168(i)–6(c). The depreciable excess basis, as defined in § 1.168(i)–6(b)(10), of the replacement MACRS property continues to be depreciated by the taxpayer in accordance with the first sentence of this paragraph (g)(5)(iv)(B). Further, in the year of disposition of the involuntarily converted MACRS property, the taxpayer must include in taxable income the excess of the depreciation deductions allowable, including the additional first year depreciation deduction allowable, on the unadjusted depreciable basis of the VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 replacement MACRS property over the additional first year depreciation deduction that would have been allowable to the taxpayer on the remaining exchanged basis of the replacement MACRS property at the time of replacement, as defined in paragraph (g)(5)(iv)(A) of this section, plus the depreciation deductions that would have been allowable, including the additional first year depreciation deduction allowable, to the taxpayer on the depreciable excess basis of the replacement MACRS property from the date the replacement MACRS property was placed in service by the taxpayer, taking into account the applicable convention, to the time of disposition of the involuntarily converted MACRS property. Similar rules apply to replacement computer software. (v) Examples. The application of this paragraph (g)(5) is illustrated by the following examples: (A) Example 1. (1) In April 2016, CSK, a calendar-year corporation, acquired for $200,000 and placed in service Canopy V1, a gas station canopy. Canopy V1 is qualified property under section 168(k)(2), as in effect on the day before amendment by the Act, and is 5-year property under section 168(e). CSK depreciated Canopy V1 under the general depreciation system of section 168(a) by using the 200-percent declining balance method of depreciation, a 5-year recovery period, and the half-year convention. CSK elected to use the optional depreciation tables to compute the depreciation allowance for Canopy V1. In November 2017, Canopy V1 was destroyed in a fire and was no longer usable in CSK’s business. In December 2017, in an involuntary conversion, CSK acquired and placed in service Canopy W1 with all of the $160,000 of insurance proceeds CSK received due to the loss of Canopy V1. Canopy W1 is qualified property under section 168(k)(2) and this section, and is 5year property under section 168(e). Canopy W1 also meets the original use requirement in paragraph (b)(3)(ii) of this section. CSK did not make the election under § 1.168(i)–6(i)(1). (2) For 2016, CSK is allowed a 50-percent additional first year depreciation deduction of $100,000 for Canopy V1 (the unadjusted depreciable basis of $200,000 multiplied by 0.50), and a regular MACRS depreciation deduction of $20,000 for Canopy V1 (the remaining adjusted depreciable basis of $100,000 multiplied by the annual depreciation rate of 0.20 for recovery year 1). (3) For 2017, CSK is allowed a regular MACRS depreciation deduction of $16,000 for Canopy V1 (the remaining adjusted depreciable basis of $100,000 multiplied by the annual depreciation rate of 0.32 for recovery year 2 × 1⁄2 year). (4) Pursuant to paragraph (g)(5)(iii)(A) of this section, the additional first year depreciation deduction allowable for Canopy W1 for 2017 equals $64,000 (100 percent of Canopy W1’s remaining exchanged basis at the time of replacement of $64,000 (Canopy V1’s remaining adjusted depreciable basis of PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 $100,000 minus 2016 regular MACRS depreciation deduction of $20,000 minus 2017 regular MACRS depreciation deduction of $16,000)). (B) Example 2. (1) The facts are the same as in Example 1 of paragraph (g)(5)(v)(A)(1) of this section, except CSK elected not to deduct the additional first year depreciation for 5-year property placed in service in 2016. CSK deducted the additional first year depreciation for 5-year property placed in service in 2017. (2) For 2016, CSK is allowed a regular MACRS depreciation deduction of $40,000 for Canopy V1 (the unadjusted depreciable basis of $200,000 multiplied by the annual depreciation rate of 0.20 for recovery year 1). (3) For 2017, CSK is allowed a regular MACRS depreciation deduction of $32,000 for Canopy V1 (the unadjusted depreciable basis of $200,000 multiplied by the annual depreciation rate of 0.32 for recovery year 2 × 1⁄2 year). (4) Pursuant to paragraph (g)(5)(iii)(A) of this section, the additional first year depreciation deduction allowable for Canopy W1 for 2017 equals $128,000 (100 percent of Canopy W1’s remaining exchanged basis at the time of replacement of $128,000 (Canopy V1’s unadjusted depreciable basis of $200,000 minus 2016 regular MACRS depreciation deduction of $40,000 minus 2017 regular MACRS depreciation deduction of $32,000)). (C) Example 3. The facts are the same as in Example 1 of paragraph (g)(5)(v)(A)(1) of this section, except Canopy W1 meets the used property acquisition requirements in paragraph (b)(3)(iii) of this section. Because the remaining excess basis of Canopy W1 is zero, CSK is not allowed any additional first year depreciation for Canopy W1 pursuant to paragraph (g)(5)(iii)(A) of this section. (D) Example 4. (1) In December 2016, AB, a calendar-year corporation, acquired for $10,000 and placed in service Computer X2. Computer X2 is qualified property under section 168(k)(2), as in effect on the day before amendment by the Act, and is 5-year property under section 168(e). AB depreciated Computer X2 under the general depreciation system of section 168(a) by using the 200-percent declining balance method of depreciation, a 5-year recovery period, and the half-year convention. AB elected to use the optional depreciation tables to compute the depreciation allowance for Computer X2. In November 2017, AB acquired Computer Y2 by exchanging Computer X2 and $1,000 cash in a like-kind exchange. Computer Y2 is qualified property under section 168(k)(2) and this section, and is 5-year property under section 168(e). Computer Y2 also meets the original use requirement in paragraph (b)(3)(ii) of this section. AB did not make the election under § 1.168(i)–6(i)(1). (2) For 2016, AB is allowed a 50-percent additional first year depreciation deduction of $5,000 for Computer X2 (unadjusted basis of $10,000 multiplied by 0.50), and a regular MACRS depreciation deduction of $1,000 for Computer X2 (the remaining adjusted depreciable basis of $5,000 multiplied by the annual depreciation rate of 0.20 for recovery year 1). E:\FR\FM\24SER2.SGM 24SER2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations (3) For 2017, AB is allowed a regular MACRS depreciation deduction of $800 for Computer X2 (the remaining adjusted depreciable basis of $5,000 multiplied by the annual depreciation rate of 0.32 for recovery year 2 × 1⁄2 year). (4) Pursuant to paragraph (g)(5)(iii)(A) of this section, the 100-percent additional first year depreciation deduction for Computer Y2 for 2017 is allowable for the remaining exchanged basis at the time of replacement of $3,200 (Computer X2’s unadjusted depreciable basis of $10,000 minus additional first year depreciation deduction allowable of $5,000 minus the 2016 regular MACRS depreciation deduction of $1,000 minus the 2017 regular MACRS depreciation deduction of $800) and for the remaining excess basis at the time of replacement of $1,000 (cash paid for Computer Y2). Thus, the 100-percent additional first year depreciation deduction allowable for Computer Y2 totals $4,200 for 2017. (E) Example 5. (1) In July 2017, BC, a calendar-year corporation, acquired for $20,000 and placed in service Equipment X3. Equipment X3 is qualified property under section 168(k)(2), as in effect on the day before amendment by the Act, and is 5-year property under section 168(e). BC depreciated Equipment X3 under the general depreciation system of section 168(a) by using the 200-percent declining balance method of depreciation, a 5-year recovery period, and the half-year convention. BC elected to use the optional depreciation tables to compute the depreciation allowance for Equipment X3. In December 2017, BC acquired Equipment Y3 by exchanging Equipment X3 and $5,000 cash in a like-kind exchange. Equipment Y3 is qualified property under section 168(k)(2) and this section, and is 5-year property under section 168(e). Equipment Y3 also meets the used property acquisition requirements in paragraph (b)(3)(iii) of this section. BC did not make the election under § 1.168(i)–6(i)(1). (2) Pursuant to § 1.168(k)–1(f)(5)(iii)(B), no additional first year depreciation deduction is allowable for Equipment X3 and, pursuant to § 1.168(d)–1(b)(3)(ii), no regular depreciation deduction is allowable for Equipment X3, for 2017. (3) Pursuant to paragraph (g)(5)(iii)(A) of this section, no additional first year depreciation deduction is allowable for Equipment Y3’s remaining exchanged basis at the time of replacement of $20,000 (Equipment X3’s unadjusted depreciable basis of $20,000). However, pursuant to paragraph (g)(5)(iii)(A) of this section, the 100-percent additional first year depreciation deduction is allowable for Equipment Y3’s remaining excess basis at the time of replacement of $5,000 (cash paid for Equipment Y3). Thus, the 100-percent additional first year depreciation deduction allowable for Equipment Y3 is $5,000 for 2017. (F) Example 6. (1) The facts are the same as in Example 5 of paragraph (g)(5)(v)(E)(1) of this section, except BC properly makes the election under § 1.168(i)–6(i)(1) not to apply § 1.168(i)–6 to Equipment X3 and Equipment Y3. (2) Pursuant to § 1.168(k)–1(f)(5)(iii)(B), no additional first year depreciation deduction VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 is allowable for Equipment X3 and, pursuant to § 1.168(d)–1(b)(3)(ii), no regular depreciation deduction is allowable for Equipment X3, for 2017. (3) Pursuant to § 1.168(i)–6(i)(1), BC is treated as placing Equipment Y3 in service in December 2017 with a basis of $25,000 (the total of the exchanged basis of $20,000 and the excess basis of $5,000). However, pursuant to paragraph (g)(5)(iii)(D)(2) of this section, the 100-percent additional first year depreciation deduction is allowable only for Equipment Y3’s excess basis at the time of replacement of $5,000 (cash paid for Equipment Y3). Thus, the 100-percent additional first year depreciation deduction allowable for Equipment Y3 is $5,000 for 2017. (6) Change in use—(i) Change in use of MACRS property. The determination of whether the use of MACRS property, as defined in § 1.168(b)–1(a)(2), changes is made in accordance with section 168(i)(5) and § 1.168(i)–4. (ii) Conversion to personal use. If qualified property is converted from business or income-producing use to personal use in the same taxable year in which the property is placed in service by a taxpayer, the additional first year depreciation deduction is not allowable for the property. (iii) Conversion to business or incomeproducing use—(A) During the same taxable year. If, during the same taxable year, property is acquired by a taxpayer for personal use and is converted by the taxpayer from personal use to business or income-producing use, the additional first year depreciation deduction is allowable for the property in the taxable year the property is converted to business or income-producing use, assuming all of the requirements in paragraph (b) of this section are met. See paragraph (b)(3)(ii) of this section relating to the original use rules for a conversion of property to business or income-producing use. See § 1.168(i)– 4(b)(1) for determining the depreciable basis of the property at the time of conversion to business or incomeproducing use. (B) Subsequent to the acquisition year. If property is acquired by a taxpayer for personal use and, during a subsequent taxable year, is converted by the taxpayer from personal use to business or income-producing use, the additional first year depreciation deduction is allowable for the property in the taxable year the property is converted to business or incomeproducing use, assuming all of the requirements in paragraph (b) of this section are met. For purposes of paragraphs (b)(4) and (5) of this section, the property must be acquired by the taxpayer for personal use after September 27, 2017, and converted by PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 50147 the taxpayer from personal use to business or income-producing use by January 1, 2027. See paragraph (b)(3)(ii) of this section relating to the original use rules for a conversion of property to business or income-producing use. See § 1.168(i)–4(b)(1) for determining the depreciable basis of the property at the time of conversion to business or income-producing use. (iv) Depreciable property changes use subsequent to the placed-in-service year. (A) If the use of qualified property changes in the hands of the same taxpayer subsequent to the taxable year the qualified property is placed in service and, as a result of the change in use, the property is no longer qualified property, the additional first year depreciation deduction allowable for the qualified property is not redetermined. (B) If depreciable property is not qualified property in the taxable year the property is placed in service by the taxpayer, the additional first year depreciation deduction is not allowable for the property even if a change in the use of the property subsequent to the taxable year the property is placed in service results in the property being qualified property in the taxable year of the change in use. (v) Examples. The application of this paragraph (g)(6) is illustrated by the following examples: (A) Example 1. (1) On January 1, 2019, FFF, a calendar year corporation, purchased and placed in service several new computers at a total cost of $100,000. FFF used these computers within the United States for 3 months in 2019 and then moved and used the computers outside the United States for the remainder of 2019. On January 1, 2020, FFF permanently returns the computers to the United States for use in its business. (2) For 2019, the computers are considered as used predominantly outside the United States in 2019 pursuant to § 1.48–1(g)(1)(i). As a result, the computers are required to be depreciated under the alternative depreciation system of section 168(g). Pursuant to paragraph (b)(2)(ii)(B) of this section, the computers are not qualified property in 2019, the placed-in-service year. Thus, pursuant to paragraph (g)(6)(iv)(B) of this section, no additional first year depreciation deduction is allowed for these computers, regardless of the fact that the computers are permanently returned to the United States in 2020. (B) Example 2. (1) On February 8, 2023, GGG, a calendar year corporation, purchased and placed in service new equipment at a cost of $1,000,000 for use in its California plant. The equipment is 5-year property under section 168(e) and is qualified property under section 168(k). GGG depreciates its 5-year property placed in service in 2023 using the optional depreciation table that corresponds with the general depreciation system, the 200-percent E:\FR\FM\24SER2.SGM 24SER2 50148 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES2 declining balance method, a 5-year recovery period, and the half-year convention. On June 4, 2024, due to changes in GGG’s business circumstances, GGG permanently moves the equipment to its plant in Mexico. (2) For 2023, GGG is allowed an 80-percent additional first year depreciation deduction of $800,000 (the adjusted depreciable basis of $1,000,000 multiplied by 0.80). In addition, GGG’s depreciation deduction allowable in 2023 for the remaining adjusted depreciable basis of $200,000 (the unadjusted depreciable basis of $1,000,000 reduced by the additional first year depreciation deduction of $800,000) is $40,000 (the remaining adjusted depreciable basis of $200,000 multiplied by the annual depreciation rate of 0.20 for recovery year 1). (3) For 2024, the equipment is considered as used predominantly outside the United States pursuant to § 1.48–1(g)(1)(i). As a result of this change in use, the adjusted depreciable basis of $160,000 for the equipment is required to be depreciated under the alternative depreciation system of section 168(g) beginning in 2024. However, the additional first year depreciation deduction of $800,000 allowed for the equipment in 2023 is not redetermined. (7) Earnings and profits. The additional first year depreciation deduction is not allowable for purposes of computing earnings and profits. (8) Limitation of amount of depreciation for certain passenger automobiles. For a passenger automobile as defined in section 280F(d)(5), the limitation under section 280F(a)(1)(A)(i) is increased by $8,000 for qualified property acquired and placed in service by a taxpayer after September 27, 2017. (9) Coordination with section 47—(i) In general. If qualified rehabilitation expenditures, as defined in section 47(c)(2) and § 1.48–12(c), incurred by a taxpayer with respect to a qualified rehabilitated building, as defined in section 47(c)(1) and § 1.48–12(b), are qualified property, the taxpayer may claim the rehabilitation credit provided by section 47(a), provided the requirements of section 47 are met— (A) With respect to the portion of the basis of the qualified rehabilitated building that is attributable to the qualified rehabilitation expenditures if the taxpayer makes the applicable election under paragraph (f)(1)(i) of this section not to deduct any additional first year depreciation for the class of property that includes the qualified rehabilitation expenditures; or (B) With respect to the portion of the remaining rehabilitated basis of the qualified rehabilitated building that is attributable to the qualified rehabilitation expenditures if the taxpayer claims the additional first year depreciation deduction on the unadjusted depreciable basis, as defined VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 in § 1.168(b)–1(a)(3) but before the reduction in basis for the amount of the rehabilitation credit, of the qualified rehabilitation expenditures; and the taxpayer depreciates the remaining adjusted depreciable basis, as defined in paragraph (e)(2)(i) of this section, of such expenditures using straight line cost recovery in accordance with section 47(c)(2)(B)(i) and § 1.48–12(c)(7)(i). For purposes of this paragraph (g)(9)(i)(B), the remaining rehabilitated basis is equal to the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3) but before the reduction in basis for the amount of the rehabilitation credit, of the qualified rehabilitation expenditures that are qualified property reduced by the additional first year depreciation allowed or allowable, whichever is greater. (ii) Example. The application of this paragraph (g)(9) is illustrated by the following example: (A) Between February 8, 2023, and June 4, 2023, JM, a calendar-year taxpayer, incurred qualified rehabilitation expenditures of $200,000 with respect to a qualified rehabilitated building that is nonresidential real property under section 168(e). These qualified rehabilitation expenditures are qualified property and qualify for the 20percent rehabilitation credit under section 47(a)(1). JM’s basis in the qualified rehabilitated building is zero before incurring the qualified rehabilitation expenditures and JM placed the qualified rehabilitated building in service in July 2023. JM depreciates its nonresidential real property placed in service in 2023 under the general depreciation system of section 168(a) by using the straight line method of depreciation, a 39-year recovery period, and the mid-month convention. JM elected to use the optional depreciation tables to compute the depreciation allowance for its depreciable property placed in service in 2023. Further, for 2023, JM did not make any election under paragraph (f) of this section. (B) Because JM did not make any election under paragraph (f) of this section, JM is allowed an 80-percent additional first year depreciation deduction of $160,000 for the qualified rehabilitation expenditures for 2023 (the unadjusted depreciable basis of $200,000 (before reduction in basis for the rehabilitation credit) multiplied by 0.80). JM also is allowed to claim a rehabilitation credit of $8,000 for the remaining rehabilitated basis of $40,000 (the unadjusted depreciable basis (before reduction in basis for the rehabilitation credit) of $200,000 less the additional first year depreciation deduction of $160,000, multiplied by 0.20 to calculate the rehabilitation credit). For 2023, the ratable share of the rehabilitation credit of $8,000 is $1,600. Further, JM’s depreciation deduction for 2023 for the remaining adjusted depreciable basis of $32,000 (the unadjusted depreciable basis (before reduction in basis for the rehabilitation credit) of $200,000 less the additional first year depreciation deduction PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 of $160,000 less the rehabilitation credit of $8,000) is $376.64 (the remaining adjusted depreciable basis of $32,000 multiplied by the depreciation rate of 0.01177 for recovery year 1, placed in service in month 7). (10) Coordination with section 514(a)(3). The additional first year depreciation deduction is not allowable for purposes of section 514(a)(3). (11) [Reserved] (h) Applicability dates—(1) In general. Except as provided in paragraphs (h)(2) and (3) of this section, the rules of this section apply to— (i) Qualified property under section 168(k)(2) that is placed in service by the taxpayer during or after the taxpayer’s taxable year that includes September 24, 2019; and (ii) A specified plant for which the taxpayer properly made an election to apply section 168(k)(5) and that is planted, or grafted to a plant that was previously planted, by the taxpayer during or after the taxpayer’s taxable year that includes September 24, 2019. (2) Early application of this section. A taxpayer may choose to apply this section, in its entirety, to— (i) 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 (ii) A specified plant for which the taxpayer properly made an election to apply section 168(k)(5) and that is planted, or grafted to a plant that was previously planted, after September 27, 2017, by the taxpayer during the taxpayer’s taxable year ending on or after September 28, 2017. (3) Early application of regulation project REG–104397–18. A taxpayer may rely on the provisions of this section in regulation project REG–104397–18 (2018–41 I.R.B. 558) (see § 601.601(d)(2)(ii)(b) of this chapter) for— (i) 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 September 24, 2019; and (ii) A specified plant for which the taxpayer properly made an election to apply section 168(k)(5) and that is planted, or grafted to a plant that was previously planted, after September 27, 2017, by the taxpayer during the taxpayer’s taxable year ending on or after September 28, 2017, and ending before the taxpayer’s taxable year that includes September 24, 2019. E:\FR\FM\24SER2.SGM 24SER2 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations Par. 10. Section 1.169–3 is amended by adding a sentence at the end of paragraph (a) and adding three sentences at the end of paragraph (g) to read as follows: ■ § 1.169–3 (a) * * * Except as provided in paragraphs (b), (c), (d), and (e) of this section, the provisions of §§ 1.179–1 through 1.179–5 apply for property placed in service by the taxpayer in taxable years ending after January 25, 1993. * * * * * * * * (e) Application of § 1.179–4(c)(2)–(1) In general. Except as provided in paragraphs (e)(2) and (3) of this section, the provisions of § 1.179–4(c)(2) relating to section 336(e) are applicable on or after September 24, 2019. (2) Early application of § 1.179– 4(c)(2). A taxpayer may choose to apply the provisions of § 1.179–4(c)(2) relating to section 336(e) for the taxpayer’s taxable years ending on or after September 28, 2017. (3) Early application of regulation project REG–104397–18. A taxpayer may rely on the provisions of § 1.179–4(c)(2) relating to section 336(e) in regulation project REG–104397–18 (2018–41 I.R.B. 558) (see § 601.601(d)(2)(ii)(b) of this chapter) for the taxpayer’s taxable years ending on or after September 28, 2017, and ending before September 24, 2019. ■ Par. 13. Section 1.312–15 is amended by adding a sentence at the end of paragraph (a)(1) and adding paragraph (e) to read as follows: ■ Amortizable basis. (a) * * * Further, before computing the amortization deduction allowable under section 169, the adjusted basis for purposes of determining gain for a facility that is acquired and placed in service after September 27, 2017, and that is qualified property under section 168(k), as amended by the Tax Cuts and Jobs Act, Public Law 115–97 (131 Stat. 2054 (December 22, 2017)) (the ‘‘Act’’), or § 1.168(k)–2, must be reduced by the amount of the additional first year depreciation deduction allowed or allowable, whichever is greater, under section 168(k), as amended by the Act. * * * * * (g) * * * The last sentence of paragraph (a) of this section applies to a certified pollution control facility that is qualified property under section 168(k)(2) and placed in service by a taxpayer during or after the taxpayer’s taxable year that includes September 24, 2019. However, a taxpayer may choose to apply the last sentence of paragraph (a) of this section to a certified pollution control facility that is qualified property under section 168(k)(2) and acquired and placed in service after September 27, 2017, by the taxpayer during taxable years ending on or after September 28, 2017. A taxpayer may rely on the last sentence in paragraph (a) of this section in regulation project REG–104397–18 (2018–41 IRB 558) (see § 601.601(d)(2)(ii)(b) of this chapter) for a certified pollution control facility that is qualified property under section 168(k)(2) and acquired and placed in service after September 27, 2017, by the taxpayer during taxable years ending on or after September 28, 2017, and ending before the taxpayer’s taxable year that includes September 24, 2019. ■ Par. 11. Section 1.179–4 is amended by revising paragraph (c)(2) to read as follows: § 1.179–4 Definitions. khammond on DSKJM1Z7X2PROD with RULES2 * * * * * (c) * * * (2) Property deemed to have been acquired by a new target corporation as a result of a section 338 election (relating to certain stock purchases treated as asset acquisitions) or a section 336(e) election (relating to certain stock dispositions treated as asset transfers) made for a disposition described in § 1.336–2(b)(1) will be considered acquired by purchase. * * * * * VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 Par. 12. Section 1.179–6 is amended by revising the first sentence in paragraph (a) and adding paragraph (e) to read as follows: § 1.179–6 Effective/applicability dates. § 1.312–15 Effect of depreciation on earnings and profits. (a) * * * (1) * * * Further, see § 1.168(k)– 2(g)(7) with respect to the treatment of the additional first year depreciation deduction allowable under section 168(k), as amended by the Tax Cuts and Jobs Act, Public Law 115–97 (131 Stat. 2054 (December 22, 2017)), for purposes of computing the earnings and profits of a corporation. * * * * * (e) Applicability date of qualified property. The last sentence of paragraph (a)(1) of this section applies to the taxpayer’s taxable years ending on or after September 24, 2019. However, a taxpayer may choose to apply the last sentence in paragraph (a)(1) of this section for the taxpayer’s taxable years ending on or after September 28, 2017. A taxpayer may rely on the last sentence in paragraph (a)(1) of this section in regulation project REG–104397–18 (2018–41 I.R.B. 558) (see § 601.601(d)(2)(ii)(b) of this chapter) for the taxpayer’s taxable years ending on or after September 28, 2017, and ending PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 50149 before the taxpayer’s taxable year that includes September 24, 2019. ■ Par. 14. Section 1.704–1 is amended by adding three sentences at the end of paragraph (b)(1)(ii)(a) and adding a sentence at the end of paragraph (b)(2)(iv)(g)(3) to read as follows: § 1.704–1 Partner’s distributive share. * * * * * (b) * * * (1) * * * (ii) * * * (a) * * * The last sentence of paragraph (b)(2)(iv)(g)(3) of this section is applicable for partnership taxable years ending on or after September 24, 2019. However, a partnership may choose to apply the last sentence in paragraph (b)(2)(iv)(g)(3) of this section for the partnership’s taxable years ending on or after September 28, 2017. A partnership may rely on the last sentence in paragraph (b)(2)(iv)(g)(3) of this section in regulation project REG– 104397–18 (2018–41 I.R.B. 558) (see § 601.601(d)(2)(ii)(b) of this chapter) for the partnership’s taxable years ending on or after September 28, 2017, and ending before the partnership’s taxable year that includes September 24, 2019. * * * * * (2) * * * (iv) * * * (g) * * * (3) * * * For purposes of the preceding sentence, additional first year depreciation deduction under section 168(k) is not a reasonable method. * * * * * ■ Par. 15. Section 1.704–3 is amended by adding a sentence at the end of paragraph (d)(2), revising the first sentence in paragraph (f), and adding three sentences at the end of paragraph (f) to read as follows: § 1.704–3 Contributed property. * * * * * (d) * * * (2) * * * However, the additional first year depreciation deduction under section 168(k) is not a permissible method for purposes of the preceding sentence and, if a partnership has acquired property in a taxable year for which the additional first year depreciation deduction under section 168(k) has been used of the same type as the contributed property, the portion of the contributed property’s book basis that exceeds its adjusted tax basis must be recovered under a reasonable method. See § 1.168(k)–2(b)(3)(iv)(B). * * * * * (f) * * * With the exception of paragraphs (a)(1), (a)(8)(ii) and (iii), and (a)(10) and (11) of this section, and of E:\FR\FM\24SER2.SGM 24SER2 50150 Federal Register / Vol. 84, No. 185 / Tuesday, September 24, 2019 / Rules and Regulations the last sentence in paragraph (d)(2) of this section, this section applies to property contributed to a partnership and to restatements pursuant to § 1.704– 1(b)(2)(iv)(f) on or after December 21, 1993. * * * The last sentence of paragraph (d)(2) of this section applies to property contributed to a partnership on or after September 24, 2019. However, a taxpayer may choose to apply the last sentence in paragraph (d)(2) of this section for property contributed to a partnership on or after September 28, 2017. A taxpayer may rely on the last sentence in paragraph (d)(2) of this section in regulation project REG–104397–18 (2018–41 I.R.B. 558) (see § 601.601(d)(2)(ii)(b) of this chapter) for property contributed to a partnership on or after September 28, 2017, and ending before September 24, 2019. * * * * * ■ Par. 16. Section 1.743–1 is amended by adding three sentences to the end of paragraph (j)(4)(i)(B)(1), adding one new sentence at the end of paragraph (j)(4)(i)(B)(2), and adding three sentences at the end of paragraph (l) to read as follows: § 1.743–1 Optional adjustment to basis of partnership property. * * * * (j) * * * (4) * * * (i) * * * (B) * * * (1) * * * The partnership is allowed to deduct the additional first year khammond on DSKJM1Z7X2PROD with RULES2 * VerDate Sep<11>2014 17:42 Sep 23, 2019 Jkt 247001 depreciation under section 168(k) and § 1.168(k)–2 for an increase in the basis of qualified property, as defined in section 168(k) and § 1.168(k)–2, under section 743(b) in a class of property, as defined in § 1.168(k)–2(f)(1)(ii)(A) through (F), even if the partnership made the election under section 168(k)(7) and § 1.168(k)–2(f)(1) not to deduct the additional first year depreciation for all other qualified property of the partnership in the same class of property, as defined in § 1.168(k)–2(f)(1)(ii)(A) through (F), and placed in service in the same taxable year, provided the section 743(b) basis adjustment meets all requirements of section 168(k) and § 1.168(k)–2. Further, the partnership may make an election under section 168(k)(7) and § 1.168(k)– 2(f)(1) not to deduct the additional first year depreciation for an increase in the basis of qualified property, as defined in section 168(k) and § 1.168(k)–2, under section 743(b) in a class of property, as defined in § 1.168(k)–2(f)(1)(ii)(A) through (F), and placed in service in the same taxable year, even if the partnership does not make that election for all other qualified property of the partnership in the same class of property, as defined in § 1.168(k)– 2(f)(1)(ii)(A) through (F), and placed in service in the same taxable year. In this case, the section 743(b) basis adjustment must be recovered under a reasonable method. (2) * * * The first sentence of this paragraph (j)(4)(i)(B)(2) does not apply to a partnership that is not a publicly PO 00000 Frm 00044 Fmt 4701 Sfmt 9990 traded partnership within the meaning of section 7704(b) with respect to any basis increase under section 743(b) that is recovered using the additional first year depreciation deduction under section 168(k). * * * * * (l) * * * The last three sentences of paragraph (j)(4)(i)(B)(1) of this section, and the last sentence of paragraph (j)(4)(i)(B)(2) of this section, apply to transfers of partnership interests that occur on or after September 24, 2019. However, a partnership may choose to apply the last three sentences in paragraph (j)(4)(i)(B)(1) of this section, and the last sentence of paragraph (j)(4)(i)(B)(2) of this section, for transfers of partnership interests that occur on or after September 28, 2017. A partnership may rely on the last three sentences in paragraph (j)(4)(i)(B)(1) of this section in regulation project REG–104397–18 (2018–41 I.R.B. 558) (see § 601.601(d)(2)(ii)(b) of this chapter) for transfers of partnership interests that occur on or after September 28, 2017, and ending before September 24, 2019. Kirsten Wielobob, Deputy Commissioner for Services and Enforcement. Approved: September 11, 2019. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2019–20036 Filed 9–17–19; 4:15 pm] BILLING CODE 4830–01–P E:\FR\FM\24SER2.SGM 24SER2

Agencies

[Federal Register Volume 84, Number 185 (Tuesday, September 24, 2019)]
[Rules and Regulations]
[Pages 50108-50150]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20036]



[[Page 50107]]

Vol. 84

Tuesday,

No. 185

September 24, 2019

Part II





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





Additional First Year Depreciation Deduction; Final Rule

Federal Register / Vol. 84 , No. 185 / Tuesday, September 24, 2019 / 
Rules and Regulations

[[Page 50108]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9874]
RIN 1545-BO74


Additional First Year Depreciation Deduction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that provide guidance 
regarding the additional first year depreciation deduction under 
section 168(k) of the Internal Revenue Code (Code). The final 
regulations reflect and clarify the increase of the benefit and 
expansion of the universe of qualifying property, particularly to 
certain classes of used property, authorized by the Tax Cuts and Jobs 
Act. The final regulations affect taxpayers who deduct depreciation for 
qualified property acquired and placed in service after September 27, 
2017.

DATES: 
    Effective date: These regulations are effective on September 24, 
2019.
    Applicability date: For dates of applicability, see Sec. Sec.  
1.48-12(a)(2)(i), 1.167(a)-14(e)(3), 1.168(b)-1(b)(2), 1.168(d)-
1(d)(2), 1.168(i)-4(g)(2), 1.168(i)-6(k)(4), 1.168(k)-2(h), 1.169-3(g), 
1.179-6, 1.312-15(e), 1.704-1(b)(1)(ii)(a), 1.704-3(f), and 1.743-1(l). 
A taxpayer may choose to apply these final 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, 
provided the taxpayer consistently applies all rules in these final 
regulations. Additionally, a taxpayer may rely on the proposed 
regulations under section 168(k) in regulation project REG-104397-18 
(2018-41 I.R.B. 558), for 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, and ending before September 24, 2019.

FOR FURTHER INFORMATION CONTACT: Elizabeth R. Binder or Kathleen Reed 
at (202) 317-7005 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under section 168(k). On August 8, 2018, the Department of 
the Treasury (Treasury Department) and the IRS published a notice of 
proposed rulemaking (REG-104397-18) in the Federal Register (83 FR 
39292) containing proposed regulations under section 168(k) (the August 
Proposed Regulations). The Summary of Comments and Explanation of 
Revisions section summarizes the provisions of section 168(k) and the 
provisions of the August Proposed Regulations, which are explained in 
greater detail in the preamble to the August Proposed Regulations.
    The Treasury Department and the IRS received written and electronic 
comments responding to the August Proposed Regulations and held a 
public hearing on the proposed regulations on November 28, 2018. After 
full consideration of the comments received on the August Proposed 
Regulations and the testimony heard at the public hearing, this 
Treasury decision adopts the August Proposed Regulations with 
modifications in response to certain comments and testimony, as 
described in the Summary of Comments and Explanation of Revisions 
section. Concurrently with the publication of these final regulations, 
the Treasury Department and the IRS are publishing in the Proposed Rule 
section of this edition of the Federal Register a notice of proposed 
rulemaking providing, also in response to the above-cited comments and 
testimony, additional proposed regulations under section 168(k) (REG-
106808-19).

Summary of Comments and Explanation of Revisions

    The Treasury Department and the IRS received comments from 
approximately 20 commenters in response to the August Proposed 
Regulations. All comments were considered and are available at https://www.regulations.gov or upon request. The comments addressing the August 
Proposed Regulations are summarized in this Summary of Comments and 
Explanation of Revisions section.
    Section 168(k) was amended on December 22, 2017, by sections 
12001(b)(13), 13201, and 13204 of the Tax Cuts and Jobs Act, Public Law 
115-97 (131 Stat. 2054) (the ``Act''). Because of these amendments, the 
August Proposed Regulations and these final regulations update existing 
regulations in Sec.  1.168(k)-1 by providing a new section at Sec.  
1.168(k)-2 for property acquired and placed in service after September 
27, 2017, and make conforming amendments to the existing regulations.
    As discussed in the preamble to the August Proposed Regulations, 
the August Proposed Regulations and these final regulations describe 
and clarify the statutory requirements that must be met for depreciable 
property to qualify for the additional first year depreciation 
deduction provided by section 168(k). Further, the August Proposed 
Regulations and these final regulations provide guidance to taxpayers 
in determining the additional first year depreciation deduction and the 
amount of depreciation otherwise allowable for this property.
    Part I of this section provides an overview of section 168(k). Part 
II of this section addresses the operational rules. Part III of this 
section addresses the computation of the additional first year 
depreciation deduction and the elections under section 168(k). Part IV 
addresses the special rules for certain situations described in Sec.  
1.168(k)-2(g) of the final regulations (Sec.  1.168(k)-2(f) of the 
August Proposed Regulations).

I. Overview

    Section 167(a) allows as a depreciation deduction a reasonable 
allowance for the exhaustion, wear and tear, and obsolescence of 
property used in a trade or business or of property held for the 
production of income. The depreciation deduction allowable for tangible 
depreciable property placed in service after 1986 generally is 
determined under the Modified Accelerated Cost Recovery System provided 
by section 168 (MACRS property). The depreciation deduction allowable 
for computer software that is placed in service after August 10, 1993, 
and is not an amortizable section 197 intangible, is determined under 
section 167(f)(1).
    Section 168(k) 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.
    Section 168(k), prior to amendment by the Act, allowed an 
additional first year depreciation deduction for the placed-in-service 
year equal to 50 percent of the adjusted basis of qualified property. 
Qualified property was

[[Page 50109]]

defined in part as property the original use of which begins with the 
taxpayer; that is, the property had to be new property.
    Section 13201 of the Act made several amendments to the allowance 
for additional first year depreciation deduction in section 168(k). For 
example, the additional first year depreciation deduction percentage is 
increased from 50 to 100 percent. In addition, the property eligible 
for the additional first year depreciation deduction is expanded to 
include certain used depreciable property and certain film, television, 
or live theatrical productions. Also, the placed-in-service date is 
extended from before January 1, 2020, to before January 1, 2027 (from 
before January 1, 2021, to before January 1, 2028, for longer 
production period property or certain aircraft property described in 
section 168(k)(2)(B) or (C)). A final example of the amendments by the 
Act to section 168(k) is the date on which a specified plant is planted 
or grafted by the taxpayer is extended from before January 1, 2020, to 
before January 1, 2027.
    Section 168(k), as amended by the Act, allows a 100-percent 
additional first year depreciation deduction for qualified property 
acquired and placed in service after September 27, 2017, and placed in 
service before January 1, 2023 (before January 1, 2024, for longer 
production period property or certain aircraft property described in 
section 168(k)(2)(B) or (C)). If a taxpayer elects to apply section 
168(k)(5), the 100-percent additional first year depreciation deduction 
also is allowed for a specified plant planted or grafted after 
September 27, 2017, and before January 1, 2023. The 100-percent 
additional first year depreciation deduction is decreased by 20 
percentage points annually for qualified property placed in service, or 
a specified plant planted or grafted, after December 31, 2022 (after 
December 31, 2023, for longer production period property or certain 
aircraft property described in section 168(k)(2)(B) or (C)).
    Section 168(k)(2)(A), as amended by the Act, defines ``qualified 
property'' as meaning, in general, property (1) to which section 168 
applies that has a recovery period of 20 years or less, (2) which is 
computer software as defined in section 167(f)(1)(B), for which a 
deduction is allowable under section 167(a) without regard to section 
168(k), (3) which is water utility property, (4) which is a qualified 
film or television production as defined in section 181(d), for which a 
deduction would have been allowable under section 181 without regard to 
section 181(a)(2) or (g) or section 168(k), or (5) which is a qualified 
live theatrical production as defined in section 181(e), for which a 
deduction would have been allowable under section 181 without regard to 
section 181(a)(2) or (g) or section 168(k). ``Qualified property'' also 
is defined in section 168(k)(2)(A) as meaning property, the original 
use of which begins with the taxpayer or the acquisition of which by 
the taxpayer meets the requirements of section 168(k)(2)(E)(ii); and 
which is placed in service by the taxpayer before January 1, 2027. 
Section 168(k)(2)(E)(ii) requires that the acquired property was not 
used by the taxpayer at any time prior to such acquisition and the 
acquisition of such property meets the requirements of section 
179(d)(2)(A), (B), and (C) and section 179(d)(3).
    However, section 168(k)(2)(D) provides that qualified property does 
not include any property to which the alternative depreciation system 
specified in section 168(g) applies, determined without regard to 
section 168(g)(7) (relating to election to have the alternative 
depreciation system apply), and after application of section 280F(b) 
(relating to listed property with limited business use).
    Section 13201(h) of the Act provides the effective dates of the 
amendments to section 168(k) made by section 13201 of the Act. Except 
as provided in section 13201(h)(2) of the Act, section 13201(h)(1) of 
the Act provides that these amendments apply to property acquired and 
placed in service after September 27, 2017. However, property is not 
treated as acquired after the date on which a written binding contract, 
as defined in Sec.  1.168(k)-2(b)(5)(iii) of these final regulations, 
is entered into for such acquisition. Section 13201(h)(2) provides that 
the amendments apply to specified plants planted or grafted after 
September 27, 2017.
    Additionally, section 12001(b)(13) of the Act repealed section 
168(k)(4) (relating to the election to accelerate alternative minimum 
tax credits in lieu of the additional first year depreciation 
deduction) for taxable years beginning after December 31, 2017. 
Further, section 13204(a)(4)(B)(ii) repealed section 168(k)(3) 
(relating to qualified improvement property) for property placed in 
service after December 31, 2017.
    Unless otherwise indicated, all references to section 168(k) 
hereinafter are references to section 168(k) as amended by the Act.

II. Operational Rules

A. Eligibility Requirements for Additional First Year Depreciation 
Deduction

    The August Proposed Regulations and these final regulations follow 
section 168(k)(2) and section 13201(h) of the Act to provide that 
depreciable property must meet four requirements to be qualified 
property. These requirements are (1) the depreciable property must be 
of a specified type; (2) the original use of the depreciable property 
must commence with the taxpayer or used depreciable property must meet 
the acquisition requirements of section 168(k)(2)(E)(ii); (3) the 
depreciable property must be placed in service by the taxpayer within a 
specified time period or must be planted or grafted by the taxpayer 
before a specified date; and (4) the depreciable property must be 
acquired by the taxpayer after September 27, 2017. The written and 
electronic comments that the Treasury Department and the IRS received 
with respect to each of these requirements are discussed below.

B. Property of a Specified Type

1. Property Eligible for the Additional First Year Depreciation 
Deduction
a. In General
    The August Proposed Regulations and these final regulations follow 
the definition of qualified property in section 168(k)(2)(A)(i) and 
(k)(5) and provide that qualified property must be one of the 
following: (1) MACRS property that has a recovery period of 20 years or 
less; (2) computer software as defined in, and depreciated under, 
section 167(f)(1); (3) water utility property as defined in section 
168(e)(5) and depreciated under section 168; (4) a qualified film or 
television production as defined in section 181(d) and for which a 
deduction would have been allowable under section 181 without regard to 
section 181(a)(2) and (g) or section 168(k); (5) a qualified live 
theatrical production as defined in section 181(e) and for which a 
deduction would have been allowable under section 181 without regard to 
section 181(a)(2) and (g) or section 168(k); or (6) a specified plant 
as defined in section 168(k)(5)(B) and for which the taxpayer has made 
an election to apply section 168(k)(5).
b. Qualified Improvement Property
    The August Proposed Regulations and these final regulations provide 
that qualified property also includes qualified improvement property 
that is acquired by the taxpayer after

[[Page 50110]]

September 27, 2017, and placed in service by the taxpayer after 
September 27, 2017, and before January 1, 2018. Multiple commenters 
requested clarification that qualified improvement property placed in 
service after 2017 also is qualified property eligible for the 
additional first year depreciation deduction. Another commenter 
requested that the IRS not challenge or audit taxpayers that treat 
qualified improvement property placed in service after 2017 as 15-year 
property eligible for the additional first year depreciation deduction.
    For property placed in service after December 31, 2017, section 
13204 of the Act amended section 168(k) to eliminate qualified 
improvement property as a specific category of qualified property, and 
amended section 168(e) to eliminate the 15-year MACRS property 
classification for qualified leasehold improvement property, qualified 
restaurant property, and qualified retail improvement property. The 
legislative history of section 13204 of the Act provides that the MACRS 
recovery period is 15 years for qualified improvement property. Conf. 
Rep. No. 115-466, at 367 (2017). However, section 168(e), as amended by 
section 13204 of the Act, does not classify qualified improvement 
property as having a recovery period of 20 years or less. Consequently, 
a legislative change must be enacted to provide for a recovery period 
of 20 years or less for qualified improvement property placed in 
service after 2017 to be qualified property. Accordingly, the Treasury 
Department and the IRS decline to adopt these comments.
c. Qualified Restaurant Property and Qualified Retail Improvement 
Property
    The August Proposed Regulations and these final regulations provide 
that MACRS property with a recovery period of 20 years or less includes 
the following MACRS property that is acquired by the taxpayer after 
September 27, 2017, and placed in service by the taxpayer after 
September 27, 2017, and before January 1, 2018: (1) Qualified leasehold 
improvement property; (2) qualified restaurant property that is 
qualified improvement property; and (3) qualified retail improvement 
property. One commenter requested clarification that qualified retail 
improvement property, and qualified restaurant property that is 
qualified improvement property, also are qualified property eligible 
for the additional first year depreciation deduction. In making this 
request, the Treasury Department and the IRS assume the commenter is 
concerned about such property that is placed in service after 2017.
    For property placed in service after December 31, 2017, section 
13204 of the Act amended section 168(e) to eliminate the 15-year MACRS 
property classifications for qualified leasehold improvement property, 
qualified restaurant property, and qualified retail improvement 
property. Because these property classifications are no longer in 
effect for property placed in service after 2017, the Treasury 
Department and the IRS decline to adopt this comment.
d. Qualified Film, Television, or Live Theatrical Production
    Consistent with section 168(k)(2)(A)(i)(IV) and (V), the August 
Proposed Regulations provide that qualified property includes a 
qualified film or television production, or a qualified live theatrical 
production, for which a deduction would have been allowable under 
section 181 without regard to section 181(a)(2) and (g), or section 
168(k). One commenter requested guidance on when a qualified film had 
to be produced by an unrelated party so that a taxpayer acquiring the 
film now can claim additional first year depreciation. In making this 
request, the Treasury Department and the IRS assume the commenter 
interpreted the rule as allowing the additional first year depreciation 
deduction for a used film production. Another commenter requested 
clarification on whether a used film or television production qualifies 
for the additional first year depreciation deduction. These requests 
involve the interaction of sections 168(k) and 181.
    Section 181 allows a taxpayer to elect to deduct up to $15 million 
of the aggregate production costs of a qualified film, television, or 
live theatrical production for the taxable year in which the costs are 
paid or incurred by the taxpayer instead of capitalizing the costs and 
recovering such costs through depreciation deductions. See Sec.  1.181-
1(a)(1). Pursuant to Sec.  1.181-1(a)(3), production costs do not 
include the cost of obtaining a production after its initial release or 
broadcast. Further, Sec.  1.181-1(a)(1) provides that only an owner of 
the qualified film or television production is eligible to a make a 
section 181 election. Section 1.181-1(a)(2)(i) defines an owner, for 
purposes of Sec. Sec.  1.181-1 through -6, as any person that is 
required under section 263A to capitalize the costs of producing the 
production into the cost basis of the production, or that would be 
required to do so if section 263A applied to that person. Pursuant to 
Sec.  1.181-1(a)(2)(ii), a person that acquires a finished or 
partially-finished production is treated as an owner of that production 
for purposes Sec. Sec.  1.181-1 through -6, but only if the production 
is acquired prior to its initial release or broadcast. Section 1.181-
1(a)(7) defines initial release or broadcast, for purposes of 
Sec. Sec.  1.181-1 through 1.181-6, as the first commercial exhibition 
or broadcast of a production to an audience.
    The Treasury Department and the IRS agree that clarification is 
needed on whether section 168(k) applies to a used qualified film, 
television, or live theatrical production. The deduction which would 
have been allowable under section 181 and Sec. Sec.  1.181-1 
through1.181-6 for a qualified film, television, or live theatrical 
production is only for production costs paid or incurred by an owner of 
the qualified film or television production prior to its initial 
release or broadcast or by an owner of the qualified live theatrical 
production prior to its initial live staged performance. Accordingly, 
section 168(k) does not apply to a used qualified film, television, or 
live theatrical production (that is, such production acquired after its 
initial release or broadcast, or after its initial live staged 
performance, as applicable). However, the final regulations clarify 
that only production costs of the qualified film, television, or live 
theatrical production for which a deduction would have been allowable 
under section 181 and the regulations under section 181 are eligible 
for the additional first year depreciation deduction. The final 
regulations also clarify that the owner, as defined in Sec.  1.181-
1(a)(2), of the qualified film, television, or live theatrical 
production is the only taxpayer eligible to claim the additional first 
year depreciation for such production and must be the taxpayer that 
places such production in service.
    A commenter requested clarification that a licensee may deduct the 
additional first year depreciation for the cost of acquiring a license 
to a qualified film (for example, the cost of acquiring a license of 
video on demand rights for a limited term or the cost of acquiring a 
license of rights in a foreign country for a limited term). As stated 
in the preceding paragraphs, only the owner of the qualified film, 
television, or live theatrical production is eligible to make a section 
181 election. Section 1.181-1(a)(2)(ii) provides that a person that 
acquires only a limited license or right to exploit a production is not 
an owner of a production for purposes of Sec. Sec.  1.181-1 through 
1.181-6. Therefore, for the reasons stated above, the

[[Page 50111]]

Treasury Department and the IRS decline to adopt this comment.
    One commenter suggested that the final regulations clarify when a 
qualified film, television, or live theatrical production had to be 
produced to be eligible for the additional first year depreciation 
deduction. Section 181 is effective for a qualified film or television 
production commencing after October 22, 2004, and for a qualified live 
theatrical production commencing after December 31, 2015. Because this 
suggestion concerns the effective dates of section 181, the suggestion 
is beyond the scope of these final regulations. Accordingly, the 
Treasury Department and the IRS decline to adopt this suggestion.
2. Property Not Eligible for the Additional First Year Depreciation 
Deduction
a. In General
    The August Proposed Regulations and these final regulations provide 
that qualified property does not include (1) property excluded from the 
application of section 168 as a result of section 168(f); (2) property 
that is required to be depreciated under the alternative depreciation 
system of section 168(g) (ADS); (3) any class of property for which the 
taxpayer elects not to deduct the additional first year depreciation 
under section 168(k)(7); (4) a specified plant placed in service by the 
taxpayer in the taxable year and for which the taxpayer made an 
election to apply section 168(k)(5) for a prior year under section 
168(k)(5)(D); (5) any class of property for which the taxpayer elects 
to apply section 168(k)(4), as in effect before the enactment of the 
Act, to property placed in service in any taxable year beginning before 
January 1, 2018; or (6) property described in section 168(k)(9)(A) or 
(B).
b. Property Required To Be Depreciated Under the ADS
    Property described in section 168(g)(1)(A), (B), (C), (D), (F), or 
(G) is required to be depreciated under the ADS. In addition, other 
provisions of the Code require property to be depreciated under the 
ADS. For example, property described in section 263A(e)(2)(A) if the 
taxpayer or any related person (as defined in section 263A(e)(2)(B)) 
has made an election under section 263A(d)(3), and property described 
in section 280F(b)(1) is required to be depreciated under the ADS.
    The Treasury Department and the IRS are aware that taxpayers and 
practitioners have questioned whether using the ADS to determine the 
adjusted basis of the taxpayer's qualified business asset investment 
pursuant to section 250(b)(2)(B) or 951A(d)(3) causes the taxpayer's 
tangible property to be ineligible for the additional first year 
depreciation deduction. The final regulations clarify that it does not 
make that property ineligible for the additional first year 
depreciation deduction. The final regulations also clarify that using 
the ADS to determine the adjusted basis of the taxpayer's tangible 
assets for allocating business interest expense between excepted and 
non-excepted trades or businesses under section 163(j) does not make 
that property ineligible for the additional first year depreciation 
deduction. In both instances, however, this rule does not apply if the 
property is required to be depreciated under the ADS pursuant to 
section 168(g)(1)(A), (B), (C), (D), (F), or (G), or other provisions 
of the Code other than section 163(j), 250(b)(2)(B), or 951A(d)(3).
    If section 168(h)(6) applies (property owned by partnerships 
treated as tax-exempt use property), the Treasury Department and the 
IRS also are aware that taxpayers and practitioners have questioned 
whether only the tax-exempt entity's proportionate share of the 
property or the entire property is not eligible for the additional 
first year depreciation deduction. If section 168(h)(6) applies, 
section 168(h)(6)(A) provides that the tax-exempt entity's 
proportionate share of the property is treated as tax-exempt use 
property. Accordingly, the final regulations clarify that only the tax-
exempt entity's proportionate share of the property is described in 
section 168(g)(1)(B) and is not eligible for the additional first year 
depreciation deduction.
c. Property Described in Section 168(k)(9)
i. In General
    Consistent with section 168(k)(9)(A), the August Proposed 
Regulations and these final regulations provide 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). Further, consistent 
with section 168(k)(9)(B), the August Proposed Regulations and these 
final regulations provide that qualified property does not include any 
property used in a trade or business that has had floor plan financing 
indebtedness if the floor plan financing interest related to such 
indebtedness is taken into account under section 168(j)(1)(C).
    Because section 163(j) applies to taxable years beginning after 
December 31, 2017, the August Proposed Regulations and these final 
regulations also provide that these exclusions from the additional 
first year depreciation deduction apply to property placed in service 
in any taxable year beginning after December 31, 2017. The August 
Proposed Regulations did not provide any further guidance under section 
168(k)(9).
    Several commenters 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. Concurrently with the publication of these final regulations, 
the Treasury Department and the IRS are publishing elsewhere in this 
issue of the Federal Register proposed regulations under section 168(k) 
(REG-106808-19) that address these comments.
ii. Property Described in Section 168(k)(9)(A) (Regulated Public 
Utility Property)
    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). Concurrently with the publication of these final 
regulations, the Treasury Department and the IRS are publishing 
elsewhere in this issue of the Federal Register proposed regulations 
under section 168(k) (REG-106808-19) that address this question.
    Several commenters 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. This comment is related to the comment discussed in part 
II(D)(3) of this Summary of Comments and Explanation of Revisions 
section regarding the election provided in section 3.02(2)(b) of Rev. 
Proc. 2011-26 (2011-16 I.R.B. 664). Concurrently with the publication 
of these final regulations, the Treasury Department and the IRS are 
publishing elsewhere in this issue of the Federal Register proposed 
regulations under section 168(k) (REG-106808-19) that address both 
comments.
    Another commenter requested that the Treasury Department and the 
IRS change the position in the August Proposed Regulations so that 
qualified property does not include property that is primarily used in 
a trade business described in section 168(k)(9)(A), acquired after 
September 27, 2017, and

[[Page 50112]]

placed in service before January 1, 2018. The commenter asserted that 
the definition of a trade or business in section 163(j)(7)(A)(iv) is 
not new, and regulated public utility companies were not expecting such 
property to be eligible for the additional first year depreciation 
deduction. The definition of a trade or business under section 
163(j)(7)(A)(iv) is outside the scope of these final regulations. 
Further, because section 163(j) applies to taxable years beginning 
after December 31, 2017, the Treasury Department and the IRS believe 
that the exclusion of property described in section 168(k)(9)(A) from 
the additional first year depreciation deduction applies to such 
property placed in service in taxable years beginning after December 
31, 2017. Accordingly, the Treasury Department and the IRS decline to 
adopt this suggestion.
iii. Property Described in Section 168(k)(9)(B) (Floor Plan Financing 
Indebtedness)
    A commenter requested guidance on when floor plan financing 
interest is ``taken into account'' for purposes of section 
168(k)(9)(B). If section 168(k)(9)(B) applies for a taxable year, the 
Treasury Department and the IRS also are aware that taxpayers and 
practitioners have questioned whether ``has had floor plan financing 
indebtedness'' in section 168(k)(9)(B) means that the additional first 
year depreciation deduction is not allowed for property placed in 
service by a trade or business described in section 168(k)(9)(B) in any 
subsequent taxable year. Concurrently with the publication of these 
final regulations, the Treasury Department and the IRS are publishing 
elsewhere in this issue of the Federal Register proposed regulations 
under section 168(k) (REG-106808-19) that address both matters.

C. New and Used Property

1. New Property
    The August Proposed Regulations and these final regulations 
generally retain the original use rules in Sec.  1.168(k)-1(b)(3). 
Pursuant to section 168(k)(2)(A)(ii), the August Proposed Regulations 
and these final regulations do not provide any date by which the 
original use of the property must commence with the taxpayer.
    The August Proposed Regulations and these final regulations define 
original use as meaning the first use to which the property is put, 
whether or not that use corresponds to the use of the property by the 
taxpayer. A commenter requested that this definition be revised to 
provide that original use means the first use of the property within 
the United States. The definition of original use in the August 
Proposed Regulations and in Sec.  1.168(k)-1(b)(3) is the same as the 
definition of such term in the legislative history of the Job Creation 
and Worker Assistance Act of 2002, Public Law 107-147 (116 Stat. 21), 
that added section 168(k) to the Code. There is no indication in the 
legislative history of section 13201 of the Act that Congress intended 
to change the definition of original use. Accordingly, the Treasury 
Department and the IRS decline to adopt this comment.
2. Used Property
a. In General
    Pursuant to section 168(k)(2)(A)(ii) and (k)(2)(E)(ii), the August 
Proposed Regulations and these final regulations provide that the 
acquisition of used property is eligible for the additional first year 
depreciation deduction if such acquisition meets the following three 
requirements: (1) The property was not used by the taxpayer or a 
predecessor at any time prior to the acquisition; (2) the acquisition 
of the property meets the related party and carryover basis 
requirements of section 179(d)(2)(A), (B), and (C) and Sec.  1.179-
4(c)(1)(ii), (iii), and (iv), or Sec.  1.179-4(c)(2); and (3) the 
acquisition of the property meets the cost requirements of section 
179(d)(3) and Sec.  1.179-4(d).
    Several commenters requested a definition of ``predecessor.'' One 
commenter suggested that the term be limited to a transfer described in 
section 381. Another commenter suggested that the term be 
comprehensively defined, including transactions between partners and 
partnerships, or shareholders and corporations. This commenter also 
asserted that restrictions based on use by a predecessor should be 
removed because the language is not in section 168(k).
    Besides the used property requirements in the August Proposed 
Regulations, the term ``predecessor'' is used in the acquisition 
requirements in the proposed regulations and in Sec.  1.168(k)-1(b)(4). 
The Treasury Department and the IRS have determined that the inclusion 
of predecessor in both requirements is necessary and appropriate to 
prevent abuse by taxpayers to churn assets. Accordingly, the Treasury 
Department and the IRS do not adopt the suggestion to remove the term 
``predecessor.''
    However, the Treasury Department and the IRS agree that a 
definition of predecessor is needed. The final regulations provide that 
a predecessor includes (i) a transferor of an asset to a transferee in 
a transaction to which section 381(a) applies, (ii) a transferor of an 
asset to a transferee in a transaction in which the transferee's basis 
in the asset is determined, in whole or in part, by reference to the 
basis of the asset in the hands of the transferor, (iii) a partnership 
that is considered as continuing under section 708(b)(2), (iv) the 
decedent in the case of an asset acquired by an estate, or (v) a 
transferor of an asset to a trust.
b. Depreciable Interest
    The August Proposed Regulations and these final regulations provide 
that the property is treated as used by the taxpayer or a predecessor 
at any time prior to acquisition by the taxpayer or predecessor if the 
taxpayer or the predecessor had a depreciable interest in the property 
at any time prior to such acquisition, whether or not the taxpayer or 
the predecessor claimed depreciation deductions for the property.
i. Definition
    A commenter requested a definition of ``depreciable interest'' or a 
clarification that the term has the meaning as applied for purposes of 
section 167. The term ``depreciable interest'' in the August Proposed 
Regulations and these final regulations has the same meaning as that 
term is used for purposes of section 167. The property must be used in 
the taxpayer's trade or business or held by the taxpayer for the 
production of income pursuant to section 167(a). In addition, case law 
provides that the person who made the capital investment in the 
property is the person entitled to a return on that capital by means of 
claiming a depreciation deduction. Gladding Dry Goods Co. v. 
Commissioner, 2 B.T.A. 336, 338 (1925). Legal title and the right of 
possession are not determinative. Hopkins Partners v. Commissioner, 
T.C. Memo. 2009-107 (citing Gladding Dry Goods, 2 B.T.A. at 338). 
Instead, the question is which party actually invested in the property. 
Id.
    The issue of whether a taxpayer has a depreciable interest in 
property generally arises when a lessor or a lessee makes improvements 
to property. If a lessor makes improvements at the lessor's own 
expense, the lessor is entitled to depreciation deductions even though 
the lessee has the use of the improvements. Gladding Dry Goods, 2 
B.T.A. at 338-339; Hopkins Partners. If a lessee makes improvements and 
the title to the improvements vests immediately in the lessor, the 
lessor's bare legal title does not preclude the lessee from recovering 
its investment in

[[Page 50113]]

the improvements through depreciation deductions. Hopkins Partners; see 
also McGrath v. Commissioner, T.C. Memo. 2002-231. However, when the 
lessee makes improvements as a substitute for rent, the lessee has no 
depreciable interest in the leasehold improvement. Hopkins Partners 
(citing Your Health Club, Inc. v. Commissioner, 4 T.C. 385, 390 (1944), 
acq., 1945 C.B. 7). Because the determination of whether a person has a 
depreciable interest in the property depends on the facts and 
circumstances and concerns whether the property is eligible for the 
depreciation deduction under section 167, the request is beyond the 
scope of these final regulations. Accordingly, the Treasury Department 
and the IRS decline to adopt this comment.
ii. Safe Harbor
    The preamble to the August Proposed Regulations requested comments 
on whether a safe harbor should be provided on how many taxable years a 
taxpayer or a predecessor should look back to determine if the taxpayer 
or the predecessor previously had a depreciable interest in the 
property. Multiple commenters made suggestions. One commenter suggested 
a look-back period of five years from the placed-in-service date of the 
property, with a rebuttable presumption that neither the taxpayer nor a 
predecessor held a depreciable interest in the property prior to the 5-
year period. Other commenters suggested a look-back period of three 
years, including the current taxable year. Another commenter suggested 
that the prior use rule apply only to property initially owned on or 
after the date of enactment of the Act and a look-back period that is 
the shorter of the applicable recovery period of the property or 10 
years. Another commenter suggested no look-back period for used 
property to be used in the United States for the first time. Finally, 
another commenter suggested the following three alternatives for 
determining if property is previously used by the taxpayer or a 
predecessor: The prior use or disposition of the property occurred 
pursuant to a plan that included the taxpayer's reacquisition of the 
property; the person possesses actual or constructive knowledge of the 
prior use of the property; or provide a look-back period measured by 
reference to the property's recovery period, such as the lesser of the 
property's recovery period or a set number of years.
    After considering these suggestions, the Treasury Department and 
the IRS have decided to provide a look-back period of five calendar 
years immediately prior to the taxpayer's current placed-in-service 
year of the property. We believe that five years is the appropriate 
number of years to reduce the potential for churning assets. Most 
assets have a recovery period of five or seven years under section 
168(c). In addition, we believe that this bright-line test will be easy 
for both taxpayers and the IRS to administer. Therefore, the final 
regulations provide that to determine if the taxpayer or a predecessor 
had a depreciable interest in the property at any time prior to 
acquisition, only the five calendar years immediately prior to the 
taxpayer's current placed-in-service year of the property are taken 
into account. If the taxpayer and a predecessor have not been in 
existence for this entire 5-year period, only the number of calendar 
years the taxpayer and the predecessor have been in existence is taken 
into account.
iii. Used in the United States for the First Time
    A commenter requested the August Proposed Regulations be revised to 
allow the used property requirements be met for property that will be 
used in the United States for the first time and that is acquired at 
its fair market value by a U.S. taxpayer from a non-U.S. related party, 
and for property that is acquired by a U.S. affiliate from a non-U.S. 
parent corporation in an arm's-length transaction. The statutory 
language of section 168(k)(2)(E)(ii) and the legislative history of 
section 13201 of the Act do not support such a rule. Conf. Rep. No. 
115-466, at 353. Accordingly, the Treasury Department and the IRS 
decline to adopt this comment.
iv. Substantial Renovation of Property
    The Treasury Department and the IRS are aware that taxpayers and 
practitioners have questioned whether a taxpayer that purchases 
substantially renovated property is eligible to claim the additional 
first year depreciation deduction for such property (assuming all other 
requirements are met).
    The August Proposed Regulations and these final regulations retain 
the original use rules in Sec.  1.168(k)-1(b)(3)(i). Under these rules, 
the cost of reconditioned or rebuilt property does not satisfy the 
original use requirement. However, if the cost of the used parts in 
such property is not more than 20 percent of the total cost of the 
property, whether acquired or self-constructed, the property is treated 
as meeting the original use requirement.
    Consistent with the original use rules, the final regulations 
provide that if a taxpayer acquires and places in service substantially 
renovated property and the taxpayer or a predecessor previously had a 
depreciable interest in the property before it was substantially 
renovated, that taxpayer's or predecessor's depreciable interest is not 
taken into account for determining whether the substantially renovated 
property was used by the taxpayer or a predecessor at any time before 
its acquisition by the taxpayer. For this purpose and consistent with 
the original use rules, property is substantially renovated if the cost 
of the used parts is not more than 20 percent of the total cost of the 
substantially renovated property, whether acquired or self-constructed.
c. Section 336(e) Election
    Section 1.179-4(c)(2) provides that property deemed to have been 
acquired by a new target corporation as a result of a section 338 
election will be considered acquired by purchase for purposes of Sec.  
1.179-4(c)(1). Upon a section 338 election, the target corporation (old 
target) is treated as transferring all of its assets to an unrelated 
person in exchange for consideration that includes the discharge of its 
liabilities, and a different corporation (new target) is treated as 
acquiring all of its assets from an unrelated person in exchange for 
consideration that includes the assumption of those liabilities. 
Section 1.338-1(a)(1). Although both old target and new target are a 
single corporation under corporate law, Sec.  1.338-1(a)(1) provides 
that they generally are considered to exist as separate corporations 
for purposes of subtitle A of the Code.
    The Federal income tax consequences of a section 336(e) election 
made with respect to a qualified stock disposition not described, in 
whole or in part, in section 355(d)(2) or (e)(2) are similar to the 
Federal income tax consequences of a section 338 election. See Sec.  
1.336-2(b)(1). Accordingly, the August Proposed Regulations and these 
final regulations modify Sec.  1.179-4(c)(2) to include property deemed 
to have been acquired by a new target corporation pursuant to a section 
336(e) election made with respect to such a qualified stock 
disposition. Thus, property deemed to have been acquired by a new 
target corporation as a result of either a section 338 election or a 
section 336(e) election made with respect to a qualified stock 
disposition not described, in whole or in part, in section 355(d)(2) or 
(e)(2) is considered acquired by purchase for purposes of Sec.  1.179-
4(c)(1).

[[Page 50114]]

    Conversely, if a section 336(e) election is made with respect to a 
qualified stock disposition that is described, in whole or in part, in 
section 355(d)(2) or (e)(2), old target is treated as selling its 
assets to an unrelated person but then purchasing the assets back 
(sale-to-self model). Section 1.336-2(b)(2). Because the sale-to-self 
model does not deem a new target corporation to acquire the assets from 
an unrelated person, commenters have questioned whether assets deemed 
purchased in such a qualified stock disposition should be considered 
acquired by purchase for purposes of Sec.  1.179-4(c)(1). The final 
regulations clarify that the reference to section 336(e) in Sec.  
1.179-4(c)(2) does not include dispositions described in section 
355(d)(2) or (e)(2) because, under the sale-to-self model, old target 
will be treated as acquiring the assets in which it previously had a 
depreciable interest.
d. Rules Applying to Consolidated Groups
    The August Proposed Regulations treat a member of a consolidated 
group as previously having a depreciable interest in all property in 
which the consolidated group is treated as previously having a 
depreciable interest. For purposes of this proposed rule, a 
consolidated group is treated as having a depreciable interest in 
property if any current or previous member of the group had a 
depreciable interest in the property while a member of the group. The 
August Proposed Regulations also do not allow the additional first year 
depreciation deduction when, as part of a series of related 
transactions, one or more members of a consolidated group acquire both 
the stock of a corporation that previously had a depreciable interest 
in the property and the property itself. Additionally, if the 
acquisition of property is part of a series of related transactions 
that also includes one or more transactions in which the transferee of 
the property ceases to be a member of a consolidated group, then 
whether the taxpayer is a member of a consolidated group is tested 
immediately after the last transaction in the series.
    Multiple commenters requested clarification of these rules. 
Concurrently with the publication of the final regulations, the 
Treasury Department and the IRS are publishing elsewhere in this issue 
of the Federal Register proposed regulations under section 168(k) (REG-
106808-19) that address these comments.
e. 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 relation between the 
original transferor and the ultimate transferee is tested immediately 
after the last transaction in the series (related transactions rule). 
We received comments requesting clarification on the application of the 
related transactions rule in certain circumstances. Concurrently with 
the publication of the final regulations, the Treasury Department and 
the IRS are publishing elsewhere in this issue of the Federal Register 
proposed regulations under section 168(k) (REG-106808-19) that address 
these comments.
f. Application to Partnerships
    The August Proposed Regulations and these final regulations address 
whether certain section 704(c) allocations, the basis of distributed 
property determined under section 732, and basis adjustments under 
sections 734(b) and 743(b) qualify for the additional first year 
depreciation deduction. One commenter recommended applying the 
principles underlying section 197(f)(9) to analyze these issues under 
section 168(k). The Treasury Department and the IRS considered this 
approach and determined that it was not appropriate for purposes of 
section 168(k). Although the regulations under section 197(f)(9) apply 
an aggregate approach with respect to basis adjustments under sections 
732, 734, and 743 (as well as certain section 704(c) allocations), the 
Treasury Department and the IRS looked to the purpose of section 
168(k), not section 197(f)(9), to determine how to best approach the 
entity versus aggregate theory question. Furthermore, the statutory 
language found in section 197(f)(9)(E), which treats each partner in a 
partnership as having owned and used the partner's proportionate share 
of the partnership's assets for purposes of determining basis increases 
under sections 732, 734, and 743, is not in section 168(k). Therefore, 
the August Proposed Regulations and these final regulations determine 
the proper treatment of each basis adjustment under section 168(k) on a 
case-by-case basis.
    One commenter to the August Proposed Regulations asked for 
clarification regarding a partner's depreciable interest in property 
held by a partnership. Concurrently with the publication of the final 
regulations, the Treasury Department and the IRS are publishing 
elsewhere in this issue of the Federal Register proposed regulations 
under section 168(k) (REG-106808-19) that address this comment.
i. Section 704(c) Remedial Allocations
    The August Proposed Regulations and these final regulations provide 
that remedial allocations under section 704(c) do not qualify for the 
additional first year depreciation deduction. The same rule applies in 
the case of revaluations of partnership property (reverse section 
704(c) allocations).
    One commenter requested that the final regulations permit immediate 
expensing of excess book basis under the remedial allocation method in 
Sec.  1.704-3(d) and corresponding remedial allocations of income and 
depreciation. The Treasury Department and the IRS decline to adopt this 
comment because the underlying property that gives rise to remedial 
allocations was contributed to the partnership in a section 721 
transaction and has a basis described in section 179(d)(2)(C), which is 
in violation of section 168(k)(2)(E)(ii)(I), as well as the original 
use requirement.
ii. Section 734(b) Adjustments
    The August Proposed Regulations and these final regulations provide 
that section 734(b) basis adjustments are not eligible for the 
additional first year depreciation deduction.
    One commenter suggested that the Treasury Department and the IRS 
should permit immediate expensing of basis adjustments under section 
734(b)(1)(A) allocable to qualified property. Section 734(b)(1)(A) 
provides that, in the case of a distribution of property to a partner 
with respect to which a section 754 election is in effect (or when 
there is a substantial basis reduction under section 734(d)), the 
partnership will increase the adjusted basis of partnership property by 
the amount of any gain recognized to the distributee partner under 
section 731(a)(1). The Treasury Department and the IRS decline to adopt 
this comment because section 734(b) adjustments are made to the common 
basis of partnership property and do not satisfy the original use 
clause of section 168(k)(2)(A)(ii) or the used property requirement of 
section 168(k)(2)(E)(ii)(I).
iii. Section 743(b) Adjustments
    The August Proposed Regulations and these final regulations provide 
that, in determining whether a section 743(b) basis adjustment meets 
the used property acquisition requirements of section 168(k)(2)(E)(ii), 
each partner is

[[Page 50115]]

treated as having owned and used the partner's proportionate share of 
partnership property. In the case of a transfer of a partnership 
interest, section 168(k)(2)(E)(ii)(I) will be satisfied if the partner 
acquiring the interest, or a predecessor of such partner, has not used 
the portion of the partnership property to which the section 743(b) 
basis adjustment relates at any time prior to the acquisition (that is, 
the transferee has not used the transferor's portion of partnership 
property prior to the acquisition), notwithstanding the fact that the 
partnership itself has previously used the property. Similarly, for 
purposes of applying section 179(d)(2)(A), (B), and (C), the partner 
acquiring a partnership interest is treated as acquiring a portion of 
partnership property, and the partner who is transferring a partnership 
interest is treated as the person from whom the property is acquired.
    The August Proposed Regulations provide that a section 743(b) basis 
adjustment in a class of property (not including the property class for 
section 743(b) basis adjustments) may be recovered using the additional 
first year depreciation deduction under section 168(k) without regard 
to whether the partnership elects out of the additional first year 
depreciation deduction under section 168(k)(7) for all other qualified 
property in the same class of property and placed in service in the 
same taxable year. Similarly, a partnership may make the election out 
of the additional first year depreciation deduction under section 
168(k)(7) for a section 743(b) basis adjustment in a class of property 
(not including the property class for section 743(b) basis 
adjustments), and this election will not bind the partnership to such 
election for all other qualified property of the partnership in the 
same class of property and placed in service in the same taxable year.
    One commenter recommended that the final regulations require 
consistent treatment for section 743(b) adjustments in a class of 
property and all other qualified property in the same class and placed 
in service in the same taxable year. The Treasury Department and the 
IRS believe that taxpayers should have the flexibility to use or elect 
out of the additional first year depreciation deduction for section 
743(b) adjustments in a class of property without being bound to that 
choice for all other qualified property in the same class and placed in 
service in the same taxable year. Therefore, the final regulations 
retain the rule of the August Proposed Regulations.
    One commenter requested that upper-tier partnerships be able to 
make an election under section 168(k)(7), or not, for both qualified 
property held directly by the upper-tier partnership and qualified 
property held indirectly through lower-tier partnerships. The Treasury 
Department and the IRS believe that a system of upper-tier partnerships 
making this election on behalf of lower-tier partnerships would be 
difficult to administer, and decline to adopt this comment. Lower-tier 
partnerships can make a section 168(k)(7) separately or may choose not 
to make that election.
    One commenter suggested that there could be potential confusion 
with the language that would be added to Sec.  1.743-1(j)(4)(i)(B)(1) 
by the August Proposed Regulations. This commenter stated that the 
addition of ``notwithstanding the above'' to that provision could be 
read to negate other provisions of Sec.  1.743-1(j)(4)(i)(B). The 
Treasury Department and the IRS did not intend this implication. In 
these final regulations, the Treasury Department and the IRS have 
clarified this section by removing ``notwithstanding the above.''
    The preamble to the August Proposed Regulations provides that a 
section 743(b) basis adjustment is eligible for the additional first 
year depreciation deduction provided all of the requirements of section 
168(k) are met and assuming Sec.  1.743-1(j)(4)(i)(B)(2) does not 
apply. Some commenters asked for clarification regarding the 
application of Sec.  1.743-1(j)(4)(i)(B)(2). Section 1.743-
1(j)(4)(i)(B)(2) provides that, if a partnership uses the remedial 
allocation method under Sec.  1.704-3(d) with respect to an item of the 
partnership's recovery property, then the portion of any section 743(b) 
basis increase for that property that is attributable to section 704(c) 
built-in gain is recovered over the remaining recovery period for the 
partnership's excess book basis in the property as determined in the 
final sentence of Sec.  1.704-3(d)(2). This would preclude the partner 
from taking the additional first year depreciation deduction for the 
portion of the section 743(b) basis increase attributable to section 
704(c) built-in gain. Section 1.743-1(j)(4)(i)(B)(2) further provides 
that any remaining portion of a section 743(b) basis increase is 
recovered under Sec.  1.743-1(j)(4)(i)(B)(1), which treats a section 
743(b) basis increase as newly-purchased property placed in service 
when the transfer of the partnership interest occurs. Section 1.743-
1(j)(4)(i)(B)(1) also provides that any applicable recovery period and 
method may be used for the basis increase. Therefore, under the August 
Proposed Regulations, the additional first year depreciation deduction 
is available for the portion of a section 743(b) basis increase that is 
not attributable to section 704(c) built-in gain, regardless of the 
section 704(c) method used, assuming all the requirements of section 
168(k) are satisfied.
    One commenter requested that the final regulations permit a 
partnership to use the additional first year depreciation deduction 
with respect to the portion of the section 743(b) basis increase that 
is attributable to section 704(c) built-in gain, even if the 
partnership is using the remedial allocation method with respect to the 
property. The Treasury Department and the IRS agree with this comment. 
However, an exception to this rule is needed in the case of publicly 
traded partnerships (within the meaning of section 7704(b)) to maintain 
fungibility for publicly traded partnership units. Thus, the final 
regulations amend Sec.  1.743-1(j)(4)(i)(B)(2) to provide an exception 
to the rule that the portion of a section 743(b) basis increase that is 
attributable to section 704(c) built-in gain is recovered over the 
remaining recovery period for the partnership's excess book basis in 
the property. This exception applies only in the case of a partnership 
that is not a publicly traded partnership and that is recovering a 
section 743(b) basis increase using the additional first year 
depreciation deduction under section 168(k). If this exception applies, 
the entire section 743(b) basis increase is eligible for the additional 
first year depreciation. For publicly traded partnerships, the rules of 
the August Proposed Regulations described in the preceding paragraph 
continue to apply.
g. Syndication Transaction
    The syndication transaction rule in the August Proposed Regulations 
and these final regulations is based on the rules in section 
168(k)(2)(E)(iii) for syndication transactions.
    For new or used property, the August Proposed Regulations provide 
that if (1) a lessor has a depreciable interest in the property and the 
lessor and any predecessor did not previously have a depreciable 
interest in the property, (2) the property is sold by the lessor or any 
subsequent purchaser within three months after the date the property 
was originally placed in service by the lessor (or, in the case of 
multiple units of property subject to the same lease, within three 
months after the date the final unit is placed in service, so long as 
the period between the time the first unit is placed in service and the 
time

[[Page 50116]]

the last unit is placed in service does not exceed 12 months), and (3) 
the user (lessee) of the property after the last sale during the three-
month period remains the same as when the property was originally 
placed in service by the lessor, then the purchaser of the property in 
the last sale during the three-month period is considered the taxpayer 
that acquired the property, has a depreciable interest in the property, 
and the taxpayer that originally placed the property in service, but 
not earlier than the date of the last sale. Thus, if a transaction is 
within the rules described above, the purchaser of the property in the 
last sale during the three-month period is eligible to claim the 
additional first year depreciation for the property assuming all 
requirements are met, and the earlier purchasers of the property are 
not.
    If the lessor reacquires the property, a commenter requested that 
the August Proposed Regulations be clarified to provide that the lessor 
did not previously have a depreciable interest in the property. The 
Treasury Department and the IRS agree with this suggestion. 
Accordingly, the final regulations clarify that, if a transaction is 
within the rules described in the preceding paragraph, the purchaser of 
the property in the last sale during the three-month period is the 
original user of the property, if the lessor acquired and placed in 
service new property, and is the taxpayer having a depreciable interest 
in the property, if the lessor acquired and placed in service used 
property. Neither the lessor nor any intermediate purchaser is treated 
as previously having a depreciable interest in the property.
h. Sale-Leaseback Transaction
    Because section 13201 of the Act removed the rules regarding sale-
leasebacks, the August Proposed Regulations did not retain the original 
use rules in Sec.  1.168(k)-1(b)(3)(iii)(A) and (C) regarding such 
transactions, including a sale-leaseback transaction followed by a 
syndication transaction. A commenter requested that the depreciable 
interest rule in the August Proposed Regulations be changed to a never-
have-depreciated test so that a seller-lessee in a sale-leaseback 
transaction that exercises the option to purchase the property at the 
end of the lease term will meet the used property rules in the proposed 
regulations. Alternatively, the commenter suggested Sec.  1.168(k)-
2(f)(1) of the August Proposed Regulations be revised to allow the 
additional first year depreciation deduction in the situation described 
in the preceding sentence provided the sale-leaseback occurred in the 
same taxable year in which the seller-lessee placed the property in 
service. The commenter asserted that leased assets should not be 
treated differently than other used property. Another commenter 
asserted that a rule similar to the one in Sec.  1.168(k)-
1(b)(3)(iii)(A) should be provided when the sale-leaseback occurs 
within a very short period of time after the property is placed in 
service by the seller-lessee.
    The Treasury Department and the IRS have decided not to adopt these 
comments, because section 13201 of the Act removed the rules regarding 
sale-leasebacks. However, the Treasury Department and the IRS believe 
that an exception to the depreciable interest rule is appropriate when 
the taxpayer disposes of property within a short period of time after 
the taxpayer placed such property in service. Concurrently with the 
publication of these final regulations, the Treasury Department and the 
IRS are publishing elsewhere in this issue of the Federal Register 
proposed regulations under section 168(k) (REG-106808-19) that provide 
this proposed rule.

D. Date of Acquisition

1. In General
    The August Proposed Regulations and these final regulations provide 
rules applicable to the acquisition requirements of the effective date 
under section 13201(h) of the Act. The August Proposed Regulations and 
these final regulations provide that these rules apply to all property, 
including self-constructed property or property described in section 
168(k)(2)(B) or (C).
    Pursuant to section 13201(h)(1)(A) of the Act, the August Proposed 
Regulations and these final regulations provide that the property must 
be acquired by the taxpayer after September 27, 2017, or, acquired by 
the taxpayer pursuant to a written binding contract entered into by the 
taxpayer after September 27, 2017.
    The August Proposed Regulations also provide that property that is 
manufactured, constructed, or produced for the taxpayer by another 
person under a written binding contract that is entered into prior to 
the manufacture, construction, or production of the property for use by 
the taxpayer in its trade or business or for its production of income 
is acquired pursuant to a written binding contract. Many commenters 
disagreed with this position because it is not supported by the 
legislative history of section 13201 of the Act, it is a departure from 
the self-constructed property rules in Sec.  1.168(k)-1(b)(4)(iii), and 
it is administratively burdensome. The Treasury Department and the IRS 
have reconsidered their decision. Accordingly, Sec.  1.168(k)-
2(b)(5)(ii)(A) and (b)(5)(iv) of the final regulations provide that 
property that is manufactured, constructed, or produced for the 
taxpayer by another person under a written binding contract that is 
entered into prior to the manufacture, construction, or production of 
the property for use by the taxpayer in its trade or business or for 
its production of income is not acquired pursuant to a written binding 
contract but is self-constructed property.
    The August Proposed Regulations also provide that if the written 
binding contract states the date on which the contract was entered into 
and a closing date, delivery date, or other similar date, the date on 
which the contract was entered into is the date the taxpayer acquired 
the property. The Treasury Department and the IRS are aware that some 
contracts are not binding contracts on the date the contract is entered 
into (for example, due to a contingency clause). Accordingly, Sec.  
1.168(k)-2(b)(5)(ii)(B) of the final regulations provides that the 
acquisition date of property that the taxpayer acquired pursuant to a 
written binding contract is the later of (1) the date on which the 
contract was entered into; (2) the date on which the contract is 
enforceable under State law; (3) if the contract has one or more 
cancellation periods, the date on which all cancellation periods end; 
or (4) if the contract has one or more contingency clauses, the date on 
which all conditions subject to such clauses are satisfied. For this 
purpose, a cancellation period is the number of days stated in the 
contract for any party to cancel the contract without penalty, and a 
contingency clause is one that provides for a condition (or conditions) 
or action (or actions) that is within the control of any party or a 
predecessor.
2. Written Binding Contract
    A commenter requested clarification on whether the liquidated 
damages rule in Sec.  1.168(k)-2(b)(5)(iii)(A) in the August Proposed 
Regulations applies only to a breach by the purchaser. A similar 
question was raised in comments on Sec.  1.168(k)-1T regarding the rule 
stating that if the contract provided for a full refund of the purchase 
price in lieu of any damages allowable by law in the event of breach or 
cancellation, the contract is not considered binding. At that time, the 
Treasury Department and the IRS decided that the limitations should 
fall on both parties, the purchaser and the seller. The same should 
apply in the

[[Page 50117]]

instant case. Accordingly, the Treasury Department and the IRS decline 
to adopt this comment.
    The Treasury Department and the IRS are aware that taxpayers and 
practitioners have questioned how to apply the 5-percent liquidated 
damages rule in the August Proposed Regulations when the contract has 
multiple damage provisions. The Treasury Department and the IRS 
intended that only the provision with the highest damages be taken into 
account in determining whether the contract limits damages. The final 
regulations clarify this intention.
    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). If some, but not all, of the costs are eligible, or if the 
costs are subject to the different applicable percentages, the 
commenter also requested that a basis allocation rule be provided. This 
comment is related to the comment discussed in part II(D)(3) of this 
Summary of Comments and Explanation of Revisions section regarding the 
election provided in section 3.02(2)(b) of Rev. Proc. 2011-26 (2011-16 
I.R.B. 664). Concurrently with the publication of these final 
regulations, the Treasury Department and the IRS are publishing 
elsewhere in this issue of the Federal Register proposed regulations 
under section 168(k) (REG-106808-19) that address these comments.
    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. The Treasury 
Department and the IRS also are aware that, in some cases, a taxpayer 
did not acquire property pursuant to a written binding contract. 
Concurrently with the publication of these final regulations, the 
Treasury Department and the IRS are publishing elsewhere in this issue 
of the Federal Register proposed regulations under section 168(k) (REG-
106808-19) that address these issues.
3. Self-Constructed Property
    If a taxpayer manufactures, constructs, or produces property for 
its own use, the Treasury Department and the IRS recognize that the 
written binding contract rule in section 13201(h)(1) of the Act does 
not apply. In such case, the August Proposed Regulations and these 
final regulations provide that the acquisition rules in section 
13201(h)(1) of the Act are treated as met if the taxpayer begins 
manufacturing, constructing, or producing the property after September 
27, 2017. As stated in part II(D)(1) of this Summary of Comments and 
Explanation of Revisions section, the final regulations provide that 
property that is manufactured, constructed, or produced for the 
taxpayer by another person under a written binding contract that is 
entered into prior to the manufacture, construction, or production of 
the property is self-constructed property by the taxpayer. In this 
case, these final regulations also provide that the acquisition rules 
in section 13201(h)(1) of the Act are treated as met if the taxpayer 
begins manufacturing, constructing, or producing such property after 
September 27, 2017. The August Proposed Regulations and these final 
regulations provide rules similar to those in Sec.  1.168(k)-
1(b)(4)(iii)(B) for defining when manufacturing, construction, or 
production begins, including the safe harbor, and in Sec.  1.168(k)-
1(b)(4)(iii)(C) for a contract to acquire, or for the manufacture, 
construction, or production of, a component of the larger self-
constructed property.
    Two commenters requested clarification on whether the cost of a 
component of a larger self-constructed property that is acquired under 
a binding contract entered into before September 28, 2017, is included 
in the safe harbor for determining when manufacturing, construction, or 
production of the larger self-constructed property begins. Consistent 
with Sec.  1.168(k)-1(b)(4)(iii)(B)(2), the safe harbor in the August 
Proposed Regulations and these final regulations do not provide a date 
restriction for calculation of the 10 percent. Accordingly, examples in 
Sec.  1.168(k)-2(d)(3)(iv), which has the same safe harbor as in Sec.  
1.168(k)-2(b)(5)(iv), illustrate that the cost of such component is 
taken into account for determining whether the taxpayer has 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 or designing, securing financing, exploring, or researching) 
under the safe harbor. If the cost of the acquired component is more 
than 10 percent of the total cost of the property (excluding the cost 
of any land and preliminary activities such as planning or designing, 
securing financing, exploring, or researching), the manufacture, 
construction, or production of the larger self-constructed property 
begins on the date on which the taxpayer paid or incurred the cost of 
such component.
    A commenter requested clarification on whether the 100-percent 
additional first year depreciation deduction is allowable for self-
constructed property owned by a trade or business described in section 
163(j)(7)(A)(iv) (regulated public utility) where the construction of 
such property begins after September 27, 2017, and the property is 
placed in service in a taxable year beginning after 2017. In such case, 
the property is not eligible for the 100-percent additional first year 
depreciation deduction pursuant to section 168(k)(9)(A). Example 11 is 
provided in Sec.  1.168(k)-2(b)(5)(viii)(K) of these final regulations 
to illustrate this point.
    Multiple commenters requested that the final regulations provide an 
election similar to the one provided in section 3.02(2)(b) of Rev. 
Proc. 2011-26 for components acquired or self-constructed after 
September 27, 2017, of larger self-constructed property when the 
manufacture, construction, or production of the larger self-constructed 
property begins before September 28, 2017. Concurrently with the 
publication of these final regulations, the Treasury Department and the 
IRS are publishing elsewhere in this issue of the Federal Register 
proposed regulations under section 168(k) (REG-106808-19) that address 
these comments.

III. Computation of Additional First Year Depreciation Deduction and 
Elections Under Section 168(k)

A. Computation of Additional First Year Depreciation Deduction

    Pursuant to section 168(k)(1)(A), the August Proposed Regulations 
and these final regulations provide that the allowable additional first 
year depreciation deduction for qualified property is equal to the 
applicable percentage (as defined in section 168(k)(6)) of the 
unadjusted depreciable basis (as defined in Sec.  1.168(b)-1(a)(3)) of 
the property. For qualified property described in section 168(k)(2)(B), 
the unadjusted depreciable basis (as defined in Sec.  1.168(b)-1(a)(3)) 
of the property is limited to the property's basis attributable to 
manufacture, construction, or production of the property before January 
1, 2027, as provided in section 168(k)(2)(B)(ii).

[[Page 50118]]

Pursuant to section 168(k)(2)(G), the August Proposed Regulations and 
these final regulations also provide that the additional first year 
depreciation deduction is allowed for both regular tax and alternative 
minimum tax (AMT) purposes. The August Proposed Regulations and these 
final regulations provide rules similar to those in Sec.  1.168(k)-
1(d)(2) for determining the amount of depreciation otherwise allowable 
for qualified property.
    A commenter requested clarification on whether the deduction under 
section 181 for a qualified film, television, or live theatrical 
production is taken before the additional first year depreciation 
deduction for the same production. Section 181(b) provides that with 
respect to the basis of any qualified film or television production or 
any qualified live theatrical production to which an election under 
section 181(a) is made, no other depreciation or amortization deduction 
shall be allowable. Consequently, if the owner of the qualified film, 
television, or live theatrical production makes an election under 
section 181(a), the basis of the production is reduced by the amount of 
the section 181 deduction before the additional first year depreciation 
deduction is computed. Accordingly, the final regulations revise the 
definition of unadjusted depreciable basis in Sec.  1.168(b)-1(a)(3) to 
reflect the reduction in basis for the amount the taxpayer elects to 
treat as an expense under section 181.

B. Elections Under Section 168(k)

    The August Proposed Regulations and these final regulations provide 
rules for making the election out of the additional first year 
depreciation deduction pursuant to section 168(k)(7) and for making the 
election to apply section 168(k)(5) to a specified plant. Additionally, 
the August Proposed Regulations and these final regulations provide 
rules for making the election under section 168(k)(10) to deduct 50 
percent, instead of 100 percent, additional first year depreciation for 
qualified property acquired after September 27, 2017, by the taxpayer 
and placed in service or planted or grafted, as applicable, by the 
taxpayer during its taxable year that includes September 28, 2017.
    Several commenters requested relief to make late elections under 
section 168(k)(7) or (10) for property placed in service during the 
taxpayer's taxable year that includes September 28, 2017, because some 
taxpayers already filed their Federal tax returns for that taxable year 
before the proposed regulations were issued. The commenters also noted 
that a taxpayer with a due date, with extensions, of September 15, 
2018, or October 15, 2018, for its Federal tax return for the taxable 
year that includes September 28, 2017, may not have had sufficient time 
to analyze the proposed regulations to make a timely election under 
section 168(k)(7) or (10). The IRS issued Revenue Procedure 2019-33 
(2019-34 I.R.B. 662) to address this request by providing an additional 
period of time for taxpayers to make an election, or revoke an 
election, under section 168(k)(5), (7), or (10) for property acquired 
after September 27, 2017, and placed in service during the taxpayer's 
taxable year that includes September 28, 2017.

IV. Special Rules

    The August Proposed Regulations and these final regulations provide 
special rules similar to those in Sec.  1.168(k)-1(f) for the following 
situations: (1) Qualified property placed in service or planted or 
grafted, as applicable, and disposed of in the same taxable year; (2) 
redetermination of basis of qualified property; (3) recapture of 
additional first year depreciation for purposes of section 1245 and 
section 1250; (4) a certified pollution control facility that is 
qualified property; (5) like-kind exchanges and involuntary conversions 
of qualified property; (6) a change in use of qualified property; (7) 
the computation of earnings and profits; (8) the increase in the 
limitation of the amount of depreciation for passenger automobiles; (9) 
the rehabilitation credit under section 47; and (10) computation of 
depreciation for purposes of section 514(a)(3).
    The August Proposed Regulations and these final regulations provide 
a special rule for qualified property that is placed in service in a 
taxable year and then contributed to a partnership under section 721(a) 
in the same taxable year when one of the other partners previously had 
a depreciable interest in the property. Situation 1 of Rev. Rul. 99-5 
(1999-1 C.B. 434) is an example of such a fact pattern. In this 
situation, the August Proposed Regulations provide that the additional 
first year depreciation deduction with respect to the contributed 
property is not allocated under the general rules of Sec.  1.168(d)-
1(b)(7)(ii). Instead, the additional first year depreciation deduction 
is allocated entirely to the contributing partner prior to the section 
721(a) transaction and not to the partnership.
    In the fact pattern described in the preceding paragraph, a 
commenter requested clarification on whether the property is placed in 
service by the contributing partner prior to the section 721(a) 
transaction. Another commenter requested clarification on whether the 
contributing partner deducts the additional first year depreciation for 
the qualified property or the partnership allocates the additional 
first year depreciation deduction for the qualified property to the 
contributing partner. The final regulations provide that the 
contributing partner is deemed to place in service the qualified 
property prior to the section 721(a) transaction, and that the 
contributing partner deducts the entire additional first year 
depreciation for such property. The contributing partner will 
contribute the property to the partnership with a zero basis, and the 
contributed property will be section 704(c) property in the hands of 
the partnership.
    Several commenters questioned how the August Proposed Regulations 
apply to a section 743(b) adjustment when there is a purchase of a 
partnership interest followed by a subsequent transfer of that 
partnership interest. Under the August Proposed Regulations, if 
qualified property is placed into service or planted or grafted, as 
applicable, and disposed of in the same taxable year, the additional 
first year depreciation deduction generally is not allowed. However, 
there is an exception to this rule in the case of nonrecognition 
transfers under section 168(i)(7). These rules in the August Proposed 
Regulations apply only to transfers of qualified property and not to 
section 743(b) adjustments resulting from transfers of partnership 
interests. Several commenters recommended that parallel rules should 
apply to transfers of partnership interests. The Treasury Department 
and the IRS agree with this comment.
    These final regulations provide that, if a partnership interest is 
acquired and disposed of during the same taxable year, the additional 
first year depreciation deduction is not allowed for any section 743(b) 
adjustment arising from the initial acquisition. However, if a 
partnership interest is purchased and disposed of in a section 
168(i)(7) transaction in the same taxable year, the section 743(b) 
adjustment is allowable, provided all of the requirements of section 
168(k) are satisfied. The section 743(b) adjustment is apportioned 
between the purchaser/transferor and the transferee under the same 
rules that apply to transfers of qualified property.
    A commenter requested a rule allowing dealerships that purchase 
replacement vehicles for use in their fleet of rental or leased 
vehicles to deduct the additional first year depreciation deduction in 
transactions

[[Page 50119]]

that are similar to like-kind exchanges when at least 10 vehicles are 
traded in during the same taxable year. The treatment requested is 
similar to that given to like-kind exchanges under section 1031 as in 
effect before the enactment of the Act. The Treasury Department and the 
IRS decline to adopt this comment because it is outside the scope of 
these final regulations.
    The Treasury Department and the IRS are aware that taxpayers and 
practitioners have questioned whether the unadjusted 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. Consistent with the definition of depreciable basis in 
Sec.  1.168(d)-1(b)(4), the basis is not reduced by the allowed or 
allowable additional first year depreciation deduction in determining 
whether the mid-quarter convention applies for the taxable year. 
Concurrently with the publication of these final regulations, the 
Treasury Department and the IRS are publishing elsewhere in this issue 
of the Federal Register proposed regulations under section 168(k) (REG-
106808-19) that provide this proposed rule.

Statement of Availability of IRS Documents

    The IRS Revenue Procedures and Revenue Rulings cited in this 
document are published in the Internal Revenue Bulletin (or Cumulative 
Bulletin) and are available from the Superintendent of Documents, U.S. 
Government Publishing Office, Washington, DC 20402, or by visiting the 
IRS website at http://www.irs.gov.

Effective/Applicability Date

    These final regulations 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 September 24, 2019. 
However, a taxpayer may choose to apply these final 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, 
provided the taxpayer consistently applies all rules in these final 
regulations. Additionally, a taxpayer may rely on the proposed 
regulations under section 168(k) in regulation project REG-104397-18 
(2018-41 I.R.B. 558), 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, and ending before September 24, 2019.

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 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 
regulations as economically significant under section 1(c) of the MOA. 
Accordingly, the OMB has reviewed these regulations.

A. Background

1. Bonus Depreciation Generally
    In general, section 167 allows taxpayers to claim a ``reasonable 
allowance for the exhaustion, wear and tear'' of property used in a 
trade or business or held for the production of income. For most 
tangible property, the amount of the deduction is determined under 
section 168, which effectively provides schedules of deductions (as a 
share of the initial basis) for different types of assets. The baseline 
schedule generally provides for the deduction to be spread over a 
number of years.
    In the Job Creation and Worker Assistance Act of 2002, Congress put 
in place section 168(k), creating what is colloquially known as ``bonus 
depreciation.'' Under this initial legislation, firms were allowed to 
take a deduction equal to 30 percent of the initial basis of qualified 
property in the year in which it was placed in service; the remaining 
70 percent was depreciated according to the usual schedule. Broadly 
speaking, ``qualified property'' included personal property that had a 
class life of 20 years or less; additionally, the property was required 
to be ``new,'' meaning that the original use of the property must have 
commenced with the taxpayer in question. By shifting depreciation 
deductions forward in time, section 168(k) generally increased the 
present value of the depreciation deductions attributable to a given 
piece of property, increasing the incentive to invest in new property. 
Since 2001, Congress has changed the ``bonus percentage'' several 
times, in accordance with the following table, including the 2005-2007 
period when bonus depreciation was not in effect for most property.

 Table 1--Percent Additional Depreciation (for Most Qualified Property),
                        by Date Placed in Service
                      [Property placed in service]
------------------------------------------------------------------------
                                                                Bonus
                Beginning date                    End date    percentage
------------------------------------------------------------------------
9/11/2001.....................................     5/4/2003           30
5/5/2003......................................   12/31/2004           50
1/1/2005......................................   12/31/2007            0
1/1/2008......................................     9/8/2010           50
9/9/2010......................................   12/31/2011          100
1/1/2012......................................   12/31/2017           50
------------------------------------------------------------------------

2. Bonus Depreciation Under the Act
    The Act changed section 168(k) in several ways. First, the Act 
increased the bonus percentage. Under the pre-Act section 168(k), the 
bonus percentage for most property was 50 percent in 2017, 40 percent 
in 2018, 30 percent in 2019, and zero thereafter. The Act amended these 
percentages to 100 percent for most property placed in service between 
September 28, 2017 and the end of 2022, 80 percent in 2023, 60 percent 
in 2024, 40 percent in 2025, 20 percent in 2026, and 0 thereafter. The 
Act also removed the ``original use'' requirement, meaning that 
taxpayers 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). Similarly, section 
168(g)(1)(G) provides that certain property used by real property and 
agricultural businesses that make an election to be excluded from the 
section 163(j) limitation are required to use the Alternative 
Depreciation System (ADS) for certain property which does not qualify 
for bonus depreciation. Furthermore, section 168(k)(2)(a)(ii)(IV) and 
(V) allowed qualified film, television, and live theatrical

[[Page 50120]]

productions (as defined under section 181) to qualify for bonus 
depreciation.
3. Proposed and Final Regulations
    The August Proposed Regulations and these final regulations create 
Sec.  1.168(k)-2 which applies generally to property acquired and 
placed in service after September 27, 2017. The August Proposed 
Regulations and these final regulations largely draw upon language in 
existing Sec.  1.168(k)-1, which generally continues to apply to 
property acquired or placed in service prior to September 27, 2017, 
with minor edits being made to conform to changes made by the Act. For 
provisions of section 168 that were generally unchanged by the Act, 
Sec.  1.168(k)-2 predominantly follows Sec.  1.168(k)-1 directly, with 
only minor changes. Additionally, Sec.  1.168(k)-2 provides rules that 
clarify how the changes to section 168 made by the Act apply to 
property acquired after September 27, 2017.
    In some instances the final regulations repeat unambiguous rules 
provided in the statute. However, there were a number of areas where 
clarification was necessary, and the analysis below focuses on these 
substantive portions of the regulation. These final regulations 
finalize certain provisions of the August Proposed Regulations with no 
change. In addition, these final regulations include provisions from 
the August Proposed Regulations that were modified to take into account 
comments received. The provisions discussed in this special analysis 
include (1) rules regarding film, television, and live theatrical 
performances, (2) clarifications regarding property depreciated under 
ADS for purposes other than section 168, (3) the eligibility of 
partnership basis adjustments under section 743(b) for bonus 
depreciation, (4) the treatment of tax-exempt use property, as defined 
by section 168(h)(6), (5) the definition of ``prior use'' for 
determining whether ``used'' property is eligible for bonus 
depreciation, and (6) clarifications regarding the date at which 
property is considered to be acquired in the case of self-constructed 
property.

B. No-Action Baseline

    The Treasury Department and the IRS have assessed the benefits and 
costs of these final regulations relative to a no-action baseline 
reflecting anticipated Federal income tax-related behavior in the 
absence of these final regulations.

C. Economic Analysis of Regulation

    This section describes the main provisions of these final 
regulations, (including those finalized with no change from the August 
Proposed Regulations) and analyzes the economic effects of each one.
1. Film, Television, and Live Theatrical Performances
    Sections 168(k)(2)(A)(i)(IV) and (V) provide that a qualified film 
or television production, or a qualified live theatrical production, is 
eligible for bonus depreciation, borrowing definitions from section 
181. There was ambiguity in determining whether ``used'' film, 
television, and theatrical performances were eligible--i.e., those 
properties whose production began under a different taxpayer. Following 
existing rules under section 181, these final regulations provide that 
direct production costs and acquisition costs are eligible for bonus 
depreciation in the hands of the owner, so long as the production was 
acquired before the initial date of release (or initial live staged 
performance). The Treasury Department and the IRS have determined that 
this is the proper interpretation of the statute, and that other 
statutory readings were not legally supportable. Nevertheless, this 
result provides a middle ground between two extreme positions: One in 
which only the initial owner was eligible for bonus depreciation, and 
one in which all acquisition costs of film, television, or live 
theatrical performances were eligible for section 168(k) under nearly 
all circumstances. Thus, the incentives for investment--and therefore 
the potential link to economic growth and efficiency--created by this 
interpretation are also in the middle of these two extremes. The 
Treasury Department and IRS expect that most taxpayers would have come 
to a similar interpretation of the treatment of used television, film, 
and theatrical performances in the absence of these final regulations. 
Therefore, the Treasury Department and IRS project that this 
clarification will have only small economic effects.
    Additionally, while section 181 and the regulations thereunder 
provide a definition for when a film or television production is placed 
in service, they do not do so for live theatrical performances. The 
August Proposed Regulations and these final regulations provide such a 
definition for live theatrical performances, directly adapting the 
rules for film and television productions to live theatrical 
performances. Specifically, a live theatrical performance is considered 
placed in service when it begins commercial exhibition (i.e., 
performances in front of paying audiences); an exhibition designed to 
attract further funding, or to determine whether the production should 
proceed, does not qualify as a commercial exhibition. This rule delays 
the placed in service date relative to the alternative choice (in which 
such an earlier exhibition would cause a live theatrical performance to 
be placed in service). This choice has two potential offsetting 
economic effects. First, this choice potentially delays the date in 
which the taxpayer could claim bonus depreciation for the performance, 
which could slightly reduce the incentive to invest in such a 
performance. Second, this choice increases the length of time over 
which a potential buyer could acquire the performance and remain 
eligible to claim bonus depreciation (since the acquisition of a 
production is only eligible until the date of its initial live staged 
performance); this could slightly increase the incentive to invest in 
such productions by increasing resale opportunities. The Treasury 
Department and the IRS project that these offsetting effects will have 
only small net effects on investment in live theatrical performances.
2. Depreciation Using ADS for Purposes Other Than Section 168
    In general, property that is required to be depreciated under the 
ADS is not eligible for bonus depreciation. Additionally, some 
provisions of the code (such as sections 250(b)(2)(B) and 951A(d)(3)) 
require the use of ADS to determine aggregate basis for the purpose of 
that provision (but not for the purpose of calculating depreciation 
deductions under section 168). These final regulations clarifies that 
such a requirement does not cause a property to be ineligible for bonus 
depreciation. The Treasury Department and the IRS project that most 
taxpayers would have come to this interpretation in the absence of this 
final regulation, so this provision is likely to have modest economic 
effects. Nevertheless, this decision might give certainty to a small 
number of taxpayers that their property is, in fact, eligible for bonus 
depreciation despite interactions with other Code provisions, 
potentially creating a small incentive for additional investment.
3. Eligibility of Partnership Basis Adjustments Under Section 743(b)
    Under the August Proposed Regulations, basis increases under 
section 743(b) (which generally occur when partnership interests are 
transferred) are generally eligible for bonus depreciation. These final 
regulations generally finalize this rule with only minor 
clarifications.

[[Page 50121]]

    The effect of allowing a section 743(b) adjustment to be eligible 
for bonus depreciation can best be explained by the following example. 
Suppose taxpayers A and B contribute $100,000 each in cash to start 
Partnership X. Partnership X purchases a $150,000 piece of equipment Y 
(of a character that is eligible for bonus depreciation) and holds a 
$50,000 non-depreciable asset. After some number of years, the basis of 
Partnership X in Y (that is, the ``inside basis'' of Y in the hands of 
Partnership X) has been adjusted down to 0 through depreciation, but 
the fair market value (FMV) of Y is $60,000. Assume no other earnings 
of the partnership or fluctuations in asset FMV. At this point, total 
FMV of the assets held by Partnership X are $110,000, and A and B each 
have a $25,000 basis in their interest in Partnership X.
    Suppose, at this point, that B sells her interest to C, an 
unrelated party, for $55,000 (equal to half of the FMV of the assets 
held by the partnership). As a result, C has basis of $55,000 in his 
interest in Partnership X, and B realizes a gain of $30,000 (equal to 
$55,000 minus her basis of $25,000). Under the usual rules of 
partnership taxation, this would cause a disconnect between C's outside 
basis--that is, the basis of C in Partnership X, which in this case is 
$55,000--and C's inside basis in the assets held by Partnership X, 
which in this case equals $25,000. This disconnect can produce 
undesired results, such as a certain gain being converted from capital 
to ordinary, or being taxed sooner than economically realized. 
Therefore, section 754 allows taxpayers to make certain adjustments, if 
elected. Assuming that a section 754 election is in place for 
Partnership X, section 743(b) causes the basis of Y to be increased by 
$30,000, equal to the gain recognized by B, and this basis adjustment 
would explicitly be assigned to C (meaning that any future cost 
recovery, through depreciation or otherwise, would be allocated to C). 
This causes C's inside basis and outside basis to come back into 
alignment, at $55,000 in this example.
    Under section 168(k) prior to the Act, such section 743(b) 
adjustments were determined to be ineligible for bonus depreciation, 
since the tangible property acquired was, by construction, not ``new.'' 
Economically, this meant that the transfer of the partnership interest 
caused an immediate realization of gain by the seller, and a deferred 
realization of deduction items by the buyer. This created a modest 
incentive for sellers to hold onto their assets for longer periods of 
time, in order to defer tax payments. As has been well studied, this 
incentive can lead to portfolio misallocation, hindering the allocation 
of capital to its most efficient use. (This problem is often referred 
to as ``lock-in.'')
    The Treasury Department and the IRS concluded that the Act's 
allowance of ``used'' property to qualify for bonus depreciation 
(subject to the other restrictions discussed in detail in the August 
Proposed Regulations and these final regulations) should extend to 
section 743(b) adjustments as well. This has the economic effect of 
mitigating the lock-in problem for transfers of certain partnership 
interests with built-in gains (to the extent that the section 743(b) 
adjustment is attributable to property that is of a character that 
qualifies for bonus depreciation). In the previous example discussed in 
this part I(C)(3) of this Special Analysis section, this would have the 
effect of allowing Partnership X to claim an immediate $30,000 
deduction (which would be allocated to C) for its $30,000 section 
743(b) adjustment. This $30,000 deduction precisely equals the $30,000 
in gain realized by B. Therefore, the aggregate tax consequences faced 
by B and C cancel out, eliminating the lock-in effect in this simple 
example.
    Reducing the lock-in effect for transfers of partnership interests 
can improve the efficiency of capital allocations throughout the 
economy. The Treasury Department and the IRS engaged in an analysis of 
the potential increase in output due to this potential increase in 
allocative efficiency. Based on projections regarding which 
partnerships will make adjustments under section 743(b) and assumptions 
about frictions to adjusting the capital stock, the Treasury Department 
and the IRS have concluded that the total economy-wide gain to output 
caused by this reduction in lock-in would be less than $5 million per 
year.
    Relatedly, allowing section 743(b) adjustments to be eligible for 
bonus depreciation increases the incentive for a new partner to acquire 
an interest in a partnership from another partner, potentially 
increasing the value of the partnership slightly. This can have the 
effect of making a previous investment in tangible property more 
attractive, which has an effect similar to a small reduction in the 
cost of capital for such partnerships. Based on an analysis of tax 
data, and applying estimates of the elasticity of capital with respect 
to the cost of capital, the Treasury Department and the IRS project 
that this effect will increase investment by no more than $20 million 
in any year, with smaller effects in most years.
4. Property Owned by Partnerships Treated as Tax-Exempt Use Property
    Section 168(h)(6) provides that property held by a partnership in 
which one partner is a tax-exempt entity and another partner is not is 
``tax-exempt use property.'' Section 168(g)(1)(B) requires tax-exempt 
use property to be depreciated according to the ADS, which renders tax-
exempt use property ineligible for bonus depreciation. These final 
regulations clarify that only the tax-exempt entity's proportional 
share of the property is ineligible for bonus depreciation, which is 
consistent with other rules in the August Proposed Regulations and 
these final regulations providing that partners have a depreciable 
interest in only their proportionate share of assets held by a 
partnership. Relative to an interpretation defining all property held 
by such a partnership with a tax-exempt partner to be ineligible, this 
provision will generally have the effect of increasing the amount of 
property eligible for bonus depreciation, which will slightly increase 
the incentive for such partnerships to invest in physical capital.
    Based on entities filing Form 990 (for certain tax-exempt entities) 
and Form 5500 (for certain pension plans), the Treasury Department and 
the IRS have determined that there were approximately 100,000 
partnerships in 2015 (out of nearly 4 million partnerships total) that 
were owned directly by at least one tax-exempt partner and at least one 
taxable partner. This figure could potentially be an underestimate, as 
it will not count partnerships that have a common structure in which 
the tax-exempt partner owns the partnership through a ``blocker'' C 
corporation (which could be treated tax-exempt under the rules of 
section 168(h)(6)(F)). Furthermore, this estimate does not take account 
of multi-tiered partnership structures. On the other hand, not all such 
partnerships would make depreciable investments that are affected by 
this final regulation.
5. New and Used Property
    In order for a property to be eligible for bonus depreciation, it 
must generally satisfy one of two conditions: (1) The original use of 
the property begins with the taxpayer, or (2) ``such property was not 
used by the taxpayer at any time prior to such acquisition'' (section 
168(k)(2)(E)(ii)(I)). Neither the August Proposed Regulations nor these 
final regulations make any substantial changes to the ``original use'' 
rules in Sec.  1.168(k)-1(b)(3). However, clarification was needed 
regarding the

[[Page 50122]]

determination of whether ``such property was . . . used by the taxpayer 
. . . prior to such acquisition''. One common circumstance in which 
this could be ambiguous is when a lessee uses (but does not own) a 
piece of property and then purchases that property upon the expiration 
of the lease. These final regulations follow the intent of Congress (as 
indicated by the Joint Committee on Taxation, General Explanation of 
Public Law 115-97 (JCS-1-18) at 125 fn. 542 (Dec. 20, 2018)) to define 
``used'' as meaning that the taxpayer previously held a ``depreciable 
interest'' in the property. In general, this would allow the former 
lessee in such an example to claim bonus depreciation upon the 
subsequent purchase of the property in question (assuming all other 
requirements are met).
    These final regulations make several additional clarifications 
regarding what is meant by ``prior depreciable interest.'' First, these 
final regulations provide that a taxpayer will be considered to have 
had a prior depreciable interest in a piece of property if his/her 
predecessor had such a prior depreciable interest; likewise, these 
final regulations provide a definition of ``predecessor,'' as requested 
by commenters. Second, these final regulations provide a safe harbor 
look-back period of five calendar years for determining whether a 
taxpayer had a prior depreciable interest. The Treasury Department and 
the IRS chose a five-year period because the vast majority of bonus-
eligible assets have General Depreciation Schedule (GDS) lives of 5 
years or more (3-year property is uncommon), and thus taxpayers will 
tend to have readily accessible records for these assets.
    These rules will help ease administrative and compliance burdens: 
Taxpayers will be able to more clearly identify their predecessors, if 
any, and the limited look-back period will mitigate the infeasibility 
of the implicit infinite lookback period some might interpret as a 
requirement of the statute. Both of these rules should help provide 
clarity and help reassure taxpayers that they will not accidentally run 
afoul of the prior depreciable interest rules, potentially encouraging 
more firms to take advantage of the investment incentives created by 
section 168(k).
    Third, these final regulations provide that ``substantially 
renovated property'' can be eligible for bonus depreciation, even if 
the taxpayer had a prior depreciable interest in the property prior to 
the renovation. For this purpose, a property is a ``substantially 
renovated property'' if the cost of the used parts is less than or 
equal to 20 percent of the total cost of the (post-renovation) 
property, whether acquired or self-constructed. The Treasury Department 
and the IRS project that this provision will have limited economic 
effects, as it will come into play only in the relatively rare 
circumstance in which a taxpayer is purchasing substantially renovated 
property and held a prior depreciable interest in the pre-renovation 
property. Nevertheless, this provision will generally increase the 
amount of property eligible for bonus depreciation, increasing the 
incentive to invest.
6. Date of Acquisition
    The Act provides that property must be acquired by the taxpayer 
after September 27, 2017, or acquired by the taxpayer pursuant to a 
``written binding contract'' entered into after September 27, 2017, in 
order for the property to be eligible for the 100 percent bonus 
depreciation rate. There was some ambiguity regarding whether third-
party constructed property--that is, property that is produced for the 
taxpayer by a third party under a written binding contract--is acquired 
``pursuant to a written binding contract'' or whether it is considered 
self-constructed property. The August Proposed Regulations reflected 
the interpretation that third party constructed property is not self-
constructed property and the contract for such property must have been 
entered into after September 27, 2017, in order to be eligible for 100 
percent bonus depreciation. However, the final regulations under Sec.  
1.168(k)-1 took a different interpretation, such that the acquisition 
date of all self-constructed property (including third party 
constructed property) is equal to the (usually later) date when 
substantial construction begins.
    These final regulations provide for the latter interpretation: 
Third-party constructed property is treated as self-constructed 
property, meaning that more taxpayers will be eligible for 100 percent 
bonus depreciation for property where contracts were entered into prior 
to September 27, 2017, but for which substantial construction began 
after that date. Given that this provision affects only investment that 
has already been made, the Treasury Department and the IRS expect it to 
have virtually no effect on economic growth or efficiency going 
forward, except to the extent that it changes taxpayers' expectations 
about future policy.

II. Paperwork Reduction Act

    These final regulations do not impose any additional information 
collection requirements in the form of reporting, recordkeeping 
requirements, or third-party disclosure requirements. However, 
taxpayers that want to make or revoke the election under section 
168(k)(5), (7), or (10), are required to attach a statement to their 
Federal tax returns pursuant to the instructions for Form 4562, 
``Depreciation and Amortization (Including Information on Listed 
Property)''. Also, pursuant to Rev. Proc. 2019-33 (2019-34 I.R.B. 662), 
taxpayers may make or revoke the election under section 168(k)(5), (7), 
or (10) by filing, within a specified time period, amended Federal tax 
returns, or Form 3115, ``Application for Change in Accounting Method,'' 
with their Federal tax returns and submit a copy of the Form 3115 to 
the IRS office in Ogden, Utah.
    For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) (PRA), the reporting burden associated with these collections 
of information 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 (see chart at the end of this part II for 
OMB control numbers). The estimate for the number of impacted filers 
with respect to the collection of information described in this part is 
0 to 141,550 respondents. Historical data was not available to directly 
estimate the number of impacted filers. This estimate assumes that no 
more than 5 percent of income tax return filers with a Form 4562 and 
relevant activity on lines 14 and/or 19(a-f) will make these elections, 
due to the limited scope of the elections. 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(f)(1) Election         0-41,685  Form 1120 series,
 not to deduct additional first                      Form 1040 series,
 year depreciation.                                  Form 1041 series,
                                                     and Form 1065
                                                     series.

[[Page 50123]]

 
Section 1.168(k)-2(f)(2) Election            0-790  Form 1120 series,
 to apply section 168(k)(5) for                      Form 1040 series,
 specified plants.                                   Form 1041 series,
                                                     and Form 1065
                                                     series.
Section 1.168(k)-2(f)(3) Election         0-90,275  Form 1120 series,
 for qualified property placed in                    Form 1040 series,
 service during the 2017 taxable                     Form 1041 series,
 year.                                               and Form 1065
                                                     series.
Section 1.168(k)-2(f)(5)(ii)               0-8,800  Form 1120 series,
 (Revocation of election--                           Form 1040 series,
 Automatic 6-month extension) and                    Form 1041 series,
 Sec.   1.168(k)-2(f)(6) (Special                    and Form 1065
 rules for 2016 and 2017 returns).                   series.
------------------------------------------------------------------------
Source: IRS:RAAS:KDA (CDW 6-1-19).

    If the time under Rev. Proc. 2019-33 for filing amended returns or 
Form 3115 has expired to revoke the election under section 168(k)(5), 
(7), or (10), taxpayers then are required to submit a request for a 
private letter ruling to revoke such election in accordance with Rev. 
Proc. 2019-1 (2019-1 I.R.B. 1) (or its successors). For purposes of the 
PRA, the reporting burden associated with these collections of 
information will be reflected in the PRA submission associated with 
income tax returns in the Form 1120 series and Form 1065 series (see 
chart at the end of this part II for OMB control numbers). The estimate 
for the number of impacted filers with respect to the collection of 
information described in this part is 0 to 10 respondents. This 
estimate is based on the number of private letter ruling requests filed 
by taxpayers from 2005 through 2018 to revoke elections under section 
168(k). 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(f)(5)(i)                   0-10  Form 1120 series and
 Revocation of election.                             Form 1065 series.
------------------------------------------------------------------------
Source: IRS:CC:ITA (CASE-MIS 5-21-19).

    The current status of the PRA submissions related to the tax forms 
and the revenue procedure that will be revised as a result of the 
information collections in these final 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 in the preceding paragraph 
for the OMB control numbers below are aggregate amounts that relate to 
the entire package of forms or revenue procedure, as applicable, 
associated with the applicable OMB control number and will in the 
future include, but not isolate, the estimated burden of the tax forms 
or the revenue procedure, as applicable, 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 estimated the burden, including that of any new 
information collections, related to the requirements under the 
regulations. For the OMB control numbers discussed in the preceding 
paragraphs, the Treasury Department and the IRS estimate PRA burdens on 
a taxpayer-type basis rather than a provision-specific basis. Those 
estimates would capture both changes made by the Act and those that 
arise out of discretionary authority exercised in these final 
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 or revenue 
procedure, as applicable, 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.

[[Page 50124]]



----------------------------------------------------------------------------------------------------------------
                 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
----------------------------------------------------------------------------------------------------------------
Form 3115............................  All other Filers (mainly        1545-2070  Published in the Federal
                                        trusts and estates)                        Register on 2/15/17 by IRS.
                                        (Legacy system).                           Public Comment period closed
                                                                                   on 4/17/17.
                                      --------------------------------------------------------------------------
                                         Link: https://www.federalregister.gov/documents/2017/02/15/2017-02985/proposed-information-collection-comment-request
                                      --------------------------------------------------------------------------
                                       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
                                      --------------------------------------------------------------------------
                                       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
----------------------------------------------------------------------------------------------------------------
Revenue Procedure 2019-1 (previously   Business (NEW Model).....       1545-0123  Published in the Federal
 2018-1).                                                                          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 final 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 burdens in Sec.  1.168(k)-2(f)(1), 
(2), and (3), (f)(5)(i) and (ii), and (f)(6) generally affect taxpayers 
that elect to make or revoke certain elections under section 168(k). 
For purposes of the PRA, the Treasury Department and the IRS estimate 
that there are 0 to 141,550 respondents of all sizes that are likely to 
be impacted by these collections of information. Most 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 Sec.  
1.168(k)-2(f)(1), (2), and (3), (f)(5)(i) and (ii), and (f)(6) to be 
the following:

------------------------------------------------------------------------
                                 Gross receipts of   Gross receipts over
             Form               $25 million or less      $25 million
------------------------------------------------------------------------
Form 1040....................  0-59,000 Respondents  0-70 Respondents
                                (estimated).          (estimated).
Form 1065....................  0-30,125 Respondents  0-935 Respondents
                                (estimated).          (estimated).
Form 1120....................  0-11,400 Respondents  0-1,560 Respondents
                                (estimated).          (estimated).
Form 1120S...................  0-35,900 Respondents  0-2,560 Respondents
                                (estimated).          (estimated).
    Total....................  0-136,425             0-5,125 Respondents
                                Respondents           (estimated).
                                (estimated).
------------------------------------------------------------------------
Source: IRS:RAAS:KDA (CDW 6-1-19).

    Regardless of the number of small entities potentially affected by 
these final regulations, the Treasury Department and the IRS have 
concluded that Sec.  1.168(k)-2(f)(1), (2), and (3), (f)(5)(i) and 
(ii), and (f)(6) will not have a significant economic impact on a 
substantial number of small entities. This conclusion is based on the 
fact that: (1) Many small businesses are not required to capitalize 
under section 263(a) the amount paid or incurred for

[[Page 50125]]

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). Further, 
Sec.  1.168(k)-2(f)(1), (2), and (3), (f)(5)(i) and (ii), and (f)(6) 
apply only if the taxpayer chooses to make an election or revoke an 
election under section 168(k). Finally, no comments regarding the 
economic impact of these regulations on small entities were received. 
Consequently, the Treasury Department and the IRS hereby certify that 
these final regulations will not have a significant economic impact on 
a substantial number of small entities.
    Pursuant to section 7805(f) of the Code, the proposed rule 
preceding this final rule was 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 
final 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 final 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.

VI. Congressional Review Act

    The Administrator of the Office of Information and Regulatory 
Affairs of the OMB has determined that this Treasury decision is a 
major rule for purposes of the Congressional Review Act (5 U.S.C. 801 
et seq.) (``CRA''). Under section 801(3) of the CRA, a major rule takes 
effect 60 days after the rule is published in the Federal Register. 
Notwithstanding this requirement, section 808(2) of the CRA allows 
agencies to dispense with the requirements of section 801 of the CRA 
when the agency for good cause finds that such procedure would be 
impracticable, unnecessary, or contrary to the public interest and that 
the rule shall take effect at such time as the agency promulgating the 
rule determines.
    Pursuant to section 808(2) of the CRA, the Treasury Department and 
the IRS find, for good cause, that a 60-day delay in the effective date 
is unnecessary and contrary to the public interest. The statutory 
provisions to which these rules relate were enacted on December 22, 
2017 and apply to property acquired and placed in service after 
September 27, 2017. In most cases, two taxable years in which such 
property may have been placed in service have ended. This means that 
the statutory provisions are currently effective, and taxpayers may be 
subject to Federal income tax liability for their 2017 or 2018 taxable 
years reflecting these provisions. In many cases, taxpayers may be 
required to file returns reflecting this Federal income liability 
during the 60-day period that begins after this rule is published in 
the Federal Register.
    These final regulations provide crucial guidance for taxpayers on 
how to apply the relevant statutory rules, compute their tax liability 
and accurately file their Federal income tax returns. These final 
regulations resolve statutory ambiguity, prevent abuse and grant 
taxpayer relief that would not be available based solely on the 
statute. Because taxpayers must already comply with the statute, a 60-
day delay in the effective date of the final regulations is unnecessary 
and contrary to the public interest. A delay would place certain 
taxpayers in the unusual position of having to determine whether to 
file tax returns during the pre-effective date period based on final 
regulations that are not yet effective. If taxpayers chose not to 
follow the final regulations and did not amend their returns after the 
regulations became effective, it would place significant strain on the 
IRS to ensure that taxpayers correctly calculated their tax 
liabilities. For example, in cases where taxpayers self-construct 
property, a delayed effective date may hamper the IRS' ability to 
determine if such property was acquired after September 27, 2017. 
Moreover, a delayed effective date could create uncertainty and 
possible restatements with respect to financial statement audits. 
Therefore, the rules in this Treasury decision are effective on the 
date of publication in the Federal Register and taxpayers may apply 
these rules to qualified property acquired and placed in service after 
September 27, 2017 in a taxable year ending on or after September 28, 
2017.
    The foregoing good cause statement only applies to the 60-day 
delayed effective date provision of section 801(3) of the CRA and is 
permitted under section 808(2) of the CRA. The Treasury Department and 
the IRS hereby comply with all aspects of the CRA and the 
Administrative Procedure Act (5 U.S.C. 551 et seq.).

Drafting Information

    The principal authors of these final 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.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *


0
Par. 2. Section 1.48-12 is amended:
0
1. In the last sentence in paragraph (a)(2)(i), by removing ``The last 
sentence'' and adding ``The next to last sentence'' in its place;
0
2. By adding three sentences at the end of paragraph (a)(2)(i); and
0
3. By adding a sentence to the end of paragraph (c)(8)(i).

[[Page 50126]]

    The additions read as follows:


Sec.  1.48-12  Qualified rehabilitated building; expenditures incurred 
after December 31, 1981.

    (a) * * *
    (2) * * *
    (i) * * * The last sentence of paragraph (c)(8)(i) of this section 
applies to qualified rehabilitation expenditures that are qualified 
property under section 168(k)(2) and placed in service by a taxpayer 
during or after the taxpayer's taxable year that includes September 24, 
2019. However, a taxpayer may choose to apply the last sentence in 
paragraph (c)(8)(i) of this section for qualified rehabilitation 
expenditures that are qualified property under section 168(k)(2) and 
acquired and placed in service after September 27, 2017, by the 
taxpayer during taxable years ending on or after September 28, 2017. A 
taxpayer may rely on the last sentence in paragraph (c)(8)(i) of this 
section in regulation project REG-104397-18 (2018-41 I.R.B. 558) (see 
Sec.  601.601(d)(2)(ii)(b) of this chapter) for qualified 
rehabilitation expenditures that are qualified property under section 
168(k)(2) and acquired and placed in service after September 27, 2017, 
by the taxpayer during taxable years ending on or after September 28, 
2017, and ending before the taxpayer's taxable year that includes 
September 24, 2019.
* * * * *
    (c) * * *
    (8) * * *
    (i) * * * Further, see Sec.  1.168(k)-2(g)(9) if the qualified 
rehabilitation expenditures are qualified property under section 
168(k), as amended by the Tax Cuts and Jobs Act, Public Law 115-97 (131 
Stat. 2054 (December 22, 2017)).
* * * * *

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


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

* * * * *
    (e) * * *
    (3) * * * The language ``or Sec.  1.168(k)-2, as applicable,'' in 
the third sentence in paragraph (b)(1) of this section applies to 
computer software that is qualified property under section 168(k)(2) 
and placed in service by a taxpayer during or after the taxpayer's 
taxable year that includes September 24, 2019. However, a taxpayer may 
choose to apply the language ``or Sec.  1.168(k)-2, as applicable,'' in 
the third sentence in paragraph (b)(1) of this section for computer 
software that is qualified property under section 168(k)(2) and 
acquired and placed in service after September 27, 2017, by the 
taxpayer during taxable years ending on or after September 28, 2017. A 
taxpayer may rely on the language ``or Sec.  1.168(k)-2, as 
applicable,'' in the third sentence in paragraph (b)(1) of this section 
in regulation project REG-104397-18 (2018-41 I.R.B. 558) (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) for computer software that is 
qualified property under section 168(k)(2) and acquired and placed in 
service after September 27, 2017, by the taxpayer during taxable years 
ending on or after September 28, 2017, and ending before the taxpayer's 
taxable year that includes September 24, 2019.

0
Par. 4. Section 1.168(b)-1 is amended:
0
1. In the second sentence in paragraph (a)(3), by removing ``under 
section 179, section 179C, or any similar provision,'' and adding 
``under section 179, section 179C, section 181, or any similar 
provision,'' in its place;
0
2. By adding paragraph (a)(5); and
0
3. By revising paragraph (b).
    The addition and revision read as follows:


Sec.  1.168(b)-1  Definitions.

    (a) * * *
    (5) Qualified improvement property. (i) Is any improvement that is 
section 1250 property to an interior portion of a building, as defined 
in Sec.  1.48-1(e)(1), that is nonresidential real property, as defined 
in section 168(e)(2)(B), if the improvement is placed in service by the 
taxpayer after the date the building was first placed in service by any 
person and if--
    (A) For purposes of section 168(e)(6), the improvement is placed in 
service by the taxpayer after December 31, 2017;
    (B) For purposes of section 168(k)(3) as in effect on the day 
before amendment by section 13204(a)(4)(B) of the Tax Cuts and Jobs 
Act, Public Law 115-97 (131 Stat. 2054 (December 22, 2017)) (``Act''), 
the improvement is acquired by the taxpayer before September 28, 2017, 
the improvement is placed in service by the taxpayer before January 1, 
2018, and the improvement meets the original use requirement in section 
168(k)(2)(A)(ii) as in effect on the day before amendment by section 
13201(c)(1) of the Act; or
    (C) For purposes of section 168(k)(3) as in effect on the day 
before amendment by section 13204(a)(4)(B) of the Act, the improvement 
is acquired by the taxpayer after September 27, 2017; the improvement 
is placed in service by the taxpayer after September 27, 2017, and 
before January 1, 2018; and the improvement meets the requirements in 
section 168(k)(2)(A)(ii) as amended by section 13201(c)(1) of the Act; 
and
    (ii) Does not include any qualified improvement for which an 
expenditure is attributable to--
    (A) The enlargement, as defined in Sec.  1.48-12(c)(10), of the 
building;
    (B) Any elevator or escalator, as defined in Sec.  1.48-1(m)(2); or
    (C) The internal structural framework, as defined in Sec.  1.48-
12(b)(3)(iii), of the building.
    (b) Applicability date--(1) In general. Except as provided in 
paragraph (b)(2) of this section, this section is applicable on or 
after February 27, 2004.
    (2) Application of paragraph (a)(5) of this section and addition of 
``section 181'' in paragraph (a)(3) of this section--(i) In general. 
Except as provided in paragraphs (b)(2)(ii) and (iii) of this section, 
paragraph (a)(5) of this section and the language ``section 181,'' in 
the second sentence in paragraph (a)(3) of this section are applicable 
on or after September 24, 2019.
    (ii) Early application of paragraph (a)(5) of this section and 
addition of ``section 181'' in paragraph (a)(3) of this section. A 
taxpayer may choose to apply paragraph (a)(5) of this section and the 
language ``section 181,'' in the second sentence in paragraph (a)(3) of 
this section for the taxpayer's taxable years ending on or after 
September 28, 2017.
    (iii) Early application of regulation project REG-104397-18. A 
taxpayer may rely on the provisions of paragraph (a)(5) of this section 
in regulation project REG-104397-18 (2018-41 I.R.B 558) (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) for the taxpayer's taxable years 
ending on or after September 28, 2017, and ending before the taxpayer's 
taxable year that includes September 24, 2019.

0
Par. 5. Section 1.168(d)-1 is amended by adding a sentence at the end 
of paragraphs (b)(3)(ii) and (b)(7)(ii) and adding three sentences at 
the end of paragraph (d)(2) to read as follows:


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

* * * * *
    (b) * * *
    (3) * * *

[[Page 50127]]

    (ii) * * * Further, see Sec.  1.168(k)-2(g)(1) for rules relating 
to qualified property under section 168(k), as amended by the Tax Cuts 
and Jobs Act, Public Law 115-97 (131 Stat. 2054 (December 22, 2017)), 
that is placed in service by the taxpayer in the same taxable year in 
which either a partnership is terminated as a result of a technical 
termination under section 708(b)(1)(B) or the property is transferred 
in a transaction described in section 168(i)(7).
* * * * *
    (7) * * *
    (ii) * * * However, see Sec.  1.168(k)-2(g)(1)(iii) for a special 
rule regarding the allocation of the additional first year depreciation 
deduction in the case of certain contributions of property to a 
partnership under section 721.
* * * * *
    (d) * * *
    (2) * * * The last sentences in paragraphs (b)(3)(ii) and 
(b)(7)(ii) of this section apply to qualified property under section 
168(k)(2) placed in service by a taxpayer during or after the 
taxpayer's taxable year that includes September 24, 2019. However, a 
taxpayer may choose to apply the last sentences in paragraphs 
(b)(3)(ii) and (b)(7)(ii) of this section to qualified property under 
section 168(k)(2) acquired and placed in service after September 27, 
2017, by the taxpayer during taxable years ending on or after September 
28, 2017. A taxpayer may rely on the last sentences in paragraphs 
(b)(3)(ii) and (b)(7)(ii) of this section in regulation project REG-
104397-18 (2018-41 I.R.B. 558) (see Sec.  601.601(d)(2)(ii)(b) of this 
chapter) for qualified property under section 168(k)(2) acquired and 
placed in service after September 27, 2017, by the taxpayer during 
taxable years ending on or after September 28, 2017, and ending before 
the taxpayer's taxable year that includes September 24, 2019.
* * * * *

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


Sec.  1.168(i)-4  Changes in use.

* * * * *
    (g) * * *
    (1) * * * Except as provided in paragraph (g)(2) of this section, 
this section applies to any change in the use of MACRS property in a 
taxable year ending on or after June 17, 2004. * * *
    (2) Qualified property under section 168(k) acquired and placed in 
service after September 27, 2017--(i) In general. The language ``or 
Sec.  1.168(k)-2(g)(6)(iii), as applicable'' in paragraph (b)(1) of 
this section, the language ``or Sec.  1.168(k)-2(g)(6)(ii), as 
applicable'' in paragraph (c) of this section, and the language ``or 
Sec.  1.168(k)-2(g)(6)(iv), as applicable'' in paragraphs (d)(3)(i)(C) 
and (d)(4)(i) of this section applies to any change in use of MACRS 
property, which is qualified property under section 168(k)(2), by a 
taxpayer during or after the taxpayer's taxable year that includes 
September 24, 2019.
    (ii) Early application. A taxpayer may choose to apply the language 
``or Sec.  1.168(k)-2(g)(6)(iii), as applicable'' in paragraph (b)(1) 
of this section, the language ``or Sec.  1.168(k)-2(g)(6)(ii), as 
applicable'' in paragraph (c) of this section, and the language ``or 
Sec.  1.168(k)-2(g)(6)(iv), as applicable'' in paragraphs (d)(3)(i)(C) 
and (d)(4)(i) of this section for any change in use of MACRS property, 
which is qualified property under section 168(k)(2) and acquired and 
placed in service after September 27, 2017, by the taxpayer during 
taxable years ending on or after September 28, 2017.
    (iii) Early application of regulation project REG-104397-18. A 
taxpayer may rely on the language ``or Sec.  1.168(k)-2(f)(6)(iii), as 
applicable'' in paragraph (b)(1) of this section, the language ``or 
Sec.  1.168(k)-2(f)(6)(ii), as applicable'' in paragraph (c) of this 
section, and the language ``or Sec.  1.168(k)-2(f)(6)(iv), as 
applicable'' in paragraphs (d)(3)(i)(C) and (d)(4)(i) of this section 
in regulation project REG-104397-18 (2018-41 I.R.B. 558) (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) for any change in use of MACRS 
property, which is qualified property under section 168(k)(2) and 
acquired and placed in service after September 27, 2017, by the 
taxpayer during taxable years ending on or after September 28, 2017, 
and ending before the taxpayer's taxable year that includes September 
24, 2019.
* * * * *

0
Par. 7. Section 1.168(i)-6 is amended:
0
1. In paragraph (d)(3)(ii)(B), by removing ``1.168(k)-1(f)(5) or Sec.  
1.1400L(b)-1(f)(5)'' wherever it appears and adding ``1.168(k)-1(f)(5), 
Sec.  1.168(k)-2(g)(5), or Sec.  1.1400L(b)-1(f)(5)'' in its place;
0
2. In paragraph (d)(3)(ii)(E), by removing ``1.168(k)-1(f)(5) or Sec.  
1.1400L(b)-1(f)(5)'' and adding ``1.168(k)-1(f)(5), Sec.  1.168(k)-
2(g)(5), or Sec.  1.1400L(b)-1(f)(5)'' in its place;
0
3. By adding a sentence at the end of paragraph (d)(4);
0
4. By adding a sentence at the end of paragraph (h);
0
5. By revising paragraph (k)(1); and
0
6. By adding paragraph (k)(4).
    The additions and revision read as follows:


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

* * * * *
    (d) * * *
    (4) * * * Further, see Sec.  1.168(k)-2(g)(5)(iv) for replacement 
MACRS property that is qualified property under section 168(k), as 
amended by the Tax Cuts and Jobs Act, Public Law 115-97 (131 Stat. 2054 
(December 22, 2017)).
* * * * *
    (h) * * * Further, see Sec.  1.168(k)-2(g)(5) for qualified 
property under section 168(k), as amended by the Tax Cuts and Jobs Act, 
Public Law 115-97 (131 Stat. 2054 (December 22, 2017)).
* * * * *
    (k) * * *
    (1) In general. Except as provided in paragraphs (k)(3) and (4) of 
this section, this section applies to a like-kind exchange or an 
involuntary conversion of MACRS property for which the time of 
disposition and the time of replacement both occur after February 27, 
2004.
* * * * *
    (4) Qualified property under section 168(k) acquired and placed in 
service after September 27, 2017--(i) In general. The language 
``1.168(k)-2(g)(5),'' in paragraphs (d)(3)(ii)(B) and (E) of this 
section and the final sentence in paragraphs (d)(4) and (h) of this 
section apply to a like-kind exchange or an involuntary conversion of 
MACRS property, which is qualified property

[[Page 50128]]

under section 168(k)(2), for which the time of replacement occurs on or 
after September 24, 2019.
    (ii) Early application. A taxpayer may choose to apply the language 
``1.168(k)-2(g)(5),'' in paragraphs (d)(3)(ii)(B) and (E) of this 
section and the final sentence in paragraphs (d)(4) and (h) of this 
section to a like-kind exchange or an involuntary conversion of MACRS 
property, which is qualified property under section 168(k)(2), for 
which the time of replacement occurs on or after September 28, 2017.
    (iii) Early application of regulation project REG-104397-18. A 
taxpayer may rely on the language ``1.168(k)-2(f)(5),'' in paragraphs 
(d)(3)(ii)(B) and (E) of this section and the final sentence in 
paragraphs (d)(4) and (h) of this section in regulation project REG-
104397-18 (2018-41 I.R.B. 558) (see Sec.  601.601(d)(2)(ii)(b) of this 
chapter) for a like-kind exchange or an involuntary conversion of MACRS 
property, which is qualified property under section 168(k)(2), for 
which the time of replacement occurs on or after September 28, 2017, 
and occurs before September 24, 2019.

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


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

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


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

    (a) Scope and definitions.
    (1) Scope.
    (2) Definitions.
    (b) Qualified property.
    (1) In general.
    (2) Description of qualified property.
    (i) In general.
    (ii) Property not eligible for additional first year 
depreciation deduction.
    (iii) Examples.
    (3) Original use or used property acquisition requirements.
    (i) In general.
    (ii) Original use.
    (A) In general.
    (B) Conversion to business or income-producing use.
    (C) Fractional interests in property.
    (iii) Used property acquisition requirements.
    (A) In general.
    (B) Property was not used by the taxpayer at any time prior to 
acquisition.
    (C) [Reserved]
    (iv) Application to partnerships.
    (A) Section 704(c) remedial allocations.
    (B) Basis determined under section 732.
    (C) Section 734(b) adjustments.
    (D) Section 743(b) adjustments.
    (v) [Reserved]
    (vi) Syndication transaction.
    (vii) Examples.
    (4) Placed-in-service date.
    (i) In general.
    (ii) Specified plant.
    (iii) Qualified film, television, or live theatrical production.
    (A) Qualified film or television production.
    (B) Qualified live theatrical production.
    (iv) Syndication transaction.
    (v) Technical termination of a partnership.
    (vi) Section 168(i)(7) transactions.
    (5) Acquisition of property.
    (i) In general.
    (ii) Acquisition date.
    (A) In general.
    (B) Determination of acquisition date for property acquired 
pursuant to a written binding contract.
    (iii) Definition of binding contract.
    (A) In general.
    (B) Conditions.
    (C) Options.
    (D) Letter of intent.
    (E) Supply agreements.
    (F) Components.
    (G) [Reserved]
    (iv) Self-constructed property.
    (A) In general.
    (B) When does manufacture, construction, or production begin.
    (C) Components of self-constructed property.
    (v) [Reserved]
    (vi) Qualified film, television, or live theatrical production.
    (A) Qualified film or television production.
    (B) Qualified live theatrical production.
    (vii) Specified plant.
    (viii) Examples.
    (c) [Reserved]
    (d) Property described in section 168(k)(2)(B) or (C).
    (1) In general.
    (2) Definition of binding contract.
    (3) Self-constructed property.
    (i) In general.
    (ii) When does manufacture, construction, or production begin.
    (A) In general.
    (B) Safe harbor.
    (iii) Components of self-constructed property.
    (A) Acquired components.
    (B) Self-constructed components.
    (iv) Examples.
    (e) Computation of depreciation deduction for qualified 
property.
    (1) Additional first year depreciation deduction.
    (i) Allowable taxable year.
    (ii) Computation.
    (iii) Property described in section 168(k)(2)(B).
    (iv) Alternative minimum tax.
    (A) In general.
    (B) Special rules.
    (2) Otherwise allowable depreciation deduction.
    (i) In general.
    (ii) Alternative minimum tax.
    (3) Examples.
    (f) Elections under section 168(k).
    (1) Election not to deduct additional first year depreciation.
    (i) In general.
    (ii) Definition of class of property.
    (iii) Time and manner for making election.
    (A) Time for making election.
    (B) Manner of making election.
    (iv) Failure to make election.
    (2) Election to apply section 168(k)(5) for specified plants.
    (i) In general.
    (ii) Time and manner for making election.
    (A) Time for making election.
    (B) Manner of making election.
    (iii) Failure to make election.
    (3) Election for qualified property placed in service during the 
2017 taxable year.
    (i) In general.
    (ii) Time and manner for making election.
    (A) Time for making election.
    (B) Manner of making election.
    (iii) Failure to make election.
    (4) Alternative minimum tax.
    (5) Revocation of election.
    (i) In general.
    (ii) Automatic 6-month extension.
    (6) Special rules for 2016 and 2017 returns.
    (g) Special rules.
    (1) Property placed in service and disposed of in the same 
taxable year.
    (i) In general.
    (ii) Technical termination of a partnership.
    (iii) Section 168(i)(7) transactions.
    (iv) Examples.
    (2) Redetermination of basis.
    (i) Increase in basis.
    (ii) Decrease in basis.
    (iii) Definitions.
    (iv) Examples.
    (3) Sections 1245 and 1250 depreciation recapture.
    (4) Coordination with section 169.
    (5) Like-kind exchanges and involuntary conversions.
    (i) Scope.
    (ii) Definitions.
    (iii) Computation.
    (A) In general.
    (B) Year of disposition and year of replacement.
    (C) Property described in section 168(k)(2)(B).
    (D) Effect of Sec.  1.168(i)-6(i)(1) election.
    (E) Alternative minimum tax.
    (iv) Replacement MACRS property or replacement computer software 
that is acquired and placed in service before disposition of 
relinquished MACRS property or relinquished computer software.
    (v) Examples.
    (6) Change in use.
    (i) Change in use of MACRS property.
    (ii) Conversion to personal use.
    (iii) Conversion to business or income-producing use.
    (A) During the same taxable year.
    (B) Subsequent to the acquisition year.
    (iv) Depreciable property changes use subsequent to the placed-
in-service year.
    (v) Examples.
    (7) Earnings and profits.
    (8) Limitation of amount of depreciation for certain passenger 
automobiles.
    (9) Coordination with section 47.

[[Page 50129]]

    (i) In general.
    (ii) Example.
    (10) Coordination with section 514(a)(3).
    (11) [Reserved]
    (h) Applicability dates.
    (1) In general.
    (2) Early application of this section.
    (3) Early application of regulation project REG-104397-18.

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


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

    (a) Scope and definitions--(1) Scope. This section provides rules 
for determining the additional first year depreciation deduction 
allowable under section 168(k) for qualified property acquired and 
placed in service after September 27, 2017.
    (2) Definitions. For purposes of this section--
    (i) Act is the Tax Cuts and Jobs Act, Public Law 115-97 (131 Stat. 
2054 (December 22, 2017));
    (ii) Applicable percentage is the percentage provided in section 
168(k)(6);
    (iii) Initial live staged performance is the first commercial 
exhibition of a production to an audience. However, the term initial 
live staged performance does not include limited exhibition prior to 
commercial exhibition to general audiences if the limited exhibition is 
primarily for purposes of publicity, determining the need for further 
production activity, or raising funds for the completion of production. 
For example, an initial live staged performance does not include a 
preview of the production if the preview is primarily to determine the 
need for further production activity; and
    (iv) Predecessor includes--
    (A) A transferor of an asset to a transferee in a transaction to 
which section 381(a) applies;
    (B) A transferor of an asset to a transferee in a transaction in 
which the transferee's basis in the asset is determined, in whole or in 
part, by reference to the basis of the asset in the hands of the 
transferor;
    (C) A partnership that is considered as continuing under section 
708(b)(2) and Sec.  1.708-1;
    (D) The decedent in the case of an asset acquired by the estate; or
    (E) A transferor of an asset to a trust.
    (b) Qualified property--(1) In general. Qualified property is 
depreciable property, as defined in Sec.  1.168(b)-1(a)(1), that meets 
all the following requirements in the first taxable year in which the 
property is subject to depreciation by the taxpayer whether or not 
depreciation deductions for the property are allowable:
    (i) The requirements in Sec.  1.168(k)-2(b)(2) (description of 
qualified property);
    (ii) The requirements in Sec.  1.168(k)-2(b)(3) (original use or 
used property acquisition requirements);
    (iii) The requirements in Sec.  1.168(k)-2(b)(4) (placed-in-service 
date); and
    (iv) The requirements in Sec.  1.168(k)-2(b)(5) (acquisition of 
property).
    (2) Description of qualified property--(i) In general. Depreciable 
property will meet the requirements of this paragraph (b)(2) if the 
property is--
    (A) MACRS property, as defined in Sec.  1.168(b)-1(a)(2), that has 
a recovery period of 20 years or less. For purposes of this paragraph 
(b)(2)(i)(A) and section 168(k)(2)(A)(i)(I), the recovery period is 
determined in accordance with section 168(c) regardless of any election 
made by the taxpayer under section 168(g)(7). This paragraph 
(b)(2)(i)(A) includes the following MACRS property that is acquired by 
the taxpayer after September 27, 2017, and placed in service by the 
taxpayer after September 27, 2017, and before January 1, 2018:
    (1) Qualified leasehold improvement property as defined in section 
168(e)(6) as in effect on the day before amendment by section 
13204(a)(1) of the Act;
    (2) Qualified restaurant property, as defined in section 168(e)(7) 
as in effect on the day before amendment by section 13204(a)(1) of the 
Act, that is qualified improvement property as defined in Sec.  
1.168(b)-1(a)(5)(i)(C) and (a)(5)(ii); and
    (3) Qualified retail improvement property as defined in section 
168(e)(8) as in effect on the day before amendment by section 
13204(a)(1) of the Act;
    (B) Computer software as defined in, and depreciated under, section 
167(f)(1) and Sec.  1.167(a)-14;
    (C) Water utility property as defined in section 168(e)(5) and 
depreciated under section 168;
    (D) Qualified improvement property as defined in Sec.  1.168(b)-
1(a)(5)(i)(C) and (a)(5)(ii) and depreciated under section 168;
    (E) A qualified film or television production, as defined in 
section 181(d) and Sec.  1.181-3, for which a deduction would have been 
allowable under section 181 and Sec. Sec.  1.181-1 through 1.181-6 
without regard to section 181(a)(2) and (g), Sec.  1.181-1(b)(1)(i) and 
(ii), and (b)(2)(i), or section 168(k). Only production costs of a 
qualified film or television production are allowable as a deduction 
under section 181 and Sec. Sec.  1.181-1 through 1.181-6 without 
regard, for purposes of section 168(k), to section 181(a)(2) and (g), 
Sec.  1.181-1(b)(1)(i) and (ii), and (b)(2)(i). The taxpayer that 
claims the additional first year depreciation deduction under this 
section for the production costs of a qualified film or television 
production must be the owner, as defined in Sec.  1.181-1(a)(2), of the 
qualified film or television production. See Sec.  1.181-1(a)(3) for 
the definition of production costs;
    (F) A qualified live theatrical production, as defined in section 
181(e), for which a deduction would have been allowable under section 
181 and Sec. Sec.  1.181-1 through 1.181-6 without regard to section 
181(a)(2) and (g), Sec.  1.181-1(b)(1)(i) and (ii), and (b)(2)(i), or 
section 168(k). Only production costs of a qualified live theatrical 
production are allowable as a deduction under section 181 and 
Sec. Sec.  1.181-1 through 1.181-6 without regard, for purposes of 
section 168(k), to section 181(a)(2) and (g), Sec.  1.181-1(b)(1)(i) 
and (ii), and (b)(2)(i). The taxpayer that claims the additional first 
year depreciation deduction under this section for the production costs 
of a qualified live theatrical production must be the owner, as defined 
in Sec.  1.181-1(a)(2), of the qualified live theatrical production. In 
applying Sec.  1.181-1(a)(2)(ii) to a person that acquires a finished 
or partially-finished qualified live theatrical production, such person 
is treated as an owner of that production, but only if the production 
is acquired prior to its initial live staged performance. Rules similar 
to the rules in Sec.  1.181-1(a)(3) for the definition of production 
costs of a qualified film or television production apply for defining 
production costs of a qualified live theatrical production; or
    (G) A specified plant, as defined in section 168(k)(5)(B), for 
which the taxpayer has properly made an election to apply section 
168(k)(5) for the taxable year in which the specified plant is planted, 
or grafted to a plant that has already been planted, by the taxpayer in 
the ordinary course of the taxpayer's farming business, as defined in 
section 263A(e)(4) (for further guidance, see paragraph (f) of this 
section).
    (ii) Property not eligible for additional first year depreciation 
deduction. Depreciable property will not meet the requirements of this 
paragraph (b)(2) if the property is--
    (A) Described in section 168(f) (for example, automobiles for which 
the taxpayer uses the optional business standard mileage rate);
    (B) Required to be depreciated under the alternative depreciation 
system of section 168(g) pursuant to section 168(g)(1)(A), (B), (C), 
(D), (F), or (G), or

[[Page 50130]]

other provisions of the Internal Revenue Code (for example, property 
described in section 263A(e)(2)(A) if the taxpayer or any related 
person, as defined in section 263A(e)(2)(B), has made an election under 
section 263A(d)(3), or property described in section 280F(b)(1)). If 
section 168(h)(6) applies to the property, only the tax-exempt entity's 
proportionate share of the property, as determined under section 
168(h)(6), is treated as tax-exempt use property described in section 
168(g)(1)(B) and in this paragraph (b)(2)(ii)(B). This paragraph 
(b)(2)(ii)(B) does not apply to property for which the adjusted basis 
is required to be determined using the alternative depreciation system 
of section 168(g) pursuant to section 250(b)(2)(B) or 951A(d)(3), as 
applicable, or to property for which the adjusted basis is required to 
be determined using the alternative depreciation system of section 
168(g) for allocating business interest expense between excepted and 
non-excepted trades or businesses under section 163(j), but only if the 
property is not required to be depreciated under the alternative 
depreciation system of section 168(g) pursuant to section 168(g)(1)(A), 
(B), (C), (D), (F), or (G), or other provisions of the Code, other than 
section 163(j), 250(b)(2)(B), or 951A(d)(3), as applicable;
    (C) Included in any class of property for which the taxpayer elects 
not to deduct the additional first year depreciation (for further 
guidance, see paragraph (f) of this section);
    (D) A specified plant that is placed in service by the taxpayer 
during the taxable year and for which the taxpayer made an election to 
apply section 168(k)(5) for a prior taxable year;
    (E) Included in any class of property for which the taxpayer elects 
to apply section 168(k)(4). This paragraph (b)(2)(ii)(E) applies to 
property placed in service by the taxpayer in any taxable year 
beginning before January 1, 2018;
    (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; or
    (G) 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. Such property also must be placed in service by the 
taxpayer in any taxable year beginning after December 31, 2017.
    (iii) Examples. The application of this paragraph (b)(2) is 
illustrated by the following examples. Unless the facts specifically 
indicate otherwise, assume that the parties are not related within the 
meaning of section 179(d)(2)(A) or (B) and Sec.  1.179-4(c), and are 
not described in section 163(j)(3):

    (A) Example 1. On February 8, 2018, A finishes the production of 
a qualified film, as defined in Sec.  1.181-3. On June 4, 2018, B 
acquires this finished production from A. The initial release or 
broadcast, as defined in Sec.  1.181-1(a)(7), of this qualified film 
is on July 28, 2018. Because B acquired the qualified film before 
its initial release or broadcast, B is treated as the owner of the 
qualified film for purposes of section 181 and Sec.  1.181-1(a)(2). 
Assuming all other requirements of this section are met and all 
requirements of section 181 and Sec. Sec.  1.181-1 through 1.181-6, 
other than section 181(a)(2) and (g), and Sec.  1.181-1(b)(1)(i) and 
(ii), and (b)(2)(i), are met, B's acquisition cost of the qualified 
film qualifies for the additional first year depreciation deduction 
under this section.
    (B) Example 2. The facts are the same as in Example 1 of 
paragraph (b)(2)(iii)(A) of this section, except that B acquires a 
limited license or right to release the qualified film in Europe. As 
a result, B is not treated as the owner of the qualified film 
pursuant to Sec.  1.181-1(a)(2). Accordingly, paragraph (b)(2)(i)(E) 
of this section is not satisfied, and B's acquisition cost of the 
license or right does not qualify for the additional first year 
depreciation deduction.
    (C) Example 3. C owns a film library. All of the films in this 
film library are completed and have been released or broadcasted. In 
2018, D buys this film library from C. Because D acquired the films 
after their initial release or broadcast, D's acquisition cost of 
the film library does not qualify for a deduction under section 181. 
As a result, paragraph (b)(2)(i)(E) of this section is not 
satisfied, and D's acquisition cost of the film library does not 
qualify for the additional first year depreciation deduction.
    (D) Example 4. During 2019, E Corporation, a domestic 
corporation, acquired new equipment for use in its manufacturing 
trade or business in Mexico. To determine its qualified business 
asset investment for purposes of section 250, E Corporation must 
determine the adjusted basis of the new equipment using the 
alternative depreciation system of section 168(g) pursuant to 
sections 250(b)(2)(B) and 951A(d)(3). E Corporation also is required 
to depreciate the new equipment under the alternative depreciation 
system of section 168(g) pursuant to section 168(g)(1)(A). As a 
result, the new equipment does not qualify for the additional first 
year depreciation deduction pursuant to paragraph (b)(2)(ii)(B) of 
this section.
    (E) Example 5. The facts are the same as in Example 4 of 
paragraph (b)(2)(iii)(D) of this section, except E Corporation 
acquired the new equipment for use in its manufacturing trade or 
business in California. The new equipment is not described in 
section 168(g)(1)(A), (B), (C), (D), (F), or (G). No other provision 
of the Internal Revenue Code, other than section 250(b)(2)(B) or 
951A(d)(3), requires the new equipment to be depreciated using the 
alternative depreciation system of section 168(g). To determine its 
qualified business asset investment for purposes of section 250, E 
Corporation must determine the adjusted basis of the new equipment 
using the alternative depreciation system of section 168(g) pursuant 
to sections 250(b)(2)(B) and 951A(d)(3). Because E Corporation is 
not required to depreciate the new equipment under the alternative 
depreciation system of section 168(g), paragraph (b)(2)(ii)(B) of 
this section does not apply to this new equipment. Assuming all 
other requirements are met, the new equipment qualifies for the 
additional first year depreciation deduction under this section.

    (3) Original use or used property acquisition requirements--(i) In 
general. Depreciable property will meet the requirements of this 
paragraph (b)(3) if the property meets the original use requirements in 
paragraph (b)(3)(ii) of this section or if the property meets the used 
property acquisition requirements in paragraph (b)(3)(iii) of this 
section.
    (ii) Original use--(A) In general. Depreciable property will meet 
the requirements of this paragraph (b)(3)(ii) if the original use of 
the property commences with the taxpayer. Except as provided in 
paragraphs (b)(3)(ii)(B) and (C) of this section, original use means 
the first use to which the property is put, whether or not that use 
corresponds to the use of the property by the taxpayer. Additional 
capital expenditures paid or incurred by a taxpayer to recondition or 
rebuild property acquired or owned by the taxpayer satisfy the original 
use requirement. However, the cost of reconditioned or rebuilt property 
does not satisfy the original use requirement (but may satisfy the used 
property acquisition requirements in paragraph (b)(3)(iii) of this 
section). The question of whether property is reconditioned or rebuilt 
property is a question of fact. For purposes of this paragraph 
(b)(3)(ii)(A), property that contains used parts will not be treated as 
reconditioned or rebuilt if the cost of the used parts is not more than 
20 percent of the total cost of the property, whether acquired or self-
constructed.
    (B) Conversion to business or income-producing use--(1) Personal 
use to business or income-producing use. If a taxpayer initially 
acquires new property for personal use and subsequently uses the 
property in the taxpayer's trade or business or for the taxpayer's 
production of income, the taxpayer is considered the original user of 
the property. If a person initially acquires new property for personal 
use and a taxpayer subsequently acquires the property from the person 
for use in the taxpayer's trade or business or for the

[[Page 50131]]

taxpayer's production of income, the taxpayer is not considered the 
original user of the property.
    (2) Inventory to business or income-producing use. If a taxpayer 
initially acquires new property and holds the property primarily for 
sale to customers in the ordinary course of the taxpayer's business and 
subsequently withdraws the property from inventory and uses the 
property primarily in the taxpayer's trade or business or primarily for 
the taxpayer's production of income, the taxpayer is considered the 
original user of the property. If a person initially acquires new 
property and holds the property primarily for sale to customers in the 
ordinary course of the person's business and a taxpayer subsequently 
acquires the property from the person for use primarily in the 
taxpayer's trade or business or primarily for the taxpayer's production 
of income, the taxpayer is considered the original user of the 
property. For purposes of this paragraph (b)(3)(ii)(B)(2), the original 
use of the property by the taxpayer commences on the date on which the 
taxpayer uses the property primarily in the taxpayer's trade or 
business or primarily for the taxpayer's production of income.
    (C) Fractional interests in property. If, in the ordinary course of 
its business, a taxpayer sells fractional interests in new property to 
third parties unrelated to the taxpayer, each first fractional owner of 
the property is considered as the original user of its proportionate 
share of the property. Furthermore, if the taxpayer uses the property 
before all of the fractional interests of the property are sold but the 
property continues to be held primarily for sale by the taxpayer, the 
original use of any fractional interest sold to a third party unrelated 
to the taxpayer subsequent to the taxpayer's use of the property begins 
with the first purchaser of that fractional interest. For purposes of 
this paragraph (b)(3)(ii)(C), persons are not related if they do not 
have a relationship described in section 267(b) and Sec.  1.267(b)-1, 
or section 707(b) and Sec.  1.707-1.
    (iii) Used property acquisition requirements--(A) In general. 
Depreciable property will meet the requirements of this paragraph 
(b)(3)(iii) if the acquisition of the used property meets the following 
requirements:
    (1) Such property was not used by the taxpayer or a predecessor at 
any time prior to such acquisition;
    (2) The acquisition of such property meets the requirements of 
section 179(d)(2)(A), (B), and (C), and Sec.  1.179-4(c)(1)(ii), (iii), 
and (iv); or Sec.  1.179-4(c)(2) (property is acquired by purchase); 
and
    (3) The acquisition of such property meets the requirements of 
section 179(d)(3) and Sec.  1.179-4(d) (cost of property) (for further 
guidance regarding like-kind exchanges and involuntary conversions, see 
paragraph (g)(5) of this section).
    (B) Property was not used by the taxpayer at any time prior to 
acquisition--(1) In general. Solely for purposes of paragraph 
(b)(3)(iii)(A)(1) of this section, the property is treated as used by 
the taxpayer or a predecessor at any time prior to acquisition by the 
taxpayer or predecessor if the taxpayer or the predecessor had a 
depreciable interest in the property at any time prior to such 
acquisition, whether or not the taxpayer or the predecessor claimed 
depreciation deductions for the property. To determine if the taxpayer 
or a predecessor had a depreciable interest in the property at any time 
prior to acquisition, only the five calendar years immediately prior to 
the taxpayer's current placed-in-service year of the property is taken 
into account. If the taxpayer and a predecessor have not been in 
existence for this entire five-year period, only the number of calendar 
years the taxpayer and the predecessor have been in existence is taken 
into account. If a lessee has a depreciable interest in the 
improvements made to leased property and subsequently the lessee 
acquires the leased property of which the improvements are a part, the 
unadjusted depreciable basis, as defined in Sec.  1.168(b)-1(a)(3), of 
the acquired property that is eligible for the additional first year 
depreciation deduction, assuming all other requirements are met, must 
not include the unadjusted depreciable basis attributable to the 
improvements.
    (2) Taxpayer has a depreciable interest in a portion of the 
property. If a taxpayer initially acquires a depreciable interest in a 
portion of the property and subsequently acquires a depreciable 
interest in an additional portion of the same property, such additional 
depreciable interest is not treated as used by the taxpayer at any time 
prior to its acquisition by the taxpayer under paragraphs 
(b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of this section. This paragraph 
(b)(3)(iii)(B)(2) does not apply if the taxpayer or a predecessor 
previously had a depreciable interest in the subsequently acquired 
additional portion. For purposes of this paragraph (b)(3)(iii)(B)(2), a 
portion of the property is considered to be the percentage interest in 
the property. If a taxpayer holds a depreciable interest in a portion 
of the property, sells that portion or a part of that portion, and 
subsequently acquires a depreciable interest in another portion of the 
same property, the taxpayer will be treated as previously having a 
depreciable interest in the property up to the amount of the portion 
for which the taxpayer held a depreciable interest in the property 
before the sale.
    (3) Substantial renovation of property. If a taxpayer acquires and 
places in service substantially renovated property and the taxpayer or 
a predecessor previously had a depreciable interest in the property 
before it was substantially renovated, the taxpayer's or predecessor's 
depreciable interest in the property before it was substantially 
renovated is not taken into account for determining whether the 
substantially renovated property was used by the taxpayer or a 
predecessor at any time prior to its acquisition by the taxpayer under 
paragraphs (b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of this section. For 
purposes of this paragraph (b)(3)(iii)(B)(3), property is substantially 
renovated if the cost of the used parts is not more than 20 percent of 
the total cost of the substantially renovated property, whether 
acquired or self-constructed.
    (C) [Reserved]
    (iv) Application to partnerships--(A) Section 704(c) remedial 
allocations. Remedial allocations under section 704(c) do not satisfy 
the requirements of paragraph (b)(3) of this section. See Sec.  1.704-
3(d)(2).
    (B) Basis determined under section 732. Any basis of distributed 
property determined under section 732 does not satisfy the requirements 
of paragraph (b)(3) of this section.
    (C) Section 734(b) adjustments. Any increase in basis of 
depreciable property under section 734(b) does not satisfy the 
requirements of paragraph (b)(3) of this section.
    (D) Section 743(b) adjustments--(1) In general. For purposes of 
determining whether the transfer of a partnership interest meets the 
requirements of paragraph (b)(3)(iii)(A) of this section, each partner 
is treated as having a depreciable interest in the partner's 
proportionate share of partnership property. Any increase in basis of 
depreciable property under section 743(b) satisfies the requirements of 
paragraph (b)(3)(iii)(A) of this section if--
    (i) At any time prior to the transfer of the partnership interest 
that gave rise to such basis increase, neither the transferee partner 
nor a predecessor of the transferee partner had any depreciable 
interest in the portion of the property deemed acquired to which the

[[Page 50132]]

section 743(b) adjustment is allocated under section 755 and Sec.  
1.755-1; and
    (ii) The transfer of the partnership interest that gave rise to 
such basis increase satisfies the requirements of paragraphs 
(b)(3)(iii)(A)(2) and (3) of this section.
    (2) Relatedness tested at partner level. Solely for purposes of 
paragraph (b)(3)(iv)(D)(1)(ii) of this section, whether the parties are 
related or unrelated is determined by comparing the transferor and the 
transferee of the transferred partnership interest.
    (v) [Reserved]
    (vi) Syndication transaction. If new property is acquired and 
placed in service by a lessor, or if used property is acquired and 
placed in service by a lessor and the lessor or a predecessor did not 
previously have a depreciable interest in the used property, and the 
property is sold by the lessor or any subsequent purchaser within three 
months after the date the property was originally placed in service by 
the lessor (or, in the case of multiple units of property subject to 
the same lease, within three months after the date the final unit is 
placed in service, so long as the period between the time the first 
unit is placed in service and the time the last unit is placed in 
service does not exceed 12 months), and the user of the property after 
the last sale during the three-month period remains the same as when 
the property was originally placed in service by the lessor, the 
purchaser of the property in the last sale during the three-month 
period is considered the taxpayer that acquired the property for 
purposes of applying paragraphs (b)(3)(ii) and (iii) of this section. 
The purchaser of the property in the last sale during the three-month 
period is treated, for purposes of applying paragraph (b)(3) of this 
section, as--
    (A) The original user of the property in this transaction if the 
lessor acquired and placed in service new property; or
    (B) The taxpayer having the depreciable interest in the property in 
this transaction if the lessor acquired and placed in service used 
property.
    (vii) Examples. The application of this paragraph (b)(3) is 
illustrated by the following examples. Unless the facts specifically 
indicate otherwise, assume that the parties are not related within the 
meaning of section 179(d)(2)(A) or (B) and Sec.  1.179-4(c), no 
corporation is a member of a consolidated or controlled group, and the 
parties do not have predecessors:

    (A) Example 1. (1) On August 1, 2018, A buys a new machine for 
$35,000 from an unrelated party for use in A's trade or business. On 
July 1, 2020, B buys that machine from A for $20,000 for use in B's 
trade or business. On October 1, 2020, B makes a $5,000 capital 
expenditure to recondition the machine. B did not have any 
depreciable interest in the machine before B acquired it on July 1, 
2020.
    (2) A's purchase price of $35,000 satisfies the original use 
requirement of paragraph (b)(3)(ii) of this section and, assuming 
all other requirements are met, qualifies for the additional first 
year depreciation deduction under this section.
    (3) B's purchase price of $20,000 does not satisfy the original 
use requirement of paragraph (b)(3)(ii) of this section, but it does 
satisfy the used property acquisition requirements of paragraph 
(b)(3)(iii) of this section. Assuming all other requirements are 
met, the $20,000 purchase price qualifies for the additional first 
year depreciation deduction under this section. Further, B's $5,000 
expenditure satisfies the original use requirement of paragraph 
(b)(3)(ii) of this section and, assuming all other requirements are 
met, qualifies for the additional first year depreciation deduction 
under this section, regardless of whether the $5,000 is added to the 
basis of the machine or is capitalized as a separate asset.
    (B) Example 2. C, an automobile dealer, uses some of its 
automobiles as demonstrators in order to show them to prospective 
customers. The automobiles that are used as demonstrators by C are 
held by C primarily for sale to customers in the ordinary course of 
its business. On November 1, 2017, D buys from C an automobile that 
was previously used as a demonstrator by C. D will use the 
automobile solely for business purposes. The use of the automobile 
by C as a demonstrator does not constitute a ``use'' for purposes of 
the original use requirement and, therefore, D will be considered 
the original user of the automobile for purposes of paragraph 
(b)(3)(ii) of this section. Assuming all other requirements are met, 
D's purchase price of the automobile qualifies for the additional 
first year depreciation deduction for D under this section, subject 
to any limitation under section 280F.
    (C) Example 3. On April 1, 2015, E acquires a horse to be used 
in E's thoroughbred racing business. On October 1, 2018, F buys the 
horse from E and will use the horse in F's horse breeding business. 
F did not have any depreciable interest in the horse before F 
acquired it on October 1, 2018. The use of the horse by E in its 
racing business prevents F from satisfying the original use 
requirement of paragraph (b)(3)(ii) of this section. However, F's 
acquisition of the horse satisfies the used property acquisition 
requirements of paragraph (b)(3)(iii) of this section. Assuming all 
other requirements are met, F's purchase price of the horse 
qualifies for the additional first year depreciation deduction for F 
under this section.
    (D) Example 4. In the ordinary course of its business, G sells 
fractional interests in its aircraft to unrelated parties. G holds 
out for sale eight equal fractional interests in an aircraft. On 
October 1, 2017, G sells five of the eight fractional interests in 
the aircraft to H and H begins to use its proportionate share of the 
aircraft immediately upon purchase. On February 1, 2018, G sells to 
I the remaining unsold \3/8\ fractional interests in the aircraft. H 
is considered the original user as to its \5/8\ fractional interest 
in the aircraft and I is considered the original user as to its \3/
8\ fractional interest in the aircraft. Thus, assuming all other 
requirements are met, H's purchase price for its \5/8\ fractional 
interest in the aircraft qualifies for the additional first year 
depreciation deduction under this section and I's purchase price for 
its \3/8\ fractional interest in the aircraft qualifies for the 
additional first year depreciation deduction under this section.
    (E) Example 5. On September 1, 2017, J, an equipment dealer, 
buys new tractors that are held by J primarily for sale to customers 
in the ordinary course of its business. On October 15, 2017, J 
withdraws the tractors from inventory and begins to use the tractors 
primarily for producing rental income. The holding of the tractors 
by J as inventory does not constitute a ``use'' for purposes of the 
original use requirement and, therefore, the original use of the 
tractors commences with J on October 15, 2017, for purposes of 
paragraph (b)(3)(ii) of this section. However, the tractors are not 
eligible for the additional first year depreciation deduction under 
this section because J acquired the tractors before September 28, 
2017.
    (F) Example 6. K is in the trade or business of leasing 
equipment to others. During 2016, K buys a new machine (Machine #1) 
and then leases it to L for use in L's trade or business. The lease 
between K and L for Machine #1 is a true lease for Federal income 
tax purposes. During 2018, L enters into a written binding contract 
with K to buy Machine #1 at its fair market value on May 15, 2018. L 
did not have any depreciable interest in Machine #1 before L 
acquired it on May 15, 2018. As a result, L's acquisition of Machine 
#1 satisfies the used property acquisition requirements of paragraph 
(b)(3)(iii) of this section. Assuming all other requirements are 
met, L's purchase price of Machine #1 qualifies for the additional 
first year depreciation deduction for L under this section.
    (G) Example 7. The facts are the same as in Example 6 of 
paragraph (b)(3)(vii)(F) of this section, except that K and L are 
related parties within the meaning of section 179(d)(2)(A) or (B) 
and Sec.  1.179-4(c). As a result, L's acquisition of Machine #1 
does not satisfy the used property acquisition requirements of 
paragraph (b)(3)(iii) of this section. Thus, Machine #1 is not 
eligible for the additional first year depreciation deduction for L.
    (H) Example 8. The facts are the same as in Example 6 of 
paragraph (b)(3)(vii)(F) of this section, except L incurred capital 
expenditures of $5,000 to improve Machine #1 on September 5, 2017, 
and has a depreciable interest in such improvements. L's purchase 
price of $5,000 for the improvements to Machine #1 satisfies the 
original use requirement of Sec.  1.168(k)-1(b)(3)(i) and, assuming 
all other requirements are met, qualifies for the 50-percent 
additional first year depreciation deduction. Because L had a 
depreciable interest only in the improvements to Machine #1, L's 
acquisition of Machine #1,

[[Page 50133]]

excluding L's improvements to such machine, satisfies the used 
property acquisition requirements of paragraph (b)(3)(iii) of this 
section. Assuming all other requirements are met, L's unadjusted 
depreciable basis of Machine #1, excluding the amount of such 
unadjusted depreciable basis attributable to L's improvements to 
Machine #1, qualifies for the additional first year depreciation 
deduction for L under this section.
    (I) Example 9. During 2016, M and N purchased used equipment for 
use in their trades or businesses and each own a 50 percent interest 
in such equipment. Prior to this acquisition, M and N did not have 
any depreciable interest in the equipment. Assume this ownership 
arrangement is not a partnership. During 2018, N enters into a 
written binding contract with M to buy M's interest in the 
equipment. Pursuant to paragraph (b)(3)(iii)(B)(2) of this section, 
N is not treated as using M's interest in the equipment prior to N's 
acquisition of M's interest. As a result, N's acquisition of M's 
interest in the equipment satisfies the used property acquisition 
requirements of paragraph (b)(3)(iii) of this section. Assuming all 
other requirements are met, N's purchase price of M's interest in 
the equipment qualifies for the additional first year depreciation 
deduction for N under this section.
    (J) Example 10. The facts are the same as in Example 9 of 
paragraph (b)(3)(vii)(I) of this section, except N had a 100-percent 
depreciable interest in the equipment during 2011 through 2015, and 
M purchased from N a 50-percent interest in the equipment during 
2016. Pursuant to paragraph (b)(3)(iii)(B)(1) of this section, the 
lookback period is 2013 through 2017 to determine if N had a 
depreciable interest in M's 50-percent interest in the equipment N 
acquired from M in 2018. Because N had a 100-percent depreciable 
interest in the equipment during 2013 through 2015, N had a 
depreciable interest in M's 50-percent interest in the equipment 
during the lookback period. As a result, N's acquisition of M's 
interest in the equipment during 2018 does not satisfy the used 
property acquisition requirements of paragraphs (b)(3)(iii)(A)(1) 
and (b)(3)(iii)(B)(1) of this section. Paragraph (b)(3)(iii)(B)(2) 
of this section does not apply because N initially acquired a 100-
percent depreciable interest in the equipment. Accordingly, N's 
purchase price of M's interest in the equipment during 2018 does not 
qualify for the additional first year depreciation deduction for N.
    (K) Example 11. The facts are the same as in Example 9 of 
paragraph (b)(3)(vii)(I) of this section, except N had a 100-percent 
depreciable interest in the equipment only during 2011, and M 
purchased from N a 50-percent interest in the equipment during 2012. 
Pursuant to paragraph (b)(3)(iii)(B)(1) of this section, the 
lookback period is 2013 through 2017 to determine if N had a 
depreciable interest in M's 50-percent interest in the equipment N 
acquired from M in 2018. Because N had a depreciable interest in 
only its 50-percent interest in the equipment during this lookback 
period, N's acquisition of M's interest in the equipment during 2018 
satisfies the used property acquisition requirements of paragraphs 
(b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of this section. Assuming 
all other requirements are met, N's purchase price of M's interest 
in the equipment during 2018 qualifies for the additional first year 
depreciation deduction for N under this section.
    (L) Example 12. The facts are the same as in Example 9 of 
paragraph (b)(3)(vii)(I) of this section, except during 2018, M also 
enters into a written binding contract with N to buy N's interest in 
the equipment. Pursuant to paragraph (b)(3)(iii)(B)(2) of this 
section, both M and N are treated as previously having a depreciable 
interest in a 50-percent portion of the equipment. Accordingly, the 
acquisition by M of N's 50-percent interest and the acquisition by N 
of M's 50-percent interest in the equipment during 2018 do not 
qualify for the additional first year depreciation deduction.
    (M) Example 13. O and P form an equal partnership, OP, in 2018. 
O contributes cash to OP, and P contributes equipment to OP. OP's 
basis in the equipment contributed by P is determined under section 
723. Because OP's basis in such equipment is determined in whole or 
in part by reference to P's adjusted basis in such equipment, OP's 
acquisition of such equipment does not satisfy section 179(d)(2)(C) 
and Sec.  1.179-4(c)(1)(iv) and, thus, does not satisfy the used 
property acquisition requirements of paragraph (b)(3)(iii) of this 
section. Accordingly, OP's acquisition of such equipment is not 
eligible for the additional first year depreciation deduction.
    (N) Example 14. Q, R, and S form an equal partnership, QRS, in 
2019. Each partner contributes $100, which QRS uses to purchase a 
retail motor fuels outlet for $300. Assume this retail motor fuels 
outlet is QRS' only property and is qualified property under section 
168(k)(2)(A)(i). QRS makes an election not to deduct the additional 
first year depreciation for all qualified property placed in service 
during 2019. QRS has a section 754 election in effect. QRS claimed 
depreciation of $15 for the retail motor fuels outlet for 2019. 
During 2020, when the retail motor fuels outlet's fair market value 
is $600, Q sells all of its partnership interest to T in a fully 
taxable transaction for $200. T never previously had a depreciable 
interest in the retail motor fuels outlet. T takes an outside basis 
of $200 in the partnership interest previously owned by Q. T's share 
of the partnership's previously taxed capital is $95. Accordingly, 
T's section 743(b) adjustment is $105 and is allocated entirely to 
the retail motor fuels outlet under section 755. Assuming all other 
requirements are met, T's section 743(b) adjustment qualifies for 
the additional first year depreciation deduction under this section.
    (O) Example 15. The facts are the same as in Example 14 of 
paragraph (b)(3)(vii)(N) of this section, except that Q sells his 
partnership interest to U, a related person within the meaning of 
section 179(d)(2)(A) or (B) and Sec.  1.179-4(c). U's section 743(b) 
adjustment does not qualify for the additional first year 
depreciation deduction.
    (P) Example 16. The facts are the same as in Example 14 of 
paragraph (b)(3)(vii)(N) of this section, except that Q dies and his 
partnership interest is transferred to V. V takes a basis in Q's 
partnership interest under section 1014. As a result, section 
179(d)(2)(C)(ii) and Sec.  1.179-4(c)(1)(iv) are not satisfied, and 
V's section 743(b) adjustment does not qualify for the additional 
first year depreciation deduction.
    (Q) Example 17. The facts are the same as in Example 14 of 
paragraph (b)(3)(vii)(N) of this section, except that QRS purchased 
the retail motor fuels outlet from T prior to T purchasing Q's 
partnership interest in QRS. T had a depreciable interest in such 
retail motor fuels outlet. Because T had a depreciable interest in 
the retail motor fuels outlet before T acquired its interest in QRS, 
T's section 743(b) adjustment does not qualify for the additional 
first year depreciation deduction.
    (R) Example 18. (1) W, a freight transportation company, 
acquires and places in service a used aircraft during 2019 (Airplane 
#1). Prior to this acquisition, W never had a depreciable interest 
in this aircraft. During September 2020, W enters into a written 
binding contract with a third party to renovate Airplane #1. The 
third party begins to renovate Airplane #1 in October 2020 and 
delivers the renovated aircraft (Airplane #2) to W in February 2021. 
To renovate Airplane #1, the third party used mostly new parts but 
also used parts from Airplane #1. The cost of the used parts is not 
more than 20 percent of the total cost of the renovated airplane, 
Airplane #2. W uses Airplane #2 in its trade or business.
    (2) Although Airplane #2 contains used parts, the cost of the 
used parts is not more than 20 percent of the total cost of Airplane 
#2. As a result, Airplane #2 is not treated as reconditioned or 
rebuilt property, and W is considered the original user of Airplane 
#2, pursuant to paragraph (b)(3)(ii)(A) of this section. 
Accordingly, assuming all other requirements are met, the amount 
paid or incurred by W for Airplane #2 qualifies for the additional 
first year depreciation deduction for W under this section.
    (S) Example 19. (1) X, a freight transportation company, 
acquires and places in service a new aircraft in 2019 (Airplane #1). 
During 2022, X sells Airplane #1 to AB and AB uses Airplane #1 in 
its trade or business. Prior to this acquisition, AB never had a 
depreciable interest in Airplane #1. During January 2023, AB enters 
into a written binding contract with a third party to renovate 
Airplane #1. The third party begins to renovate Airplane #1 in 
February 2023 and delivers the renovated aircraft (Airplane #2) to 
AB in June 2023. To renovate Airplane #1, the third party used 
mostly new parts but also used parts from Airplane #1. The cost of 
the used parts is not more than 20 percent of the total cost of the 
renovated airplane, Airplane #2. AB uses Airplane #2 in its trade or 
business. During 2025, AB sells Airplane #2 to X and X uses Airplane 
#2 in its trade or business.
    (2) With respect to X's purchase of Airplane #1 in 2019, X is 
the original user of this airplane pursuant to paragraph 
(b)(3)(ii)(A) of this section. Accordingly, assuming all other 
requirements are met, X's purchase price for Airplane #1 qualifies 
for

[[Page 50134]]

the additional first year depreciation deduction for X under this 
section.
    (3) Because AB never had a depreciable interest in Airplane #1 
prior to its acquisition in 2022, the requirements of paragraphs 
(b)(3)(iii)(A)(1) and (b)(3)(ii)(B)(1) of this section are 
satisfied. Accordingly, assuming all other requirements are met, 
AB's purchase price for Airplane #1 qualifies for the additional 
first year depreciation deduction for AB under this section.
    (4) Although Airplane #2 contains used parts, the cost of the 
used parts is not more than 20 percent of the total cost of Airplane 
#2. As a result, Airplane #2 is not treated as reconditioned or 
rebuilt property, and AB is considered the original user of Airplane 
#2, pursuant to paragraph (b)(3)(ii)(A) of this section. 
Accordingly, assuming all other requirements are met, the amount 
paid or incurred by AB for Airplane #2 qualifies for the additional 
first year depreciation deduction for AB under this section.
    (5) With respect to X's purchase of Airplane #2 in 2025, 
Airplane #2 is substantially renovated property pursuant to 
paragraph (b)(3)(iii)(B)(3) of this section. Also, pursuant to 
paragraph (b)(3)(iii)(B)(3) of this section, X's depreciable 
interest in Airplane #1 is not taken into account for determining if 
X previously had a depreciable interest in Airplane #2 prior to its 
acquisition during 2025. As a result, Airplane #2 is not treated as 
used by X at any time before its acquisition of Airplane #2 in 2025 
pursuant to paragraph (b)(3)(iii)(B)(3) of this section. 
Accordingly, assuming all other requirements are met, X's purchase 
price of Airplane #2 qualifies for the additional first year 
depreciation deduction for X under this section.
    (T) Example 20. In November 2017, AA Corporation purchases a 
used drill press costing $10,000 and is granted a trade-in allowance 
of $2,000 on its old drill press. The used drill press is qualified 
property under section 168(k)(2)(A)(i). The old drill press had a 
basis of $1,200. Under sections 1012 and 1031(d), the basis of the 
used drill press is $9,200 ($1,200 basis of old drill press plus 
cash expended of $8,000). Only $8,000 of the basis of the used drill 
press satisfies the requirements of section 179(d)(3) and Sec.  
1.179-4(d) and, thus, satisfies the used property acquisition 
requirement of paragraph (b)(3)(iii) of this section. The remaining 
$1,200 of the basis of the used drill press does not satisfy the 
requirements of section 179(d)(3) and Sec.  1.179-4(d) because it is 
determined by reference to the old drill press. Accordingly, 
assuming all other requirements are met, only $8,000 of the basis of 
the used drill press is eligible for the additional first year 
depreciation deduction under this section.
    (U) Example 21. (1) M Corporation acquires and places in service 
a used airplane on March 26, 2018. Prior to this acquisition, M 
Corporation never had a depreciable interest in this airplane. On 
March 26, 2018, M Corporation also leases the used airplane to N 
Corporation, an airline company. On May 27, 2018, M Corporation 
sells to O Corporation the used airplane subject to the lease with N 
Corporation. M Corporation and O Corporation are related parties 
within the meaning of section 179(d)(2)(A) or (B) and Sec.  1.179-
4(c). As of May 27, 2018, N Corporation is still the lessee of the 
used airplane. Prior to this acquisition, O Corporation never had a 
depreciable interest in the used airplane. O Corporation is a 
calendar-year taxpayer.
    (2) The sale transaction of May 27, 2018, satisfies the 
requirements of a syndication transaction described in paragraph 
(b)(3)(vi) of this section. As a result, O Corporation is considered 
the taxpayer that acquired the used airplane for purposes of 
applying the used property acquisition requirements in paragraph 
(b)(3)(iii) of this section. In applying these rules, the fact that 
M Corporation and O Corporation are related parties is not taken 
into account because O Corporation, not M Corporation, is treated as 
acquiring the used airplane. Also, O Corporation, not M Corporation, 
is treated as having the depreciable interest in the used airplane. 
Further, pursuant to paragraph (b)(4)(iv) of this section, the used 
airplane is treated as originally placed in service by O Corporation 
on May 27, 2018. Because O Corporation never had a depreciable 
interest in the used airplane and assuming all other requirements 
are met, O Corporation's purchase price of the used airplane 
qualifies for the additional first year depreciation deduction for O 
Corporation under this section.
    (V) Example 22. (1) The facts are the same as in Example 21 of 
paragraph (b)(3)(vii)(U)(1) of this section. Additionally, on 
September 5, 2018, O Corporation sells to P Corporation the used 
airplane subject to the lease with N Corporation. Prior to this 
acquisition, P Corporation never had a depreciable interest in the 
used airplane.
    (2) Because O Corporation, a calendar-year taxpayer, placed in 
service and disposed of the used airplane during 2018, the used 
airplane is not eligible for the additional first year depreciation 
deduction for O Corporation pursuant to paragraph (g)(1)(i) of this 
section.
    (3) Because P Corporation never had a depreciable interest in 
the used airplane and assuming all other requirements are met, P 
Corporation's purchase price of the used airplane qualifies for the 
additional first year depreciation deduction for P Corporation under 
this section.
    (W) Example 23. (1) The facts are the same as in Example 21 of 
paragraph (b)(3)(vii)(U)(1) of this section, except M Corporation 
and O Corporation are not related parties within the meaning of 
section 179(d)(2)(A) or (B) and Sec.  1.179-4(c). Additionally, on 
March 26, 2020, O Corporation sells to M Corporation the used 
airplane subject to the lease with N Corporation.
    (2) The sale transaction of May 27, 2018, satisfies the 
requirements of a syndication transaction described in paragraph 
(b)(3)(vi) of this section. As a result, O Corporation is considered 
the taxpayer that acquired the used airplane for purposes of 
applying the used property acquisition requirements in paragraph 
(b)(3)(iii) of this section. Also, O Corporation, not M Corporation, 
is treated as having the depreciable interest in the used airplane. 
Further, pursuant to paragraph (b)(4)(iv) of this section, the used 
airplane is treated as originally placed in service by O Corporation 
on May 27, 2018. Because O Corporation never had a depreciable 
interest in the used airplane before its acquisition in 2018 and 
assuming all other requirements are met, O Corporation's purchase 
price of the used airplane qualifies for the additional first year 
depreciation deduction for O Corporation under this section.
    (3) Prior to its acquisition of the used airplane on March 26, 
2020, M Corporation never had a depreciable interest in the used 
airplane pursuant to paragraph (b)(3)(vi) of this section. Assuming 
all other requirements are met, M Corporation's purchase price of 
the used airplane on March 26, 2020, qualifies for the additional 
first year depreciation deduction for M Corporation under this 
section.
    (X) Example 24. (1) J, K, and L are corporations that are 
unrelated parties within the meaning of section 179(d)(2)(A) or (B) 
and Sec.  1.179-4(c). None of J, K, or L is a member of a 
consolidated group. J has a depreciable interest in Equipment #5. 
During 2018, J sells Equipment #5 to K. During 2020, J merges into L 
in a transaction described in section 368(a)(1)(A). In 2021, L 
acquires Equipment #5 from K.
    (2) Because J is the predecessor of L, and because J previously 
had a depreciable interest in Equipment #5, L's acquisition of 
Equipment #5 does not satisfy paragraphs (b)(3)(iii)(A)(1) and 
(b)(3)(iii)(B)(1) of this section. Thus, L's acquisition of 
Equipment #5 does not satisfy the used property acquisition 
requirements of paragraph (b)(3)(iii) of this section. Accordingly, 
L's acquisition of Equipment #5 is not eligible for the additional 
first year depreciation deduction.

    (4) Placed-in-service date--(i) In general. Depreciable property 
will meet the requirements of this paragraph (b)(4) if the property is 
placed in service by the taxpayer for use in its trade or business or 
for production of income after September 27, 2017; and, except as 
provided in paragraphs (b)(2)(i)(A) and (D) of this section, before 
January 1, 2027, or, in the case of property described in section 
168(k)(2)(B) or (C), before January 1, 2028.
    (ii) Specified plant. If the taxpayer has properly made an election 
to apply section 168(k)(5) for a specified plant, the requirements of 
this paragraph (b)(4) are satisfied only if the specified plant is 
planted before January 1, 2027, or is grafted before January 1, 2027, 
to a plant that has already been planted, by the taxpayer in the 
ordinary course of the taxpayer's farming business, as defined in 
section 263A(e)(4).
    (iii) Qualified film, television, or live theatrical production--
(A) Qualified film or television production. For purposes of this 
paragraph (b)(4), a qualified film or television production is treated 
as placed in service at the time of initial release or broadcast as 
defined

[[Page 50135]]

under Sec.  1.181-1(a)(7). The taxpayer that places in service a 
qualified film or television production must be the owner, as defined 
in Sec.  1.181-1(a)(2), of the qualified film or television production.
    (B) Qualified live theatrical production. For purposes of this 
paragraph (b)(4), a qualified live theatrical production is treated as 
placed in service at the time of the initial live staged performance. 
The taxpayer that places in service a qualified live theatrical 
production must be the owner, as defined in paragraph (b)(2)(i)(F) of 
this section and in Sec.  1.181-1(a)(2), of the qualified live 
theatrical production.
    (iv) Syndication transaction. If new property is acquired and 
placed in service by a lessor, or if used property is acquired and 
placed in service by a lessor and the lessor and any predecessor did 
not previously have a depreciable interest in the used property, and 
the property is sold by the lessor or any subsequent purchaser within 
three months after the date the property was originally placed in 
service by the lessor (or, in the case of multiple units of property 
subject to the same lease, within three months after the date the final 
unit is placed in service, so long as the period between the time the 
first unit is placed in service and the time the last unit is placed in 
service does not exceed 12 months), and the user of the property after 
the last sale during this three-month period remains the same as when 
the property was originally placed in service by the lessor, the 
property is treated as originally placed in service by the purchaser of 
the property in the last sale during the three-month period but not 
earlier than the date of the last sale for purposes of sections 167 and 
168, and Sec. Sec.  1.46-3(d) and 1.167(a)-11(e)(1).
    (v) Technical termination of a partnership. For purposes of this 
paragraph (b)(4), in the case of a technical termination of a 
partnership under section 708(b)(1)(B) occurring in a taxable year 
beginning before January 1, 2018, qualified property placed in service 
by the terminated partnership during the taxable year of termination is 
treated as originally placed in service by the new partnership on the 
date the qualified property is contributed by the terminated 
partnership to the new partnership.
    (vi) Section 168(i)(7) transactions. For purposes of this paragraph 
(b)(4), if qualified property is transferred in a transaction described 
in section 168(i)(7) in the same taxable year that the qualified 
property is placed in service by the transferor, the transferred 
property is treated as originally placed in service on the date the 
transferor placed in service the qualified property. In the case of 
multiple transfers of qualified property in multiple transactions 
described in section 168(i)(7) in the same taxable year, the placed-in-
service date of the transferred property is deemed to be the date on 
which the first transferor placed in service the qualified property.
    (5) Acquisition of property--(i) In general. This paragraph (b)(5) 
provides rules for the acquisition requirements in section 13201(h) of 
the Act. These rules apply to all property, including self-constructed 
property or property described in section 168(k)(2)(B) or (C).
    (ii) Acquisition date--(A) In general. Except as provided in 
paragraph (b)(5)(vi) of this section, depreciable property will meet 
the requirements of this paragraph (b)(5) if the property is acquired 
by the taxpayer after September 27, 2017, or is acquired by the 
taxpayer pursuant to a written binding contract entered into by the 
taxpayer after September 27, 2017. Property that is manufactured, 
constructed, or produced for the taxpayer by another person under a 
written binding contract that is entered into prior to the manufacture, 
construction, or production of the property for use by the taxpayer in 
its trade or business or for its production of income is not acquired 
pursuant to a written binding contract but is considered to be self-
constructed property under this paragraph (b)(5). For determination of 
acquisition date, see paragraph (b)(5)(ii)(B) of this section for 
property acquired pursuant to a written binding contract and paragraph 
(b)(5)(iv) of this section for self-constructed property.
    (B) Determination of acquisition date for property acquired 
pursuant to a written binding contract. Except as provided in 
paragraphs (b)(5)(vi) and (vii) of this section, the acquisition date 
of property that the taxpayer acquired pursuant to a written binding 
contract is the later of--
    (1) The date on which the contract was entered into;
    (2) The date on which the contract is enforceable under State law;
    (3) If the contract has one or more cancellation periods, the date 
on which all cancellation periods end. For purposes of this paragraph 
(b)(5)(ii)(B)(3), a cancellation period is the number of days stated in 
the contract for any party to cancel the contract without penalty; or
    (4) If the contract has one or more contingency clauses, the date 
on which all conditions subject to such clauses are satisfied. For 
purposes of this paragraph (b)(5)(ii)(B)(4), a contingency clause is 
one that provides for a condition (or conditions) or action (or 
actions) that is within the control of any party or a predecessor.
    (iii) Definition of binding contract--(A) In general. A contract is 
binding only if it is enforceable under State law against the taxpayer 
or a predecessor, and does not limit damages to a specified amount (for 
example, by use of a liquidated damages provision). For this purpose, 
any contractual provision that limits damages to an amount equal to at 
least 5 percent of the total contract price will not be treated as 
limiting damages to a specified amount. If a contract has multiple 
provisions that limit damages, only the provision with the highest 
damages is taken into account in determining whether the contract 
limits damages. Also, in determining whether a contract limits damages, 
the fact that there may be little or no damages because the contract 
price does not significantly differ from fair market value will not be 
taken into account. For example, if a taxpayer entered into an 
irrevocable written contract to purchase an asset for $100 and the 
contract did not contain a provision for liquidated damages, the 
contract is considered binding notwithstanding the fact that the asset 
had a fair market value of $99 and under local law the seller would 
only recover the difference in the event the purchaser failed to 
perform. If the contract provided for a full refund of the purchase 
price in lieu of any damages allowable by law in the event of breach or 
cancellation, the contract is not considered binding.
    (B) Conditions. A contract is binding even if subject to a 
condition, as long as the condition is not within the control of either 
party or a predecessor. A contract will continue to be binding if the 
parties make insubstantial changes in its terms and conditions or if 
any term is to be determined by a standard beyond the control of either 
party. A contract that imposes significant obligations on the taxpayer 
or a predecessor will be treated as binding notwithstanding the fact 
that certain terms remain to be negotiated by the parties to the 
contract.
    (C) Options. An option to either acquire or sell property is not a 
binding contract.
    (D) Letter of intent. A letter of intent for an acquisition is not 
a binding contract.
    (E) Supply agreements. A binding contract does not include a supply 
or similar agreement if the amount and design specifications of the 
property to

[[Page 50136]]

be purchased have not been specified. The contract will not be a 
binding contract for the property to be purchased until both the amount 
and the design specifications are specified. For example, if the 
provisions of a supply or similar agreement state the design 
specifications of the property to be purchased, a purchase order under 
the agreement for a specific number of assets is treated as a binding 
contract.
    (F) Components. A binding contract to acquire one or more 
components of a larger property will not be treated as a binding 
contract to acquire the larger property. If a binding contract to 
acquire the component does not satisfy the requirements of this 
paragraph (b)(5), the component does not qualify for the additional 
first year depreciation deduction under this section.
    (G) [Reserved]
    (iv) Self-constructed property--(A) In general. If a taxpayer 
manufactures, constructs, or produces property for use by the taxpayer 
in its trade or business or for its production of income, the 
acquisition rules in paragraph (b)(5)(ii) of this section are treated 
as met for the property if the taxpayer begins manufacturing, 
constructing, or producing the property after September 27, 2017. 
Property that is manufactured, constructed, or produced for the 
taxpayer by another person under a written binding contract, as defined 
in paragraph (b)(5)(iii) of this section, that is entered into prior to 
the manufacture, construction, or production of the property for use by 
the taxpayer in its trade or business or for its production of income 
is considered to be manufactured, constructed, or produced by the 
taxpayer. If a taxpayer enters into a written binding contract, as 
defined in paragraph (b)(5)(iii) of this section, before September 28, 
2017, with another person to manufacture, construct, or produce 
property and the manufacture, construction, or production of this 
property begins after September 27, 2017, the acquisition rules in 
paragraph (b)(5)(ii) of this section are met.
    (B) When does manufacture, construction, or production begin--(1) 
In general. For purposes of paragraph (b)(5)(iv)(A) of this section, 
manufacture, construction, or production of property begins when 
physical work of a significant nature begins. Physical work does not 
include preliminary activities such as planning or designing, securing 
financing, exploring, or researching. The determination of when 
physical work of a significant nature begins depends on the facts and 
circumstances. For example, if a retail motor fuels outlet is to be 
constructed on-site, construction begins when physical work of a 
significant nature commences at the site; that is, when work begins on 
the excavation for footings, pouring the pads for the outlet, or the 
driving of foundation pilings into the ground. Preliminary work, such 
as clearing a site, test drilling to determine soil condition, or 
excavation to change the contour of the land (as distinguished from 
excavation for footings) does not constitute the beginning of 
construction. However, if a retail motor fuels outlet is to be 
assembled on-site from modular units manufactured off-site and 
delivered to the site where the outlet will be used, manufacturing 
begins when physical work of a significant nature commences at the off-
site location.
    (2) Safe harbor. For purposes of paragraph (b)(5)(iv)(B)(1) of this 
section, a taxpayer may choose to determine when physical work of a 
significant nature begins in accordance with this paragraph 
(b)(5)(iv)(B)(2). Physical work of a significant nature will be 
considered to begin at the time the taxpayer incurs (in the case of an 
accrual basis taxpayer) or pays (in the case of a cash basis taxpayer) 
more than 10 percent of the total cost of the property, excluding the 
cost of any land and preliminary activities such as planning or 
designing, securing financing, exploring, or researching. When property 
is manufactured, constructed, or produced for the taxpayer by another 
person, this safe harbor test must be satisfied by the taxpayer. For 
example, if a retail motor fuels outlet or other facility is to be 
constructed for an accrual basis taxpayer by another person for the 
total cost of $200,000, excluding the cost of any land and preliminary 
activities such as planning or designing, securing financing, 
exploring, or researching, construction is deemed to begin for purposes 
of this paragraph (b)(5)(iv)(B)(2) when the taxpayer has incurred more 
than 10 percent (more than $20,000) of the total cost of the property. 
A taxpayer chooses to apply this paragraph (b)(5)(iv)(B)(2) by filing a 
Federal income tax return for the placed-in-service year of the 
property that determines when physical work of a significant nature 
begins consistent with this paragraph (b)(5)(iv)(B)(2).
    (C) Components of self-constructed property--(1) Acquired 
components. If a binding contract, as defined in paragraph (b)(5)(iii) 
of this section, to acquire a component does not satisfy the 
requirements of paragraph (b)(5)(ii) of this section, the component 
does not qualify for the additional first year depreciation deduction 
under this section. A binding contract described in the preceding 
sentence to acquire one or more components of a larger self-constructed 
property will not preclude the larger self-constructed property from 
satisfying the acquisition rules in paragraph (b)(5)(iv)(A) of this 
section. Accordingly, the unadjusted depreciable basis of the larger 
self-constructed property that is eligible for the additional first 
year depreciation deduction under this section, assuming all other 
requirements are met, must not include the unadjusted depreciable basis 
of any component that does not satisfy the requirements of paragraph 
(b)(5)(ii) of this section. If the manufacture, construction, or 
production of the larger self-constructed property begins before 
September 28, 2017, the larger self-constructed property and any 
acquired components related to the larger self-constructed property do 
not qualify for the additional first year depreciation deduction under 
this section. If a binding contract to acquire the component is entered 
into after September 27, 2017, but the manufacture, construction, or 
production of the larger self-constructed property does not begin 
before January 1, 2027, the component qualifies for the additional 
first year depreciation deduction under this section, assuming all 
other requirements are met, but the larger self-constructed property 
does not.
    (2) Self-constructed components. If the manufacture, construction, 
or production of a component does not satisfy the requirements of this 
paragraph (b)(5)(iv), the component does not qualify for the additional 
first year depreciation deduction under this section. However, if the 
manufacture, construction, or production of a component does not 
satisfy the requirements of this paragraph (b)(5)(iv), but the 
manufacture, construction, or production of the larger self-constructed 
property satisfies the requirements of this paragraph (b)(5)(iv), the 
larger self-constructed property qualifies for the additional first 
year depreciation deduction under this section, assuming all other 
requirements are met, even though the component does not qualify for 
the additional first year depreciation deduction under this section. 
Accordingly, the unadjusted depreciable basis of the larger self-
constructed property that is eligible for the additional first year 
depreciation deduction under this section, assuming all other 
requirements are met, must not include the unadjusted depreciable basis 
of any component that does not

[[Page 50137]]

qualify for the additional first year depreciation deduction under this 
section. If the manufacture, construction, or production of the larger 
self-constructed property began before September 28, 2017, the larger 
self-constructed property and any self-constructed components related 
to the larger self-constructed property do not qualify for the 
additional first year depreciation deduction under this section. If the 
manufacture, construction, or production of a component begins after 
September 27, 2017, but the manufacture, construction, or production of 
the larger self-constructed property does not begin before January 1, 
2027, the component qualifies for the additional first year 
depreciation deduction under this section, assuming all other 
requirements are met, but the larger self-constructed property does 
not.
    (v) [Reserved]
    (vi) Qualified film, television, or live theatrical production--(A) 
Qualified film or television production. For purposes of section 
13201(h)(1)(A) of the Act, a qualified film or television production is 
treated as acquired on the date principal photography commences.
    (B) Qualified live theatrical production. For purposes of section 
13201(h)(1)(A) of the Act, a qualified live theatrical production is 
treated as acquired on the date when all of the necessary elements for 
producing the live theatrical production are secured. These elements 
may include a script, financing, actors, set, scenic and costume 
designs, advertising agents, music, and lighting.
    (vii) Specified plant. If the taxpayer has properly made an 
election to apply section 168(k)(5) for a specified plant, the 
requirements of this paragraph (b)(5) are satisfied if the specified 
plant is planted after September 27, 2017, or is grafted after 
September 27, 2017, to a plant that has already been planted, by the 
taxpayer in the ordinary course of the taxpayer's farming business, as 
defined in section 263A(e)(4).
    (viii) Examples. The application of this paragraph (b)(5) is 
illustrated by the following examples. Unless the facts specifically 
indicate otherwise, assume that the parties are not related within the 
meaning of section 179(d)(2)(A) or (B) and Sec.  1.179-4(c), and the 
parties do not have predecessors:

    (A) Example 1. On September 1, 2017, BB, a corporation, entered 
into a written agreement with CC, a manufacturer, to purchase 20 new 
lamps for $100 each within the next two years. Although the 
agreement specifies the number of lamps to be purchased, the 
agreement does not specify the design of the lamps to be purchased. 
Accordingly, the agreement is not a binding contract pursuant to 
paragraph (b)(5)(iii)(E) of this section.
    (B) Example 2. The facts are the same as in Example 1 of 
paragraph (b)(5)(viii)(A) of this section. On December 1, 2017, BB 
placed a purchase order with CC to purchase 20 new model XPC5 lamps 
for $100 each for a total amount of $2,000. Because the agreement 
specifies the number of lamps to be purchased and the purchase order 
specifies the design of the lamps to be purchased, the purchase 
order placed by BB with CC on December 1, 2017, is a binding 
contract pursuant to paragraph (b)(5)(iii)(E) of this section. 
Accordingly, assuming all other requirements are met, the cost of 
the 20 lamps qualifies for the 100-percent additional first year 
depreciation deduction.
    (C) Example 3. The facts are the same as in Example 1 of 
paragraph (b)(5)(viii)(A) of this section, except that the written 
agreement between BB and CC is to purchase 100 model XPC5 lamps for 
$100 each within the next two years. Because this agreement 
specifies the amount and design of the lamps to be purchased, the 
agreement is a binding contract pursuant to paragraph (b)(5)(iii)(E) 
of this section. However, because the agreement was entered into 
before September 28, 2017, no lamp acquired by BB under this 
contract qualifies for the 100-percent additional first year 
depreciation deduction.
    (D) Example 4. On September 1, 2017, DD began constructing a 
retail motor fuels outlet for its own use. On November 1, 2018, DD 
ceases construction of the retail motor fuels outlet prior to its 
completion. Between September 1, 2017, and November 1, 2018, DD 
incurred $3,000,000 of expenditures for the construction of the 
retail motor fuels outlet. On May 1, 2019, DD resumed construction 
of the retail motor fuels outlet and completed its construction on 
August 31, 2019. Between May 1, 2019, and August 31, 2019, DD 
incurred another $1,600,000 of expenditures to complete the 
construction of the retail motor fuels outlet and, on September 1, 
2019, DD placed the retail motor fuels outlet in service. None of 
DD's total expenditures of $4,600,000 qualify for the 100-percent 
additional first year depreciation deduction because, pursuant to 
paragraph (b)(5)(iv)(A) of this section, DD began constructing the 
retail motor fuels outlet before September 28, 2017.
    (E) Example 5. The facts are the same as in Example 4 of 
paragraph (b)(5)(viii)(D) of this section except that DD began 
constructing the retail motor fuels outlet for its own use on 
October 1, 2017, and DD incurred the $3,000,000 between October 1, 
2017, and November 1, 2018. DD's total expenditures of $4,600,000 
qualify for the 100-percent additional first year depreciation 
deduction because, pursuant to paragraph (b)(5)(iv)(A) of this 
section, DD began constructing the retail motor fuels outlet after 
September 27, 2017, and DD placed the retail motor fuels outlet in 
service on September 1, 2019. Accordingly, assuming all other 
requirements are met, the additional first year depreciation 
deduction for the retail motor fuels outlet will be $4,600,000, 
computed as $4,600,000 multiplied by 100 percent.
    (F) Example 6. On August 15, 2017, EE, an accrual basis 
taxpayer, entered into a written binding contract with FF to 
manufacture an aircraft described in section 168(k)(2)(C) for use in 
EE's trade or business. FF begins to manufacture the aircraft on 
October 1, 2017. The completed aircraft is delivered to EE on 
February 15, 2018, at which time EE incurred the total cost of the 
aircraft. EE places the aircraft in service on March 1, 2018. 
Pursuant to paragraphs (b)(5)(ii)(A) and (b)(5)(iv)(A) of this 
section, the aircraft is considered to be manufactured by EE. 
Because EE began manufacturing the aircraft after September 27, 
2017, the aircraft qualifies for the 100-percent additional first 
year depreciation deduction, assuming all other requirements are 
met.
    (G) Example 7. On June 1, 2017, HH entered into a written 
binding contract with GG to acquire a new component part of property 
that is being constructed by HH for its own use in its trade or 
business. HH commenced construction of the property in November 
2017, and placed the property in service in November 2018. Because 
HH entered into a written binding contract to acquire a component 
part prior to September 28, 2017, pursuant to paragraphs (b)(5)(ii) 
and (b)(5)(iv)(C)(1) of this section, the component part does not 
qualify for the 100-percent additional first year depreciation 
deduction. However, pursuant to paragraphs (b)(5)(iv)(A) and 
(b)(5)(iv)(C)(1) of this section, the property constructed by HH 
will qualify for the 100-percent additional first year depreciation 
deduction, because construction of the property began after 
September 27, 2017, assuming all other requirements are met. 
Accordingly, the unadjusted depreciable basis of the property that 
is eligible for the 100-percent additional first year depreciation 
deduction must not include the unadjusted depreciable basis of the 
component part.
    (H) Example 8. The facts are the same as in Example 7 of 
paragraph (b)(5)(viii)(G) of this section except that HH entered 
into the written binding contract with GG to acquire the new 
component part on September 30, 2017, and HH commenced construction 
of the property on August 1, 2017. Pursuant to paragraphs 
(b)(5)(iv)(A) and (C) of this section, neither the property 
constructed by HH nor the component part will qualify for the 100-
percent additional first year depreciation deduction, because HH 
began construction of the property prior to September 28, 2017.
    (I) Example 9. On September 1, 2017, II acquired and placed in 
service equipment. On January 15, 2018, II sells the equipment to JJ 
and leases the property back from JJ in a sale-leaseback 
transaction. Pursuant to paragraph (b)(5)(ii) of this section, II's 
cost of the equipment does not qualify for the 100-percent 
additional first year depreciation deduction because II acquired the 
equipment prior to September 28, 2017. However, JJ acquired used 
equipment from an unrelated party after September 27, 2017, and, 
assuming all other requirements are met, JJ's cost of the used 
equipment qualifies for the 100-percent additional first year 
depreciation deduction for JJ.
    (J) Example 10. On July 1, 2017, KK began constructing property 
for its own use in its

[[Page 50138]]

trade or business. KK placed this property in service on September 
15, 2017. On January 15, 2018, KK sells the property to LL and 
leases the property back from LL in a sale-leaseback transaction. 
Pursuant to paragraph (b)(5)(iv) of this section, KK's cost of the 
property does not qualify for the 100-percent additional first year 
depreciation deduction because KK began construction of the property 
prior to September 28, 2017. However, LL acquired used property from 
an unrelated party after September 27, 2017, and, assuming all other 
requirements are met, LL's cost of the used property qualifies for 
the 100-percent additional first year depreciation deduction for LL.
    (K) Example 11. MM, a calendar year taxpayer, is engaged in a 
trade or business described in section 163(j)(7)(A)(iv). In December 
2018, MM began constructing a new electric generation power plant 
for its own use. MM placed in service this new power plant, 
including all component parts, in 2020. Even though MM began 
constructing the power plant after September 27, 2017, none of MM's 
total expenditures of the power plant qualify for the additional 
first year depreciation deduction under this section because, 
pursuant to paragraph (b)(2)(ii)(F) of this section, the power plant 
is property that is primarily used in a trade or business described 
in section 163(j)(7)(A)(iv) and the power plant was placed in 
service in MM's taxable year beginning after 2017.

    (c) [Reserved]
    (d) Property described in section 168(k)(2)(B) or (C)--(1) In 
general. Property described in section 168(k)(2)(B) or (C) will meet 
the acquisition requirements of section 168(k)(2)(B)(i)(III) or 
(k)(2)(C)(i) if the property is acquired by the taxpayer before January 
1, 2027, or acquired by the taxpayer pursuant to a written binding 
contract that is entered into before January 1, 2027. Property 
described in section 168(k)(2)(B) or (C), including its components, 
also must meet the acquisition requirement in section 13201(h)(1)(A) of 
the Act (for further guidance, see paragraph (b)(5) of this section).
    (2) Definition of binding contract. For purposes of this paragraph 
(d), the rules in paragraph (b)(5)(iii) of this section for a binding 
contract apply.
    (3) Self-constructed property--(i) In general. If a taxpayer 
manufactures, constructs, or produces property for use by the taxpayer 
in its trade or business or for its production of income, the 
acquisition rules in paragraph (d)(1) of this section are treated as 
met for the property if the taxpayer begins manufacturing, 
constructing, or producing the property before January 1, 2027. 
Property that is manufactured, constructed, or produced for the 
taxpayer by another person under a written binding contract, as defined 
in paragraph (b)(5)(iii) of this section, that is entered into prior to 
the manufacture, construction, or production of the property for use by 
the taxpayer in its trade or business or for its production of income 
is considered to be manufactured, constructed, or produced by the 
taxpayer. If a taxpayer enters into a written binding contract, as 
defined in paragraph (b)(5)(iii) of this section, before January 1, 
2027, with another person to manufacture, construct, or produce 
property described in section 168(k)(2)(B) or (C) and the manufacture, 
construction, or production of this property begins after December 31, 
2026, the acquisition rule in paragraph (d)(1) of this section is met.
    (ii) When does manufacture, construction, or production begin--(A) 
In general. For purposes of this paragraph (d)(3), manufacture, 
construction, or production of property begins when physical work of a 
significant nature begins. Physical work does not include preliminary 
activities such as planning or designing, securing financing, 
exploring, or researching. The determination of when physical work of a 
significant nature begins depends on the facts and circumstances. For 
example, if a retail motor fuels outlet is to be constructed on-site, 
construction begins when physical work of a significant nature 
commences at the site; that is, when work begins on the excavation for 
footings, pouring the pads for the outlet, or the driving of foundation 
pilings into the ground. Preliminary work, such as clearing a site, 
test drilling to determine soil condition, or excavation to change the 
contour of the land (as distinguished from excavation for footings) 
does not constitute the beginning of construction. However, if a retail 
motor fuels outlet is to be assembled on-site from modular units 
manufactured off-site and delivered to the site where the outlet will 
be used, manufacturing begins when physical work of a significant 
nature commences at the off-site location.
    (B) Safe harbor. For purposes of paragraph (d)(3)(ii)(A) of this 
section, a taxpayer may choose to determine when physical work of a 
significant nature begins in accordance with this paragraph 
(d)(3)(ii)(B). Physical work of a significant nature will be considered 
to begin at the time the taxpayer incurs (in the case of an accrual 
basis taxpayer) or pays (in the case of a cash basis taxpayer) more 
than 10 percent of the total cost of the property, excluding the cost 
of any land and preliminary activities such as planning or designing, 
securing financing, exploring, or researching. When property is 
manufactured, constructed, or produced for the taxpayer by another 
person, this safe harbor test must be satisfied by the taxpayer. For 
example, if a retail motor fuels outlet is to be constructed for an 
accrual basis taxpayer by another person for the total cost of 
$200,000, excluding the cost of any land and preliminary activities 
such as planning or designing, securing financing, exploring, or 
researching, construction is deemed to begin for purposes of this 
paragraph (d)(3)(ii)(B) when the taxpayer has incurred more than 10 
percent (more than $20,000) of the total cost of the property. A 
taxpayer chooses to apply this paragraph (d)(3)(ii)(B) by filing a 
Federal income tax return for the placed-in-service year of the 
property that determines when physical work of a significant nature 
begins consistent with this paragraph (d)(3)(ii)(B).
    (iii) Components of self-constructed property--(A) Acquired 
components. If a binding contract, as defined in paragraph (b)(5)(iii) 
of this section, to acquire a component does not satisfy the 
requirements of paragraph (d)(1) of this section, the component does 
not qualify for the additional first year depreciation deduction under 
this section. A binding contract described in the preceding sentence to 
acquire one or more components of a larger self-constructed property 
will not preclude the larger self-constructed property from satisfying 
the acquisition rules in paragraph (d)(3)(i) of this section. 
Accordingly, the unadjusted depreciable basis of the larger self-
constructed property that is eligible for the additional first year 
depreciation deduction under this section, assuming all other 
requirements are met, must not include the unadjusted depreciable basis 
of any component that does not satisfy the requirements of paragraph 
(d)(1) of this section. If a binding contract to acquire the component 
is entered into before January 1, 2027, but the manufacture, 
construction, or production of the larger self-constructed property 
does not begin before January 1, 2027, the component qualifies for the 
additional first year depreciation deduction under this section, 
assuming all other requirements are met, but the larger self-
constructed property does not.
    (B) Self-constructed components. If the manufacture, construction, 
or production of a component by the taxpayer does not satisfy the 
requirements of paragraph (d)(3)(i) of this section, the component does 
not qualify for the additional first year depreciation deduction under 
this section. However, if the manufacture, construction, or production 
of a component does not satisfy the requirements of paragraph (d)(3)(i) 
of

[[Page 50139]]

this section, but the manufacture, construction, or production of the 
larger self-constructed property satisfies the requirements of 
paragraph (d)(3)(i) of this section, the larger self-constructed 
property qualifies for the additional first year depreciation deduction 
under this section, assuming all other requirements are met, even 
though the component does not qualify for the additional first year 
depreciation deduction under this section. Accordingly, the unadjusted 
depreciable basis of the larger self-constructed property that is 
eligible for the additional first year depreciation deduction under 
this section, assuming all other requirements are met, must not include 
the unadjusted depreciable basis of any component that does not qualify 
for the additional first year depreciation deduction under this 
section. If the manufacture, construction, or production of a component 
begins before January 1, 2027, but the manufacture, construction, or 
production of the larger self-constructed property does not begin 
before January 1, 2027, the component qualifies for the additional 
first year depreciation deduction under this section, assuming all 
other requirements are met, but the larger self-constructed property 
does not.
    (iv) Examples. The application of this paragraph (d) is illustrated 
by the following examples:

    (A) Example 1. (1) On June 1, 2016, NN decided to construct 
property described in section 168(k)(2)(B) for its own use. However, 
one of the component parts of the property had to be manufactured by 
another person for NN. On August 15, 2016, NN entered into a written 
binding contract with OO to acquire this component part of the 
property for $100,000. OO began manufacturing the component part on 
November 1, 2016, and delivered the completed component part to NN 
on September 1, 2017, at which time NN incurred $100,000 for the 
cost of the component. The cost of this component part is 9 percent 
of the total cost of the property to be constructed by NN. NN did 
not incur any other cost of the property to be constructed before NN 
began construction. NN began constructing the property described in 
section 168(k)(2)(B) on October 15, 2017, and placed in service this 
property, including all component parts, on November 1, 2020. NN 
uses the safe harbor test in paragraph (d)(3)(ii)(B) of this section 
to determine when physical work of a significant nature begins for 
the property described in section 168(k)(2)(B).
    (2) Because the component part of $100,000 that was manufactured 
by OO for NN is not more than 10 percent of the total cost of the 
property described in section 168(k)(2)(B), physical work of a 
significant nature for the property described in section 
168(k)(2)(B) did not begin before September 28, 2017.
    (3) Pursuant to paragraphs (b)(5)(iv)(C)(2) and (d)(1) of this 
section, the self-constructed component part of $100,000 
manufactured by OO for NN is not eligible for the 100-percent 
additional first year depreciation deduction because the 
manufacturing of such component part began before September 28, 
2017. However, pursuant to paragraph (d)(3)(i) of this section, the 
cost of the property described in section 168(k)(2)(B), excluding 
the cost of the component part of $100,000 manufactured by OO for 
NN, is eligible for the 100-percent additional first year 
depreciation deduction, assuming all other requirements are met, 
because construction of the property began after September 27, 2017, 
and before January 1, 2027, and the property described in section 
168(k)(2)(B) was placed in service by NN during 2020.
    (B) Example 2. (1) On June 1, 2026, PP decided to construct 
property described in section 168(k)(2)(B) for its own use. However, 
one of the component parts of the property had to be manufactured by 
another person for PP. On August 15, 2026, PP entered into a written 
binding contract with XP to acquire this component part of the 
property for $100,000. XP began manufacturing the component part on 
September 1, 2026, and delivered the completed component part to PP 
on February 1, 2027, at which time PP incurred $100,000 for the cost 
of the component. The cost of this component part is 9 percent of 
the total cost of the property to be constructed by PP. PP did not 
incur any other cost of the property to be constructed before PP 
began construction. PP began constructing the property described in 
section 168(k)(2)(B) on January 15, 2027, and placed this property, 
including all component parts, in service on November 1, 2027.
    (2) Pursuant to paragraph (d)(3)(iii)(B) of this section, the 
self-constructed component part of $100,000 manufactured by XP for 
PP is eligible for the additional first year depreciation deduction 
under this section, assuming all other requirements are met, because 
the manufacturing of the component part began before January 1, 
2027, and the property described in section 168(k)(2)(B), the larger 
self-constructed property, was placed in service by PP before 
January 1, 2028. However, pursuant to paragraph (d)(3)(i) of this 
section, the cost of the property described in section 168(k)(2)(B), 
excluding the cost of the self-constructed component part of 
$100,000 manufactured by XP for PP, is not eligible for the 
additional first year depreciation deduction under this section 
because construction of the property began after December 31, 2026.
    (C) Example 3. On December 1, 2026, QQ entered into a written 
binding contract, as defined in paragraph (b)(5)(iii) of this 
section, with RR to manufacture an aircraft described in section 
168(k)(2)(C) for use in QQ's trade or business. RR begins to 
manufacture the aircraft on February 1, 2027. QQ places the aircraft 
in service on August 1, 2027. Pursuant to paragraph (d)(3)(i) of 
this section, the aircraft meets the requirements of paragraph 
(d)(1) of this section because the aircraft was acquired by QQ 
pursuant to a written binding contract entered into before January 
1, 2027. Further, the aircraft was placed in service by QQ before 
January 1, 2028. Thus, assuming all other requirements are met, QQ's 
cost of the aircraft is eligible for the additional first year 
depreciation deduction under this section.

    (e) Computation of depreciation deduction for qualified property--
(1) Additional first year depreciation deduction--(i) Allowable taxable 
year. The additional first year depreciation deduction is allowable--
    (A) Except as provided in paragraph (e)(1)(i)(B) or (g) of this 
section, in the taxable year in which the qualified property is placed 
in service by the taxpayer for use in its trade or business or for the 
production of income; or
    (B) In the taxable year in which the specified plant is planted, or 
grafted to a plant that has already been planted, by the taxpayer in 
the ordinary course of the taxpayer's farming business, as defined in 
section 263A(e)(4), if the taxpayer properly made the election to apply 
section 168(k)(5) (for further guidance, see paragraph (f) of this 
section).
    (ii) Computation. Except as provided in paragraph (g)(5) of this 
section, the allowable additional first year depreciation deduction for 
qualified property is determined by multiplying the unadjusted 
depreciable basis, as defined in Sec.  1.168(b)-1(a)(3), of the 
qualified property by the applicable percentage. Except as provided in 
paragraph (g)(1) of this section, the additional first year 
depreciation deduction is not affected by a taxable year of less than 
12 months. See paragraph (g)(1) of this section for qualified property 
placed in service or planted or grafted, as applicable, and disposed of 
during the same taxable year. See paragraph (g)(5) of this section for 
qualified property acquired in a like-kind exchange or as a result of 
an involuntary conversion.
    (iii) Property described in section 168(k)(2)(B). For purposes of 
paragraph (e)(1)(ii) of this section, the unadjusted depreciable basis, 
as defined in Sec.  1.168(b)-1(a)(3), of qualified property described 
in section 168(k)(2)(B) is limited to the property's unadjusted 
depreciable basis attributable to the property's manufacture, 
construction, or production before January 1, 2027.
    (iv) Alternative minimum tax--(A) In general. The additional first 
year depreciation deduction is allowable for alternative minimum tax 
purposes--
    (1) Except as provided in paragraph (e)(1)(iv)(A)(2) of this 
section, in the taxable year in which the qualified property is placed 
in service by the taxpayer; or

[[Page 50140]]

    (2) In the taxable year in which a specified plant is planted by 
the taxpayer, or grafted by the taxpayer to a plant that was previously 
planted, if the taxpayer properly made the election to apply section 
168(k)(5) (for further guidance, see paragraph (f) of this section).
    (B) Special rules. In general, the additional first year 
depreciation deduction for alternative minimum tax purposes is based on 
the unadjusted depreciable basis of the property for alternative 
minimum tax purposes. However, see paragraph (g)(5)(iii)(E) of this 
section for qualified property acquired in a like-kind exchange or as a 
result of an involuntary conversion.
    (2) Otherwise allowable depreciation deduction--(i) In general. 
Before determining the amount otherwise allowable as a depreciation 
deduction for the qualified property for the placed-in-service year and 
any subsequent taxable year, the taxpayer must determine the remaining 
adjusted depreciable basis of the qualified property. This remaining 
adjusted depreciable basis is equal to the unadjusted depreciable 
basis, as defined in Sec.  1.168(b)-1(a)(3), of the qualified property 
reduced by the amount of the additional first year depreciation allowed 
or allowable, whichever is greater. The remaining adjusted depreciable 
basis of the qualified property is then depreciated using the 
applicable depreciation provisions under the Internal Revenue Code for 
the qualified property. The remaining adjusted depreciable basis of the 
qualified property that is MACRS property is also the basis to which 
the annual depreciation rates in the optional depreciation tables apply 
(for further guidance, see section 8 of Rev. Proc. 87-57 (1987-2 C.B. 
687) and Sec.  601.601(d)(2)(ii)(b) of this chapter). The depreciation 
deduction allowable for the remaining adjusted depreciable basis of the 
qualified property is affected by a taxable year of less than 12 
months.
    (ii) Alternative minimum tax. For alternative minimum tax purposes, 
the depreciation deduction allowable for the remaining adjusted 
depreciable basis of the qualified property is based on the remaining 
adjusted depreciable basis for alternative minimum tax purposes. The 
remaining adjusted depreciable basis of the qualified property for 
alternative minimum tax purposes is depreciated using the same 
depreciation method, recovery period (or useful life in the case of 
computer software), and convention that apply to the qualified property 
for regular tax purposes.

    (3) Examples. This paragraph (e) is illustrated by the following 
examples:
    (i) Example 1. On March 1, 2023, SS, a calendar-year taxpayer, 
purchased and placed in service qualified property that costs $1 
million and is 5-year property under section 168(e). SS depreciates 
its 5-year property placed in service in 2023 using the optional 
depreciation table that corresponds with the general depreciation 
system, the 200-percent declining balance method, a 5-year recovery 
period, and the half-year convention. For 2023, SS is allowed an 80-
percent additional first year depreciation deduction of $800,000 
(the unadjusted depreciable basis of $1 million multiplied by 0.80). 
Next, SS must reduce the unadjusted depreciable basis of $1 million 
by the additional first year depreciation deduction of $800,000 to 
determine the remaining adjusted depreciable basis of $200,000. 
Then, SS' depreciation deduction allowable in 2023 for the remaining 
adjusted depreciable basis of $200,000 is $40,000 (the remaining 
adjusted depreciable basis of $200,000 multiplied by the annual 
depreciation rate of 0.20 for recovery year 1).
    (ii) Example 2. On June 1, 2023, TT, a calendar-year taxpayer, 
purchased and placed in service qualified property that costs 
$1,500,000. The property qualifies for the expensing election under 
section 179 and is 5-year property under section 168(e). TT did not 
purchase any other section 179 property in 2023. TT makes the 
election under section 179 for the property and depreciates its 5-
year property placed in service in 2023 using the optional 
depreciation table that corresponds with the general depreciation 
system, the 200-percent declining balance method, a 5-year recovery 
period, and the half-year convention. Assume the maximum section 179 
deduction for 2023 is $1,000,000. For 2023, TT is first allowed a 
$1,000,000 deduction under section 179. Next, TT must reduce the 
cost of $1,500,000 by the section 179 deduction of $1,000,000 to 
determine the unadjusted depreciable basis of $500,000. Then, for 
2023, TT is allowed an 80-percent additional first year depreciation 
deduction of $400,000 (the unadjusted depreciable basis of $500,000 
multiplied by 0.80). Next, TT must reduce the unadjusted depreciable 
basis of $500,000 by the additional first year depreciation 
deduction of $400,000 to determine the remaining adjusted 
depreciable basis of $100,000. Then, TT's depreciation deduction 
allowable in 2023 for the remaining adjusted depreciable basis of 
$100,000 is $20,000 (the remaining adjusted depreciable basis of 
$100,000 multiplied by the annual depreciation rate of 0.20 for 
recovery year 1).

    (f) Elections under section 168(k)--(1) Election not to deduct 
additional first year depreciation--(i) In general. A taxpayer may make 
an election not to deduct the additional first year depreciation for 
any class of property that is qualified property placed in service 
during the taxable year. If this election is made, the election applies 
to all qualified property that is in the same class of property and 
placed in service in the same taxable year, and no additional first 
year depreciation deduction is allowable for the property placed in 
service during the taxable year in the class of property, except as 
provided in Sec.  1.743-1(j)(4)(i)(B)(1).
    (ii) Definition of class of property. For purposes of this 
paragraph (f)(1), the term class of property means:
    (A) Except for the property described in paragraphs (f)(1)(ii)(B) 
and (D), and (f)(2) of this section, each class of property described 
in section 168(e) (for example, 5-year property);
    (B) Water utility property as defined in section 168(e)(5) and 
depreciated under section 168;
    (C) Computer software as defined in, and depreciated under, section 
167(f)(1) and Sec.  1.167(a)-14(b);
    (D) Qualified improvement property as defined in Sec.  1.168(b)-
1(a)(5)(i)(C) and (a)(5)(ii), and depreciated under section 168;
    (E) Each separate production, as defined in Sec.  1.181-3(b), of a 
qualified film or television production;
    (F) Each separate production, as defined in section 181(e)(2), of a 
qualified live theatrical production; or
    (G) A partner's basis adjustment in partnership assets under 
section 743(b) for each class of property described in paragraphs 
(f)(1)(ii)(A) through (F), and (f)(2) of this section (for further 
guidance, see Sec.  1.743-1(j)(4)(i)(B)(1)).
    (iii) Time and manner for making election--(A) Time for making 
election. Except as provided in paragraph (f)(6) of this section, any 
election specified in paragraph (f)(1)(i) of this section must be made 
by the due date, including extensions, of the Federal tax return for 
the taxable year in which the qualified property is placed in service 
by the taxpayer.
    (B) Manner of making election. Except as provided in paragraph 
(f)(6) of this section, any election specified in paragraph (f)(1)(i) 
of this section must be made in the manner prescribed on Form 4562, 
``Depreciation and Amortization,'' and its instructions. The election 
is made separately by each person owning qualified property (for 
example, for each member of a consolidated group by the common parent 
of the group, by the partnership (including a lower-tier partnership; 
also including basis adjustments in the partnership assets under 
section 743(b)), or by the S corporation). If Form 4562 is revised or 
renumbered, any reference in this section to that form shall be treated 
as a reference to the revised or renumbered form.
    (iv) Failure to make election. If a taxpayer does not make the 
election specified in paragraph (f)(1)(i) of this section within the 
time and in the

[[Page 50141]]

manner prescribed in paragraph (f)(1)(iii) of this section, the amount 
of depreciation allowable for that property under section 167 or 168, 
as applicable, must be determined for the placed-in-service year and 
for all subsequent taxable years by taking into account the additional 
first year depreciation deduction. Thus, any election specified in 
paragraph (f)(1)(i) of this section shall not be made by the taxpayer 
in any other manner (for example, the election cannot be made through a 
request under section 446(e) to change the taxpayer's method of 
accounting).
    (2) Election to apply section 168(k)(5) for specified plants--(i) 
In general. A taxpayer may make an election to apply section 168(k)(5) 
to one or more specified plants that are planted, or grafted to a plant 
that has already been planted, by the taxpayer in the ordinary course 
of the taxpayer's farming business, as defined in section 263A(e)(4). 
If this election is made for a specified plant, such plant is not 
treated as qualified property under section 168(k) and this section in 
its placed-in-service year.
    (ii) Time and manner for making election--(A) Time for making 
election. Except as provided in paragraph (f)(6) of this section, any 
election specified in paragraph (f)(2)(i) of this section must be made 
by the due date, including extensions, of the Federal tax return for 
the taxable year in which the taxpayer planted or grafted the specified 
plant to which the election applies.
    (B) Manner of making election. Except as provided in paragraph 
(f)(6) of this section, any election specified in paragraph (f)(2)(i) 
of this section must be made in the manner prescribed on Form 4562, 
``Depreciation and Amortization,'' and its instructions. The election 
is made separately by each person owning specified plants (for example, 
for each member of a consolidated group by the common parent of the 
group, by the partnership (including a lower-tier partnership), or by 
the S corporation). If Form 4562 is revised or renumbered, any 
reference in this section to that form shall be treated as a reference 
to the revised or renumbered form.
    (iii) Failure to make election. If a taxpayer does not make the 
election specified in paragraph (f)(2)(i) of this section for a 
specified plant within the time and in the manner prescribed in 
paragraph (f)(2)(ii) of this section, the specified plant is treated as 
qualified property under section 168(k), assuming all requirements are 
met, in the taxable year in which such plant is placed in service by 
the taxpayer. Thus, any election specified in paragraph (f)(2)(i) of 
this section shall not be made by the taxpayer in any other manner (for 
example, the election cannot be made through a request under section 
446(e) to change the taxpayer's method of accounting).
    (3) Election for qualified property placed in service during the 
2017 taxable year--(i) In general. A taxpayer may make an election to 
deduct 50 percent, instead of 100 percent, additional first year 
depreciation for all qualified property acquired after September 27, 
2017, by the taxpayer and placed in service by the taxpayer during its 
taxable year that includes September 28, 2017. If a taxpayer makes an 
election to apply section 168(k)(5) for its taxable year that includes 
September 28, 2017, the taxpayer also may make an election to deduct 50 
percent, instead of 100 percent, additional first year depreciation for 
all specified plants that are planted, or grafted to a plant that has 
already been planted, after September 27, 2017, by the taxpayer in the 
ordinary course of the taxpayer's farming business during such taxable 
year.
    (ii) Time and manner for making election--(A) Time for making 
election. Except as provided in paragraph (f)(6) of this section, any 
election specified in paragraph (f)(3)(i) of this section must be made 
by the due date, including extensions, of the Federal tax return for 
the taxpayer's taxable year that includes September 28, 2017.
    (B) Manner of making election. Except as provided in paragraph 
(f)(6) of this section, any election specified in paragraph (f)(3)(i) 
of this section must be made in the manner prescribed on the 2017 Form 
4562, ``Depreciation and Amortization,'' and its instructions. The 
election is made separately by each person owning qualified property 
(for example, for each member of a consolidated group by the common 
parent of the group, by the partnership (including a lower-tier 
partnership), or by the S corporation).
    (iii) Failure to make election. If a taxpayer does not make the 
election specified in paragraph (f)(3)(i) of this section within the 
time and in the manner prescribed in paragraph (f)(3)(ii) of this 
section, the amount of depreciation allowable for qualified property 
under section 167 or 168, as applicable, acquired and placed in 
service, or planted or grafted, as applicable, by the taxpayer after 
September 27, 2017, must be determined for the taxable year that 
includes September 28, 2017, and for all subsequent taxable years by 
taking into account the 100-percent additional first year depreciation 
deduction, unless the taxpayer makes the election specified in 
paragraph (f)(1)(i) of this section within the time and in the manner 
prescribed in paragraph (f)(1)(iii) of this section for the class of 
property in which the qualified property is included. Thus, any 
election specified in paragraph (f)(3)(i) of this section shall not be 
made by the taxpayer in any other manner (for example, the election 
cannot be made through a request under section 446(e) to change the 
taxpayer's method of accounting).
    (4) Alternative minimum tax. If a taxpayer makes an election 
specified in paragraph (f)(1) of this section for a class of property 
or in paragraph (f)(2) of this section for a specified plant, the 
depreciation adjustments under section 56 and the regulations in this 
part under section 56 do not apply to the property or specified plant, 
as applicable, to which that election applies for purposes of computing 
the taxpayer's alternative minimum taxable income. If a taxpayer makes 
an election specified in paragraph (f)(3) of this section for all 
qualified property, see paragraphs (e)(1)(iv) and (e)(2)(ii) of this 
section.
    (5) Revocation of election-(i) In general. Except as provided in 
paragraphs (f)(5)(ii) and (f)(6) of this section, an election specified 
in this paragraph (f), once made, may be revoked only by filing a 
request for a private letter ruling and obtaining the Commissioner of 
Internal Revenue's written consent to revoke the election. The 
Commissioner may grant a request to revoke the election if the taxpayer 
acted reasonably and in good faith, and the revocation will not 
prejudice the interests of the Government. See generally Sec.  
301.9100-3 of this chapter. An election specified in this paragraph (f) 
may not be revoked through a request under section 446(e) to change the 
taxpayer's method of accounting.
    (ii) Automatic 6-month extension. If a taxpayer made an election 
specified in this paragraph (f), an automatic extension of 6 months 
from the due date of the taxpayer's Federal tax return, excluding 
extensions, for the placed-in-service year or the taxable year in which 
the specified plant is planted or grafted, as applicable, is granted to 
revoke that election, provided the taxpayer timely filed the taxpayer's 
Federal tax return for the placed-in-service year or the taxable year 
in which the specified plant is planted or grafted, as applicable, and, 
within this 6-month extension period, the taxpayer, and all taxpayers 
whose tax liability would be affected by the election, file an amended 
Federal tax return for the placed-in-service year or the taxable year 
in which the specified plant is planted or grafted, as applicable, in a 
manner that is

[[Page 50142]]

consistent with the revocation of the election.
    (6) Special rules for 2016 and 2017 returns. For an election 
specified in this paragraph (f) for qualified property placed in 
service, or for a specified plant that is planted, or grafted to a 
plant that has already been planted, by the taxpayer during its taxable 
year that included September 28, 2017, the taxpayer should refer to 
Rev. Proc. 2019-33 (2019-34 I.R.B. 662) (see Sec.  601.601(d)(2)(ii)(b) 
of this chapter) for the time and manner of making the election on the 
2016 or 2017 Federal tax return.
    (g) Special rules--(1) Property placed in service and disposed of 
in the same taxable year--(i) In general. Except as provided in 
paragraphs (g)(1)(ii) and (iii) of this section, the additional first 
year depreciation deduction is not allowed for qualified property 
placed in service or planted or grafted, as applicable, and disposed of 
during the same taxable year. If a partnership interest is acquired and 
disposed of during the same taxable year, the additional first year 
depreciation deduction is not allowed for any section 743(b) adjustment 
arising from the initial acquisition. Also, if qualified property is 
placed in service and disposed of during the same taxable year and then 
reacquired and again placed in service in a subsequent taxable year, 
the additional first year depreciation deduction is not allowable for 
the property in the subsequent taxable year.
    (ii) Technical termination of a partnership. In the case of a 
technical termination of a partnership under section 708(b)(1)(B) in a 
taxable year beginning before January 1, 2018, the additional first 
year depreciation deduction is allowable for any qualified property 
placed in service or planted or grafted, as applicable, by the 
terminated partnership during the taxable year of termination and 
contributed by the terminated partnership to the new partnership. The 
allowable additional first year depreciation deduction for the 
qualified property shall not be claimed by the terminated partnership 
but instead shall be claimed by the new partnership for the new 
partnership's taxable year in which the qualified property was 
contributed by the terminated partnership to the new partnership. 
However, if qualified property is both placed in service or planted or 
grafted, as applicable, and contributed to a new partnership in a 
transaction described in section 708(b)(1)(B) by the terminated 
partnership during the taxable year of termination, and if such 
property is disposed of by the new partnership in the same taxable year 
the new partnership received such property from the terminated 
partnership, then no additional first year depreciation deduction is 
allowable to either partnership.
    (iii) Section 168(i)(7) transactions. If any qualified property is 
transferred in a transaction described in section 168(i)(7) in the same 
taxable year that the qualified property is placed in service or 
planted or grafted, as applicable, by the transferor, the additional 
first year depreciation deduction is allowable for the qualified 
property. If a partnership interest is purchased and transferred in a 
transaction described in section 168(i)(7) in the same taxable year, 
the additional first year depreciation deduction is allowable for any 
section 743(b) adjustment that arises from the initial acquisition with 
respect to qualified property held by the partnership, provided the 
requirements of paragraph (b)(3)(iv)(D) of this section and all other 
requirements of section 168(k) and this section are satisfied. The 
allowable additional first year depreciation deduction for the 
qualified property for the transferor's taxable year in which the 
property is placed in service or planted or grafted, as applicable, is 
allocated between the transferor and the transferee on a monthly basis. 
The allowable additional first year depreciation deduction for a 
section 743(b) adjustment with respect to qualified property held by 
the partnership is allocated between the transferor and the transferee 
on a monthly basis notwithstanding that under Sec.  1.743-1(f) a 
transferee's section 743(b) adjustment is determined without regard to 
a transferors section 743(b) adjustment. These allocations shall be 
made in accordance with the rules in Sec.  1.168(d)-1(b)(7)(ii) for 
allocating the depreciation deduction between the transferor and the 
transferee. However, solely for purposes of this section, if the 
qualified property is transferred in a section 721(a) transaction to a 
partnership that has as a partner a person, other than the transferor, 
who previously had a depreciable interest in the qualified property, in 
the same taxable year that the qualified property is acquired or 
planted or grafted, as applicable, by the transferor, the qualified 
property is deemed to be placed in service or planted or grafted, as 
applicable, by the transferor during that taxable year, and the 
allowable additional first year depreciation deduction is allocated 
entirely to the transferor and not to the partnership. Additionally, if 
qualified property is both placed in service or planted or grafted, as 
applicable, and transferred in a transaction described in section 
168(i)(7) by the transferor during the same taxable year, and if such 
property is disposed of by the transferee, other than by a transaction 
described in section 168(i)(7), during the same taxable year the 
transferee received such property from the transferor, then no 
additional first year depreciation deduction is allowable to either 
party.
    (iv) Examples. The application of this paragraph (g)(1) is 
illustrated by the following examples:

    (A) Example 1. UU and VV are equal partners in Partnership JL, a 
general partnership. Partnership JL is a calendar-year taxpayer. On 
October 1, 2017, Partnership JL purchased and placed in service 
qualified property at a cost of $30,000. On November 1, 2017, UU 
sells its entire 50 percent interest to WW in a transfer that 
terminates the partnership under section 708(b)(1)(B). As a result, 
terminated Partnership JL is deemed to have contributed the 
qualified property to new Partnership JL. Pursuant to paragraph 
(g)(1)(ii) of this section, new Partnership JL, not terminated 
Partnership JL, is eligible to claim the 100-percent additional 
first year depreciation deduction allowable for the qualified 
property for the taxable year 2017, assuming all other requirements 
are met.
    (B) Example 2. On January 5, 2018, XX purchased and placed in 
service qualified property for a total amount of $9,000. On August 
20, 2018, XX transferred this qualified property to Partnership BC 
in a transaction described in section 721(a). No other partner of 
Partnership BC has ever had a depreciable interest in the qualified 
property. XX and Partnership BC are calendar-year taxpayers. Because 
the transaction between XX and Partnership BC is a transaction 
described in section 168(i)(7), pursuant to paragraph (g)(1)(iii) of 
this section, the 100-percent additional first year depreciation 
deduction allowable for the qualified property is allocated between 
XX and Partnership BC in accordance with the rules in Sec.  
1.168(d)-1(b)(7)(ii) for allocating the depreciation deduction 
between the transferor and the transferee. Accordingly, the 100-
percent additional first year depreciation deduction allowable of 
$9,000 for the qualified property for 2018 is allocated between XX 
and Partnership BC based on the number of months that XX and 
Partnership BC held the qualified property in service during 2018. 
Thus, because the qualified property was held in service by XX for 7 
of 12 months, which includes the month in which XX placed the 
qualified property in service but does not include the month in 
which the qualified property was transferred, XX is allocated $5,250 
(\7/12\ x $9,000 additional first year depreciation deduction). 
Partnership BC is allocated $3,750, the remaining \5/12\ of the 
$9,000 additional first year depreciation deduction allowable for 
the qualified property.

    (2) Redetermination of basis. If the unadjusted depreciable basis, 
as defined

[[Page 50143]]

in Sec.  1.168(b)-1(a)(3), of qualified property is redetermined (for 
example, due to contingent purchase price or discharge of indebtedness) 
before January 1, 2027, or in the case of property described in section 
168(k)(2)(B) or (C), is redetermined before January 1, 2028, the 
additional first year depreciation deduction allowable for the 
qualified property is redetermined as follows:
    (i) Increase in basis. For the taxable year in which an increase in 
basis of qualified property occurs, the taxpayer shall claim an 
additional first year depreciation deduction for qualified property by 
multiplying the amount of the increase in basis for this property by 
the applicable percentage for the taxable year in which the underlying 
property was placed in service by the taxpayer. For purposes of this 
paragraph (g)(2)(i), the additional first year depreciation deduction 
applies to the increase in basis only if the underlying property is 
qualified property. To determine the amount otherwise allowable as a 
depreciation deduction for the increase in basis of qualified property, 
the amount of the increase in basis of the qualified property must be 
reduced by the additional first year depreciation deduction allowed or 
allowable, whichever is greater, for the increase in basis and the 
remaining increase in basis of--
    (A) Qualified property, except for computer software described in 
paragraph (b)(2)(i)(B) of this section, a qualified film or television 
production described in paragraph (b)(2)(i)(E) of this section, or a 
qualified live theatrical production described in paragraph 
(b)(2)(i)(F) of this section, is depreciated over the recovery period 
of the qualified property remaining as of the beginning of the taxable 
year in which the increase in basis occurs, and using the same 
depreciation method and convention applicable to the qualified property 
that applies for the taxable year in which the increase in basis 
occurs; and
    (B) Computer software, as defined in paragraph (b)(2)(i)(B) of this 
section, that is qualified property is depreciated ratably over the 
remainder of the 36-month period, the useful life under section 
167(f)(1), as of the beginning of the first day of the month in which 
the increase in basis occurs.
    (ii) Decrease in basis. For the taxable year in which a decrease in 
basis of qualified property occurs, the taxpayer shall reduce the total 
amount otherwise allowable as a depreciation deduction for all of the 
taxpayer's depreciable property by the excess additional first year 
depreciation deduction previously claimed for the qualified property. 
If, for such taxable year, the excess additional first year 
depreciation deduction exceeds the total amount otherwise allowable as 
a depreciation deduction for all of the taxpayer's depreciable 
property, the taxpayer shall take into account a negative depreciation 
deduction in computing taxable income. The excess additional first year 
depreciation deduction for qualified property is determined by 
multiplying the amount of the decrease in basis for this property by 
the applicable percentage for the taxable year in which the underlying 
property was placed in service by the taxpayer. For purposes of this 
paragraph (g)(2)(ii), the additional first year depreciation deduction 
applies to the decrease in basis only if the underlying property is 
qualified property. Also, if the taxpayer establishes by adequate 
records or other sufficient evidence that the taxpayer claimed less 
than the additional first year depreciation deduction allowable for the 
qualified property before the decrease in basis, or if the taxpayer 
claimed more than the additional first year depreciation deduction 
allowable for the qualified property before the decrease in basis, the 
excess additional first year depreciation deduction is determined by 
multiplying the amount of the decrease in basis by the additional first 
year depreciation deduction percentage actually claimed by the taxpayer 
for the qualified property before the decrease in basis. To determine 
the amount to reduce the total amount otherwise allowable as a 
depreciation deduction for all of the taxpayer's depreciable property 
for the excess depreciation previously claimed, other than the 
additional first year depreciation deduction, resulting from the 
decrease in basis of the qualified property, the amount of the decrease 
in basis of the qualified property must be adjusted by the excess 
additional first year depreciation deduction that reduced the total 
amount otherwise allowable as a depreciation deduction, as determined 
under this paragraph (g)(2)(ii), and the remaining decrease in basis 
of--
    (A) Qualified property, except for computer software described in 
paragraph (b)(2)(i)(B) of this section, a qualified film or television 
production described in paragraph (b)(2)(i)(E) of this section, or a 
qualified live theatrical production described in paragraph 
(b)(2)(i)(F) of this section, reduces the amount otherwise allowable as 
a depreciation deduction over the recovery period of the qualified 
property remaining as of the beginning of the taxable year in which the 
decrease in basis occurs, and using the same depreciation method and 
convention of the qualified property that applies in the taxable year 
in which the decrease in basis occurs. If, for any taxable year, the 
reduction to the amount otherwise allowable as a depreciation 
deduction, as determined under this paragraph (g)(2)(ii)(A), exceeds 
the total amount otherwise allowable as a depreciation deduction for 
all of the taxpayer's depreciable property, the taxpayer shall take 
into account a negative depreciation deduction in computing taxable 
income; and
    (B) Computer software, as defined in paragraph (b)(2)(i)(B) of this 
section, that is qualified property reduces the amount otherwise 
allowable as a depreciation deduction over the remainder of the 36-
month period, the useful life under section 167(f)(1), as of the 
beginning of the first day of the month in which the decrease in basis 
occurs. If, for any taxable year, the reduction to the amount otherwise 
allowable as a depreciation deduction, as determined under this 
paragraph (g)(2)(ii)(B), exceeds the total amount otherwise allowable 
as a depreciation deduction for all of the taxpayer's depreciable 
property, the taxpayer shall take into account a negative depreciation 
deduction in computing taxable income.
    (iii) Definitions. Except as otherwise expressly provided by the 
Internal Revenue Code (for example, section 1017(a)), the regulations 
under the Internal Revenue Code, or other guidance published in the 
Internal Revenue Bulletin for purposes of this paragraph (g)(2)--
    (A) An increase in basis occurs in the taxable year an amount is 
taken into account under section 461; and
    (B) A decrease in basis occurs in the taxable year an amount would 
be taken into account under section 451.
    (iv) Examples. The application of this paragraph (g)(2) is 
illustrated by the following examples:

    (A) Example 1. (1) On May 15, 2023, YY, a cash-basis taxpayer, 
purchased and placed in service qualified property that is 5-year 
property at a cost of $200,000. In addition to the $200,000, YY 
agrees to pay the seller 25 percent of the gross profits from the 
operation of the property in 2023. On May 15, 2024, YY paid to the 
seller an additional $10,000. YY depreciates the 5-year property 
placed in service in 2023 using the optional depreciation table that 
corresponds with the general depreciation system, the 200-percent 
declining balance method, a 5-year recovery period, and the half-
year convention.
    (2) For 2023, YY is allowed an 80-percent additional first year 
depreciation deduction of $160,000 (the unadjusted depreciable basis

[[Page 50144]]

of $200,000 multiplied by 0.80). In addition, YY's depreciation 
deduction for 2023 for the remaining adjusted depreciable basis of 
$40,000 (the unadjusted depreciable basis of $200,000 reduced by the 
additional first year depreciation deduction of $160,000) is $8,000 
(the remaining adjusted depreciable basis of $40,000 multiplied by 
the annual depreciation rate of 0.20 for recovery year 1).
    (3) For 2024, YY's depreciation deduction for the remaining 
adjusted depreciable basis of $40,000 is $12,800 (the remaining 
adjusted depreciable basis of $40,000 multiplied by the annual 
depreciation rate of 0.32 for recovery year 2). In addition, 
pursuant to paragraph (g)(2)(i) of this section, YY is allowed an 
additional first year depreciation deduction for 2024 for the 
$10,000 increase in basis of the qualified property. Consequently, 
YY is allowed an additional first year depreciation deduction of 
$8,000 (the increase in basis of $10,000 multiplied by 0.80, the 
applicable percentage for 2023). Also, YY is allowed a depreciation 
deduction for 2024 attributable to the remaining increase in basis 
of $2,000 (the increase in basis of $10,000 reduced by the 
additional first year depreciation deduction of $8,000). The 
depreciation deduction allowable for 2024 attributable to the 
remaining increase in basis of $2,000 is $889 (the remaining 
increase in basis of $2,000 multiplied by 0.4444, which is equal to 
1/remaining recovery period of 4.5 years at January 1, 2024, 
multiplied by 2). Accordingly, for 2024, YY's total depreciation 
deduction allowable for the qualified property is $21,689 ($12,800 
plus $8,000 plus $889).
    (B) Example 2. (1) On May 15, 2023, ZZ, a calendar-year 
taxpayer, purchased and placed in service qualified property that is 
5-year property at a cost of $400,000. To purchase the property, ZZ 
borrowed $250,000 from Bank1. On May 15, 2024, Bank1 forgives 
$50,000 of the indebtedness. ZZ makes the election provided in 
section 108(b)(5) to apply any portion of the reduction under 
section 1017 to the basis of the depreciable property of the 
taxpayer. ZZ depreciates the 5-year property placed in service in 
2023 using the optional depreciation table that corresponds with the 
general depreciation system, the 200-percent declining balance 
method, a 5-year recovery period, and the half-year convention.
    (2) For 2023, ZZ is allowed an 80-percent additional first year 
depreciation deduction of $320,000 (the unadjusted depreciable basis 
of $400,000 multiplied by 0.80). In addition, ZZ's depreciation 
deduction allowable for 2023 for the remaining adjusted depreciable 
basis of $80,000 (the unadjusted depreciable basis of $400,000 
reduced by the additional first year depreciation deduction of 
$320,000) is $16,000 (the remaining adjusted depreciable basis of 
$80,000 multiplied by the annual depreciation rate of 0.20 for 
recovery year 1).
    (3) For 2024, ZZ's deduction for the remaining adjusted 
depreciable basis of $80,000 is $25,600 (the remaining adjusted 
depreciable basis of $80,000 multiplied by the annual depreciation 
rate 0.32 for recovery year 2). Although Bank1 forgave the 
indebtedness in 2024, the basis of the property is reduced on 
January 1, 2025, pursuant to sections 108(b)(5) and 1017(a) under 
which basis is reduced at the beginning of the taxable year 
following the taxable year in which the discharge of indebtedness 
occurs.
    (4) For 2025, ZZ's deduction for the remaining adjusted 
depreciable basis of $80,000 is $15,360 (the remaining adjusted 
depreciable basis of $80,000 multiplied by the annual depreciation 
rate 0.192 for recovery year 3). However, pursuant to paragraph 
(g)(2)(ii) of this section, ZZ must reduce the amount otherwise 
allowable as a depreciation deduction for 2025 by the excess 
depreciation previously claimed for the $50,000 decrease in basis of 
the qualified property. Consequently, ZZ must reduce the amount of 
depreciation otherwise allowable for 2025 by the excess additional 
first year depreciation of $40,000 (the decrease in basis of $50,000 
multiplied by 0.80, the applicable percentage for 2023). Also, ZZ 
must reduce the amount of depreciation otherwise allowable for 2025 
by the excess depreciation attributable to the remaining decrease in 
basis of $10,000 (the decrease in basis of $50,000 reduced by the 
excess additional first year depreciation of $40,000). The reduction 
in the amount of depreciation otherwise allowable for 2025 for the 
remaining decrease in basis of $10,000 is $5,714 (the remaining 
decrease in basis of $10,000 multiplied by 0.5714, which is equal to 
(1/remaining recovery period of 3.5 years at January 1, 2025, 
multiplied by 2). Accordingly, assuming the qualified property is 
the only depreciable property owned by ZZ, for 2025, ZZ has a 
negative depreciation deduction for the qualified property of 
$30,354 ($15,360 minus $40,000 minus $5,714).

    (3) Sections 1245 and 1250 depreciation recapture. For purposes of 
section 1245 and Sec. Sec.  1.1245-1 through -6, the additional first 
year depreciation deduction is an amount allowed or allowable for 
depreciation. Further, for purposes of section 1250(b) and Sec.  
1.1250-2, the additional first year depreciation deduction is not a 
straight line method.
    (4) Coordination with section 169. The additional first year 
depreciation deduction is allowable in the placed-in-service year of a 
certified pollution control facility, as defined in Sec.  1.169-2(a), 
that is qualified property even if the taxpayer makes the election to 
amortize the certified pollution control facility under section 169 and 
Sec. Sec.  1.169-1 through -4 in the certified pollution control 
facility's placed-in-service year.
    (5) Like-kind exchanges and involuntary conversions--(i) Scope. The 
rules of this paragraph (g)(5) apply to replacement MACRS property or 
replacement computer software that is qualified property at the time of 
replacement provided the time of replacement is after September 27, 
2017, and before January 1, 2027; or, in the case of replacement MACRS 
property or replacement computer software that is qualified property 
described in section 168(k)(2)(B) or (C), the time of replacement is 
after September 27, 2017, and before January 1, 2028.
    (ii) Definitions. For purposes of this paragraph (g)(5), the 
following definitions apply:
    (A) Replacement MACRS property has the same meaning as that term is 
defined in Sec.  1.168(i)-6(b)(1).
    (B) Relinquished MACRS property has the same meaning as that term 
is defined in Sec.  1.168(i)-6(b)(2).
    (C) Replacement computer software is computer software, as defined 
in paragraph (b)(2)(i)(B) of this section, in the hands of the 
acquiring taxpayer that is acquired for other computer software in a 
like-kind exchange or in an involuntary conversion.
    (D) Relinquished computer software is computer software that is 
transferred by the taxpayer in a like-kind exchange or in an 
involuntary conversion.
    (E) Time of disposition has the same meaning as that term is 
defined in Sec.  1.168(i)-6(b)(3) for relinquished MACRS property. For 
relinquished computer software, time of disposition is when the 
disposition of the relinquished computer software takes place under the 
convention determined under Sec.  1.167(a)-14(b).
    (F) Except as provided in paragraph (g)(5)(iv) of this section, the 
time of replacement has the same meaning as that term is defined in 
Sec.  1.168(i)-6(b)(4) for replacement MACRS property. For replacement 
computer software, the time of replacement is, except as provided in 
paragraph (g)(5)(iv) of this section, the later of--
    (1) When the replacement computer software is placed in service 
under the convention determined under Sec.  1.167(a)-14(b); or
    (2) The time of disposition of the relinquished property.
    (G) Exchanged basis has the same meaning as that term is defined in 
Sec.  1.168(i)-6(b)(7) for MACRS property, as defined in Sec.  
1.168(b)-1(a)(2). For computer software, the exchanged basis is 
determined after the amortization deductions for the year of 
disposition are determined under Sec.  1.167(a)-14(b) and is the lesser 
of--
    (1) The basis in the replacement computer software, as determined 
under section 1031(d) and Sec.  1.1031(d)-1, 1.1031(d)-2, 1.1031(j)-1, 
or 1.1031(k)-1; or section 1033(b) and Sec.  1.1033(b)-1; or
    (2) The adjusted depreciable basis of the relinquished computer 
software.
    (H) Excess basis has the same meaning as that term is defined in 
Sec.  1.168(i)-6(b)(8) for replacement MACRS property. For replacement

[[Page 50145]]

computer software, the excess basis is any excess of the basis in the 
replacement computer software, as determined under section 1031(d) and 
Sec.  1.1031(d)-1, 1.1031(d)-2, 1.1031(j)-1, or 1.1031(k)-1; or section 
1033(b) and Sec.  1.1033(b)-1, over the exchanged basis as determined 
under paragraph (g)(5)(ii)(G) of this section.
    (I) Remaining exchanged basis is the exchanged basis as determined 
under paragraph (g)(5)(ii)(G) of this section reduced by--
    (1) The percentage of such basis attributable to the taxpayer's use 
of property for the taxable year other than in the taxpayer's trade or 
business or for the production of income; and
    (2) Any adjustments to basis provided by other provisions of the 
Code and the regulations under the Code (including section 1016(a)(2) 
and (3)) for periods prior to the disposition of the relinquished 
property.
    (J) Remaining excess basis is the excess basis as determined under 
paragraph (g)(5)(ii)(H) of this section reduced by--
    (1) The percentage of such basis attributable to the taxpayer's use 
of property for the taxable year other than in the taxpayer's trade or 
business or for the production of income;
    (2) Any portion of the basis the taxpayer properly elects to treat 
as an expense under section 179 or 179C; and
    (3) Any adjustments to basis provided by other provisions of the 
Code and the regulations under the Code.
    (K) Year of disposition has the same meaning as that term is 
defined in Sec.  1.168(i)-6(b)(5).
    (L) Year of replacement has the same meaning as that term is 
defined in Sec.  1.168(i)-6(b)(6).
    (M) Like-kind exchange has the same meaning as that term is defined 
in Sec.  1.168(i)-6(b)(11).
    (N) Involuntary conversion has the same meaning as that term is 
defined in Sec.  1.168(i)-6(b)(12).
    (iii) Computation--(A) In general. If the replacement MACRS 
property or the replacement computer software, as applicable, meets the 
original use requirement in paragraph (b)(3)(ii) of this section and 
all other requirements of section 168(k) and this section, the 
remaining exchanged basis for the year of replacement and the remaining 
excess basis, if any, for the year of replacement for the replacement 
MACRS property or the replacement computer software, as applicable, are 
eligible for the additional first year depreciation deduction under 
this section. If the replacement MACRS property or the replacement 
computer software, as applicable, meets the used property acquisition 
requirements in paragraph (b)(3)(iii) of this section and all other 
requirements of section 168(k) and this section, only the remaining 
excess basis for the year of replacement for the replacement MACRS 
property or the replacement computer software, as applicable, is 
eligible for the additional first year depreciation deduction under 
this section. See paragraph (b)(3)(iii)(A)(3) of this section. The 
additional first year depreciation deduction applies to the remaining 
exchanged basis and any remaining excess basis, as applicable, of the 
replacement MACRS property or the replacement computer software, as 
applicable, if the time of replacement is after September 27, 2017, and 
before January 1, 2027; or, in the case of replacement MACRS property 
or replacement computer software, as applicable, described in section 
168(k)(2)(B) or (C), the time of replacement is after September 27, 
2017, and before January 1, 2028. The additional first year 
depreciation deduction is computed separately for the remaining 
exchanged basis and any remaining excess basis, as applicable.
    (B) Year of disposition and year of replacement. The additional 
first year depreciation deduction is allowable for the replacement 
MACRS property or replacement computer software in the year of 
replacement. However, the additional first year depreciation deduction 
is not allowable for the relinquished MACRS property or the 
relinquished computer software, as applicable, if the relinquished 
MACRS property or the relinquished computer software, as applicable, is 
placed in service and disposed of in a like-kind exchange or in an 
involuntary conversion in the same taxable year.
    (C) Property described in section 168(k)(2)(B). For purposes of 
paragraph (g)(5)(iii)(A) of this section, the total of the remaining 
exchanged basis and the remaining excess basis, if any, of the 
replacement MACRS property that is qualified property described in 
section 168(k)(2)(B) and meets the original use requirement in 
paragraph (b)(3)(ii) of this section is limited to the total of the 
property's remaining exchanged basis and remaining excess basis, if 
any, attributable to the property's manufacture, construction, or 
production after September 27, 2017, and before January 1, 2027. For 
purposes of paragraph (g)(5)(iii)(A) of this section, the remaining 
excess basis, if any, of the replacement MACRS property that is 
qualified property described in section 168(k)(2)(B) and meets the used 
property acquisition requirements in paragraph (b)(3)(iii) of this 
section is limited to the property's remaining excess basis, if any, 
attributable to the property's manufacture, construction, or production 
after September 27, 2017, and before January 1, 2027.
    (D) Effect of Sec.  1.168(i)-6(i)(1) election. If a taxpayer 
properly makes the election under Sec.  1.168(i)-6(i)(1) not to apply 
Sec.  1.168(i)-6 for any MACRS property, as defined in Sec.  1.168(b)-
1(a)(2), involved in a like-kind exchange or involuntary conversion, 
then:
    (1) If the replacement MACRS property meets the original use 
requirement in paragraph (b)(3)(ii) of this section and all other 
requirements of section 168(k) and this section, the total of the 
exchanged basis, as defined in Sec.  1.168(i)-6(b)(7), and the excess 
basis, as defined in Sec.  1.168(i)-6(b)(8), if any, in the replacement 
MACRS property is eligible for the additional first year depreciation 
deduction under this section; or
    (2) If the replacement MACRS property meets the used property 
acquisition requirements in paragraph (b)(3)(iii) of this section and 
all other requirements of section 168(k) and this section, only the 
excess basis, as defined in Sec.  1.168(i)-6(b)(8), if any, in the 
replacement MACRS property is eligible for the additional first year 
depreciation deduction under this section.
    (E) Alternative minimum tax. The additional first year depreciation 
deduction is allowed for alternative minimum tax purposes for the year 
of replacement of replacement MACRS property or replacement computer 
software, as applicable, that is qualified property. If the replacement 
MACRS property or the replacement computer software, as applicable, 
meets the original use requirement in paragraph (b)(3)(ii) of this 
section and all other requirements of section 168(k) and this section, 
the additional first year depreciation deduction for alternative 
minimum tax purposes is based on the remaining exchanged basis and the 
remaining excess basis, if any, of the replacement MACRS property or 
the replacement computer software, as applicable, for alternative 
minimum tax purposes. If the replacement MACRS property or the 
replacement computer software, as applicable, meets the used property 
acquisition requirements in paragraph (b)(3)(iii) of this section and 
all other requirements of section 168(k) and this section, the 
additional first year depreciation deduction for alternative minimum 
tax purposes is based on the remaining excess basis, if any, of the 
replacement MACRS property or the replacement computer software, as

[[Page 50146]]

applicable, for alternative minimum tax purposes.
    (iv) Replacement MACRS property or replacement computer software 
that is acquired and placed in service before disposition of 
relinquished MACRS property or relinquished computer software. If, in 
an involuntary conversion, a taxpayer acquires and places in service 
the replacement MACRS property or the replacement computer software, as 
applicable, before the time of disposition of the involuntarily 
converted MACRS property or the involuntarily converted computer 
software, as applicable; and the time of disposition of the 
involuntarily converted MACRS property or the involuntarily converted 
computer software, as applicable, is after December 31, 2026, or, in 
the case of property described in service 168(k)(2)(B) or (C), after 
December 31, 2027, then--
    (A) The time of replacement for purposes of this paragraph (g)(5) 
is when the replacement MACRS property or replacement computer 
software, as applicable, is placed in service by the taxpayer, provided 
the threat or imminence of requisition or condemnation of the 
involuntarily converted MACRS property or involuntarily converted 
computer software, as applicable, existed before January 1, 2027, or, 
in the case of property described in section 168(k)(2)(B) or (C), 
existed before January 1, 2028; and
    (B) The taxpayer depreciates the replacement MACRS property or 
replacement computer software, as applicable, in accordance with 
paragraph (e) of this section. However, at the time of disposition of 
the involuntarily converted MACRS property, the taxpayer determines the 
exchanged basis, as defined in Sec.  1.168(i)-6(b)(7), and the excess 
basis, as defined in Sec.  1.168(i)-6(b)(8), of the replacement MACRS 
property and begins to depreciate the depreciable exchanged basis, as 
defined in Sec.  1.168(i)-6(b)(9), of the replacement MACRS property in 
accordance with Sec.  1.168(i)-6(c). The depreciable excess basis, as 
defined in Sec.  1.168(i)-6(b)(10), of the replacement MACRS property 
continues to be depreciated by the taxpayer in accordance with the 
first sentence of this paragraph (g)(5)(iv)(B). Further, in the year of 
disposition of the involuntarily converted MACRS property, the taxpayer 
must include in taxable income the excess of the depreciation 
deductions allowable, including the additional first year depreciation 
deduction allowable, on the unadjusted depreciable basis of the 
replacement MACRS property over the additional first year depreciation 
deduction that would have been allowable to the taxpayer on the 
remaining exchanged basis of the replacement MACRS property at the time 
of replacement, as defined in paragraph (g)(5)(iv)(A) of this section, 
plus the depreciation deductions that would have been allowable, 
including the additional first year depreciation deduction allowable, 
to the taxpayer on the depreciable excess basis of the replacement 
MACRS property from the date the replacement MACRS property was placed 
in service by the taxpayer, taking into account the applicable 
convention, to the time of disposition of the involuntarily converted 
MACRS property. Similar rules apply to replacement computer software.
    (v) Examples. The application of this paragraph (g)(5) is 
illustrated by the following examples:

    (A) Example 1. (1) In April 2016, CSK, a calendar-year 
corporation, acquired for $200,000 and placed in service Canopy V1, 
a gas station canopy. Canopy V1 is qualified property under section 
168(k)(2), as in effect on the day before amendment by the Act, and 
is 5-year property under section 168(e). CSK depreciated Canopy V1 
under the general depreciation system of section 168(a) by using the 
200-percent declining balance method of depreciation, a 5-year 
recovery period, and the half-year convention. CSK elected to use 
the optional depreciation tables to compute the depreciation 
allowance for Canopy V1. In November 2017, Canopy V1 was destroyed 
in a fire and was no longer usable in CSK's business. In December 
2017, in an involuntary conversion, CSK acquired and placed in 
service Canopy W1 with all of the $160,000 of insurance proceeds CSK 
received due to the loss of Canopy V1. Canopy W1 is qualified 
property under section 168(k)(2) and this section, and is 5-year 
property under section 168(e). Canopy W1 also meets the original use 
requirement in paragraph (b)(3)(ii) of this section. CSK did not 
make the election under Sec.  1.168(i)-6(i)(1).
    (2) For 2016, CSK is allowed a 50-percent additional first year 
depreciation deduction of $100,000 for Canopy V1 (the unadjusted 
depreciable basis of $200,000 multiplied by 0.50), and a regular 
MACRS depreciation deduction of $20,000 for Canopy V1 (the remaining 
adjusted depreciable basis of $100,000 multiplied by the annual 
depreciation rate of 0.20 for recovery year 1).
    (3) For 2017, CSK is allowed a regular MACRS depreciation 
deduction of $16,000 for Canopy V1 (the remaining adjusted 
depreciable basis of $100,000 multiplied by the annual depreciation 
rate of 0.32 for recovery year 2 x \1/2\ year).
    (4) Pursuant to paragraph (g)(5)(iii)(A) of this section, the 
additional first year depreciation deduction allowable for Canopy W1 
for 2017 equals $64,000 (100 percent of Canopy W1's remaining 
exchanged basis at the time of replacement of $64,000 (Canopy V1's 
remaining adjusted depreciable basis of $100,000 minus 2016 regular 
MACRS depreciation deduction of $20,000 minus 2017 regular MACRS 
depreciation deduction of $16,000)).
    (B) Example 2. (1) The facts are the same as in Example 1 of 
paragraph (g)(5)(v)(A)(1) of this section, except CSK elected not to 
deduct the additional first year depreciation for 5-year property 
placed in service in 2016. CSK deducted the additional first year 
depreciation for 5-year property placed in service in 2017.
    (2) For 2016, CSK is allowed a regular MACRS depreciation 
deduction of $40,000 for Canopy V1 (the unadjusted depreciable basis 
of $200,000 multiplied by the annual depreciation rate of 0.20 for 
recovery year 1).
    (3) For 2017, CSK is allowed a regular MACRS depreciation 
deduction of $32,000 for Canopy V1 (the unadjusted depreciable basis 
of $200,000 multiplied by the annual depreciation rate of 0.32 for 
recovery year 2 x \1/2\ year).
    (4) Pursuant to paragraph (g)(5)(iii)(A) of this section, the 
additional first year depreciation deduction allowable for Canopy W1 
for 2017 equals $128,000 (100 percent of Canopy W1's remaining 
exchanged basis at the time of replacement of $128,000 (Canopy V1's 
unadjusted depreciable basis of $200,000 minus 2016 regular MACRS 
depreciation deduction of $40,000 minus 2017 regular MACRS 
depreciation deduction of $32,000)).
    (C) Example 3. The facts are the same as in Example 1 of 
paragraph (g)(5)(v)(A)(1) of this section, except Canopy W1 meets 
the used property acquisition requirements in paragraph (b)(3)(iii) 
of this section. Because the remaining excess basis of Canopy W1 is 
zero, CSK is not allowed any additional first year depreciation for 
Canopy W1 pursuant to paragraph (g)(5)(iii)(A) of this section.
    (D) Example 4. (1) In December 2016, AB, a calendar-year 
corporation, acquired for $10,000 and placed in service Computer X2. 
Computer X2 is qualified property under section 168(k)(2), as in 
effect on the day before amendment by the Act, and is 5-year 
property under section 168(e). AB depreciated Computer X2 under the 
general depreciation system of section 168(a) by using the 200-
percent declining balance method of depreciation, a 5-year recovery 
period, and the half-year convention. AB elected to use the optional 
depreciation tables to compute the depreciation allowance for 
Computer X2. In November 2017, AB acquired Computer Y2 by exchanging 
Computer X2 and $1,000 cash in a like-kind exchange. Computer Y2 is 
qualified property under section 168(k)(2) and this section, and is 
5-year property under section 168(e). Computer Y2 also meets the 
original use requirement in paragraph (b)(3)(ii) of this section. AB 
did not make the election under Sec.  1.168(i)-6(i)(1).
    (2) For 2016, AB is allowed a 50-percent additional first year 
depreciation deduction of $5,000 for Computer X2 (unadjusted basis 
of $10,000 multiplied by 0.50), and a regular MACRS depreciation 
deduction of $1,000 for Computer X2 (the remaining adjusted 
depreciable basis of $5,000 multiplied by the annual depreciation 
rate of 0.20 for recovery year 1).

[[Page 50147]]

    (3) For 2017, AB is allowed a regular MACRS depreciation 
deduction of $800 for Computer X2 (the remaining adjusted 
depreciable basis of $5,000 multiplied by the annual depreciation 
rate of 0.32 for recovery year 2 x \1/2\ year).
    (4) Pursuant to paragraph (g)(5)(iii)(A) of this section, the 
100-percent additional first year depreciation deduction for 
Computer Y2 for 2017 is allowable for the remaining exchanged basis 
at the time of replacement of $3,200 (Computer X2's unadjusted 
depreciable basis of $10,000 minus additional first year 
depreciation deduction allowable of $5,000 minus the 2016 regular 
MACRS depreciation deduction of $1,000 minus the 2017 regular MACRS 
depreciation deduction of $800) and for the remaining excess basis 
at the time of replacement of $1,000 (cash paid for Computer Y2). 
Thus, the 100-percent additional first year depreciation deduction 
allowable for Computer Y2 totals $4,200 for 2017.
    (E) Example 5. (1) In July 2017, BC, a calendar-year 
corporation, acquired for $20,000 and placed in service Equipment 
X3. Equipment X3 is qualified property under section 168(k)(2), as 
in effect on the day before amendment by the Act, and is 5-year 
property under section 168(e). BC depreciated Equipment X3 under the 
general depreciation system of section 168(a) by using the 200-
percent declining balance method of depreciation, a 5-year recovery 
period, and the half-year convention. BC elected to use the optional 
depreciation tables to compute the depreciation allowance for 
Equipment X3. In December 2017, BC acquired Equipment Y3 by 
exchanging Equipment X3 and $5,000 cash in a like-kind exchange. 
Equipment Y3 is qualified property under section 168(k)(2) and this 
section, and is 5-year property under section 168(e). Equipment Y3 
also meets the used property acquisition requirements in paragraph 
(b)(3)(iii) of this section. BC did not make the election under 
Sec.  1.168(i)-6(i)(1).
    (2) Pursuant to Sec.  1.168(k)-1(f)(5)(iii)(B), no additional 
first year depreciation deduction is allowable for Equipment X3 and, 
pursuant to Sec.  1.168(d)-1(b)(3)(ii), no regular depreciation 
deduction is allowable for Equipment X3, for 2017.
    (3) Pursuant to paragraph (g)(5)(iii)(A) of this section, no 
additional first year depreciation deduction is allowable for 
Equipment Y3's remaining exchanged basis at the time of replacement 
of $20,000 (Equipment X3's unadjusted depreciable basis of $20,000). 
However, pursuant to paragraph (g)(5)(iii)(A) of this section, the 
100-percent additional first year depreciation deduction is 
allowable for Equipment Y3's remaining excess basis at the time of 
replacement of $5,000 (cash paid for Equipment Y3). Thus, the 100-
percent additional first year depreciation deduction allowable for 
Equipment Y3 is $5,000 for 2017.
    (F) Example 6. (1) The facts are the same as in Example 5 of 
paragraph (g)(5)(v)(E)(1) of this section, except BC properly makes 
the election under Sec.  1.168(i)-6(i)(1) not to apply Sec.  
1.168(i)-6 to Equipment X3 and Equipment Y3.
    (2) Pursuant to Sec.  1.168(k)-1(f)(5)(iii)(B), no additional 
first year depreciation deduction is allowable for Equipment X3 and, 
pursuant to Sec.  1.168(d)-1(b)(3)(ii), no regular depreciation 
deduction is allowable for Equipment X3, for 2017.
    (3) Pursuant to Sec.  1.168(i)-6(i)(1), BC is treated as placing 
Equipment Y3 in service in December 2017 with a basis of $25,000 
(the total of the exchanged basis of $20,000 and the excess basis of 
$5,000). However, pursuant to paragraph (g)(5)(iii)(D)(2) of this 
section, the 100-percent additional first year depreciation 
deduction is allowable only for Equipment Y3's excess basis at the 
time of replacement of $5,000 (cash paid for Equipment Y3). Thus, 
the 100-percent additional first year depreciation deduction 
allowable for Equipment Y3 is $5,000 for 2017.

    (6) Change in use--(i) Change in use of MACRS property. The 
determination of whether the use of MACRS property, as defined in Sec.  
1.168(b)-1(a)(2), changes is made in accordance with section 168(i)(5) 
and Sec.  1.168(i)-4.
    (ii) Conversion to personal use. If qualified property is converted 
from business or income-producing use to personal use in the same 
taxable year in which the property is placed in service by a taxpayer, 
the additional first year depreciation deduction is not allowable for 
the property.
    (iii) Conversion to business or income-producing use--(A) During 
the same taxable year. If, during the same taxable year, property is 
acquired by a taxpayer for personal use and is converted by the 
taxpayer from personal use to business or income-producing use, the 
additional first year depreciation deduction is allowable for the 
property in the taxable year the property is converted to business or 
income-producing use, assuming all of the requirements in paragraph (b) 
of this section are met. See paragraph (b)(3)(ii) of this section 
relating to the original use rules for a conversion of property to 
business or income-producing use. See Sec.  1.168(i)-4(b)(1) for 
determining the depreciable basis of the property at the time of 
conversion to business or income-producing use.
    (B) Subsequent to the acquisition year. If property is acquired by 
a taxpayer for personal use and, during a subsequent taxable year, is 
converted by the taxpayer from personal use to business or income-
producing use, the additional first year depreciation deduction is 
allowable for the property in the taxable year the property is 
converted to business or income-producing use, assuming all of the 
requirements in paragraph (b) of this section are met. For purposes of 
paragraphs (b)(4) and (5) of this section, the property must be 
acquired by the taxpayer for personal use after September 27, 2017, and 
converted by the taxpayer from personal use to business or income-
producing use by January 1, 2027. See paragraph (b)(3)(ii) of this 
section relating to the original use rules for a conversion of property 
to business or income-producing use. See Sec.  1.168(i)-4(b)(1) for 
determining the depreciable basis of the property at the time of 
conversion to business or income-producing use.
    (iv) Depreciable property changes use subsequent to the placed-in-
service year. (A) If the use of qualified property changes in the hands 
of the same taxpayer subsequent to the taxable year the qualified 
property is placed in service and, as a result of the change in use, 
the property is no longer qualified property, the additional first year 
depreciation deduction allowable for the qualified property is not 
redetermined.
    (B) If depreciable property is not qualified property in the 
taxable year the property is placed in service by the taxpayer, the 
additional first year depreciation deduction is not allowable for the 
property even if a change in the use of the property subsequent to the 
taxable year the property is placed in service results in the property 
being qualified property in the taxable year of the change in use.
    (v) Examples. The application of this paragraph (g)(6) is 
illustrated by the following examples:

    (A) Example 1. (1) On January 1, 2019, FFF, a calendar year 
corporation, purchased and placed in service several new computers 
at a total cost of $100,000. FFF used these computers within the 
United States for 3 months in 2019 and then moved and used the 
computers outside the United States for the remainder of 2019. On 
January 1, 2020, FFF permanently returns the computers to the United 
States for use in its business.
    (2) For 2019, the computers are considered as used predominantly 
outside the United States in 2019 pursuant to Sec.  1.48-1(g)(1)(i). 
As a result, the computers are required to be depreciated under the 
alternative depreciation system of section 168(g). Pursuant to 
paragraph (b)(2)(ii)(B) of this section, the computers are not 
qualified property in 2019, the placed-in-service year. Thus, 
pursuant to paragraph (g)(6)(iv)(B) of this section, no additional 
first year depreciation deduction is allowed for these computers, 
regardless of the fact that the computers are permanently returned 
to the United States in 2020.
    (B) Example 2. (1) On February 8, 2023, GGG, a calendar year 
corporation, purchased and placed in service new equipment at a cost 
of $1,000,000 for use in its California plant. The equipment is 5-
year property under section 168(e) and is qualified property under 
section 168(k). GGG depreciates its 5-year property placed in 
service in 2023 using the optional depreciation table that 
corresponds with the general depreciation system, the 200-percent

[[Page 50148]]

declining balance method, a 5-year recovery period, and the half-
year convention. On June 4, 2024, due to changes in GGG's business 
circumstances, GGG permanently moves the equipment to its plant in 
Mexico.
    (2) For 2023, GGG is allowed an 80-percent additional first year 
depreciation deduction of $800,000 (the adjusted depreciable basis 
of $1,000,000 multiplied by 0.80). In addition, GGG's depreciation 
deduction allowable in 2023 for the remaining adjusted depreciable 
basis of $200,000 (the unadjusted depreciable basis of $1,000,000 
reduced by the additional first year depreciation deduction of 
$800,000) is $40,000 (the remaining adjusted depreciable basis of 
$200,000 multiplied by the annual depreciation rate of 0.20 for 
recovery year 1).
    (3) For 2024, the equipment is considered as used predominantly 
outside the United States pursuant to Sec.  1.48-1(g)(1)(i). As a 
result of this change in use, the adjusted depreciable basis of 
$160,000 for the equipment is required to be depreciated under the 
alternative depreciation system of section 168(g) beginning in 2024. 
However, the additional first year depreciation deduction of 
$800,000 allowed for the equipment in 2023 is not redetermined.

    (7) Earnings and profits. The additional first year depreciation 
deduction is not allowable for purposes of computing earnings and 
profits.
    (8) Limitation of amount of depreciation for certain passenger 
automobiles. For a passenger automobile as defined in section 
280F(d)(5), the limitation under section 280F(a)(1)(A)(i) is increased 
by $8,000 for qualified property acquired and placed in service by a 
taxpayer after September 27, 2017.
    (9) Coordination with section 47--(i) In general. If qualified 
rehabilitation expenditures, as defined in section 47(c)(2) and Sec.  
1.48-12(c), incurred by a taxpayer with respect to a qualified 
rehabilitated building, as defined in section 47(c)(1) and Sec.  1.48-
12(b), are qualified property, the taxpayer may claim the 
rehabilitation credit provided by section 47(a), provided the 
requirements of section 47 are met--
    (A) With respect to the portion of the basis of the qualified 
rehabilitated building that is attributable to the qualified 
rehabilitation expenditures if the taxpayer makes the applicable 
election under paragraph (f)(1)(i) of this section not to deduct any 
additional first year depreciation for the class of property that 
includes the qualified rehabilitation expenditures; or
    (B) With respect to the portion of the remaining rehabilitated 
basis of the qualified rehabilitated building that is attributable to 
the qualified rehabilitation expenditures if the taxpayer claims the 
additional first year depreciation deduction on the unadjusted 
depreciable basis, as defined in Sec.  1.168(b)-1(a)(3) but before the 
reduction in basis for the amount of the rehabilitation credit, of the 
qualified rehabilitation expenditures; and the taxpayer depreciates the 
remaining adjusted depreciable basis, as defined in paragraph (e)(2)(i) 
of this section, of such expenditures using straight line cost recovery 
in accordance with section 47(c)(2)(B)(i) and Sec.  1.48-12(c)(7)(i). 
For purposes of this paragraph (g)(9)(i)(B), the remaining 
rehabilitated basis is equal to the unadjusted depreciable basis, as 
defined in Sec.  1.168(b)-1(a)(3) but before the reduction in basis for 
the amount of the rehabilitation credit, of the qualified 
rehabilitation expenditures that are qualified property reduced by the 
additional first year depreciation allowed or allowable, whichever is 
greater.
    (ii) Example. The application of this paragraph (g)(9) is 
illustrated by the following example:

    (A) Between February 8, 2023, and June 4, 2023, JM, a calendar-
year taxpayer, incurred qualified rehabilitation expenditures of 
$200,000 with respect to a qualified rehabilitated building that is 
nonresidential real property under section 168(e). These qualified 
rehabilitation expenditures are qualified property and qualify for 
the 20-percent rehabilitation credit under section 47(a)(1). JM's 
basis in the qualified rehabilitated building is zero before 
incurring the qualified rehabilitation expenditures and JM placed 
the qualified rehabilitated building in service in July 2023. JM 
depreciates its nonresidential real property placed in service in 
2023 under the general depreciation system of section 168(a) by 
using the straight line method of depreciation, a 39-year recovery 
period, and the mid-month convention. JM elected to use the optional 
depreciation tables to compute the depreciation allowance for its 
depreciable property placed in service in 2023. Further, for 2023, 
JM did not make any election under paragraph (f) of this section.
    (B) Because JM did not make any election under paragraph (f) of 
this section, JM is allowed an 80-percent additional first year 
depreciation deduction of $160,000 for the qualified rehabilitation 
expenditures for 2023 (the unadjusted depreciable basis of $200,000 
(before reduction in basis for the rehabilitation credit) multiplied 
by 0.80). JM also is allowed to claim a rehabilitation credit of 
$8,000 for the remaining rehabilitated basis of $40,000 (the 
unadjusted depreciable basis (before reduction in basis for the 
rehabilitation credit) of $200,000 less the additional first year 
depreciation deduction of $160,000, multiplied by 0.20 to calculate 
the rehabilitation credit). For 2023, the ratable share of the 
rehabilitation credit of $8,000 is $1,600. Further, JM's 
depreciation deduction for 2023 for the remaining adjusted 
depreciable basis of $32,000 (the unadjusted depreciable basis 
(before reduction in basis for the rehabilitation credit) of 
$200,000 less the additional first year depreciation deduction of 
$160,000 less the rehabilitation credit of $8,000) is $376.64 (the 
remaining adjusted depreciable basis of $32,000 multiplied by the 
depreciation rate of 0.01177 for recovery year 1, placed in service 
in month 7).

    (10) Coordination with section 514(a)(3). The additional first year 
depreciation deduction is not allowable for purposes of section 
514(a)(3).
    (11) [Reserved]
    (h) Applicability dates--(1) In general. Except as provided in 
paragraphs (h)(2) and (3) of this section, the rules of this section 
apply to--
    (i) Qualified property under section 168(k)(2) that is placed in 
service by the taxpayer during or after the taxpayer's taxable year 
that includes September 24, 2019; and
    (ii) A specified plant for which the taxpayer properly made an 
election to apply section 168(k)(5) and that is planted, or grafted to 
a plant that was previously planted, by the taxpayer during or after 
the taxpayer's taxable year that includes September 24, 2019.
    (2) Early application of this section. A taxpayer may choose to 
apply this section, in its entirety, to--
    (i) 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
    (ii) A specified plant for which the taxpayer properly made an 
election to apply section 168(k)(5) and that is planted, or grafted to 
a plant that was previously planted, after September 27, 2017, by the 
taxpayer during the taxpayer's taxable year ending on or after 
September 28, 2017.
    (3) Early application of regulation project REG-104397-18. A 
taxpayer may rely on the provisions of this section in regulation 
project REG-104397-18 (2018-41 I.R.B. 558) (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) for--
    (i) 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 September 24, 
2019; and
    (ii) A specified plant for which the taxpayer properly made an 
election to apply section 168(k)(5) and that is planted, or grafted to 
a plant that was previously planted, after September 27, 2017, by the 
taxpayer during the taxpayer's taxable year ending on or after 
September 28, 2017, and ending before the taxpayer's taxable year that 
includes September 24, 2019.

[[Page 50149]]


0
Par. 10. Section 1.169-3 is amended by adding a sentence at the end of 
paragraph (a) and adding three sentences at the end of paragraph (g) to 
read as follows:


Sec.  1.169-3  Amortizable basis.

    (a) * * * Further, before computing the amortization deduction 
allowable under section 169, the adjusted basis for purposes of 
determining gain for a facility that is acquired and placed in service 
after September 27, 2017, and that is qualified property under section 
168(k), as amended by the Tax Cuts and Jobs Act, Public Law 115-97 (131 
Stat. 2054 (December 22, 2017)) (the ``Act''), or Sec.  1.168(k)-2, 
must be reduced by the amount of the additional first year depreciation 
deduction allowed or allowable, whichever is greater, under section 
168(k), as amended by the Act.
* * * * *
    (g) * * * The last sentence of paragraph (a) of this section 
applies to a certified pollution control facility that is qualified 
property under section 168(k)(2) and placed in service by a taxpayer 
during or after the taxpayer's taxable year that includes September 24, 
2019. However, a taxpayer may choose to apply the last sentence of 
paragraph (a) of this section to a certified pollution control facility 
that is qualified property under section 168(k)(2) and acquired and 
placed in service after September 27, 2017, by the taxpayer during 
taxable years ending on or after September 28, 2017. A taxpayer may 
rely on the last sentence in paragraph (a) of this section in 
regulation project REG-104397-18 (2018-41 IRB 558) (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) for a certified pollution control 
facility that is qualified property under section 168(k)(2) and 
acquired and placed in service after September 27, 2017, by the 
taxpayer during taxable years ending on or after September 28, 2017, 
and ending before the taxpayer's taxable year that includes September 
24, 2019.

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


Sec.  1.179-4  Definitions.

* * * * *
    (c) * * *
    (2) Property deemed to have been acquired by a new target 
corporation as a result of a section 338 election (relating to certain 
stock purchases treated as asset acquisitions) or a section 336(e) 
election (relating to certain stock dispositions treated as asset 
transfers) made for a disposition described in Sec.  1.336-2(b)(1) will 
be considered acquired by purchase.
* * * * *
0
Par. 12. Section 1.179-6 is amended by revising the first sentence in 
paragraph (a) and adding paragraph (e) to read as follows:


Sec.  1.179-6  Effective/applicability dates.

    (a) * * * Except as provided in paragraphs (b), (c), (d), and (e) 
of this section, the provisions of Sec. Sec.  1.179-1 through 1.179-5 
apply for property placed in service by the taxpayer in taxable years 
ending after January 25, 1993. * * *
* * * * *
    (e) Application of Sec.  1.179-4(c)(2)-(1) In general. Except as 
provided in paragraphs (e)(2) and (3) of this section, the provisions 
of Sec.  1.179-4(c)(2) relating to section 336(e) are applicable on or 
after September 24, 2019.
    (2) Early application of Sec.  1.179-4(c)(2). A taxpayer may choose 
to apply the provisions of Sec.  1.179-4(c)(2) relating to section 
336(e) for the taxpayer's taxable years ending on or after September 
28, 2017.
    (3) Early application of regulation project REG-104397-18. A 
taxpayer may rely on the provisions of Sec.  1.179-4(c)(2) relating to 
section 336(e) in regulation project REG-104397-18 (2018-41 I.R.B. 558) 
(see Sec.  601.601(d)(2)(ii)(b) of this chapter) for the taxpayer's 
taxable years ending on or after September 28, 2017, and ending before 
September 24, 2019.

0
Par. 13. Section 1.312-15 is amended by adding a sentence at the end of 
paragraph (a)(1) and adding paragraph (e) to read as follows:


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

    (a) * * *
    (1) * * * Further, see Sec.  1.168(k)-2(g)(7) with respect to the 
treatment of the additional first year depreciation deduction allowable 
under section 168(k), as amended by the Tax Cuts and Jobs Act, Public 
Law 115-97 (131 Stat. 2054 (December 22, 2017)), for purposes of 
computing the earnings and profits of a corporation.
* * * * *
    (e) Applicability date of qualified property. The last sentence of 
paragraph (a)(1) of this section applies to the taxpayer's taxable 
years ending on or after September 24, 2019. However, a taxpayer may 
choose to apply the last sentence in paragraph (a)(1) of this section 
for the taxpayer's taxable years ending on or after September 28, 2017. 
A taxpayer may rely on the last sentence in paragraph (a)(1) of this 
section in regulation project REG-104397-18 (2018-41 I.R.B. 558) (see 
Sec.  601.601(d)(2)(ii)(b) of this chapter) for the taxpayer's taxable 
years ending on or after September 28, 2017, and ending before the 
taxpayer's taxable year that includes September 24, 2019.

0
Par. 14. Section 1.704-1 is amended by adding three sentences at the 
end of paragraph (b)(1)(ii)(a) and adding a sentence at the end of 
paragraph (b)(2)(iv)(g)(3) to read as follows:


Sec.  1.704-1  Partner's distributive share.

* * * * *
    (b) * * *
    (1) * * *
    (ii) * * *
    (a) * * * The last sentence of paragraph (b)(2)(iv)(g)(3) of this 
section is applicable for partnership taxable years ending on or after 
September 24, 2019. However, a partnership may choose to apply the last 
sentence in paragraph (b)(2)(iv)(g)(3) of this section for the 
partnership's taxable years ending on or after September 28, 2017. A 
partnership may rely on the last sentence in paragraph (b)(2)(iv)(g)(3) 
of this section in regulation project REG-104397-18 (2018-41 I.R.B. 
558) (see Sec.  601.601(d)(2)(ii)(b) of this chapter) for the 
partnership's taxable years ending on or after September 28, 2017, and 
ending before the partnership's taxable year that includes September 
24, 2019.
* * * * *
    (2) * * *
    (iv) * * *
    (g) * * *
    (3) * * * For purposes of the preceding sentence, additional first 
year depreciation deduction under section 168(k) is not a reasonable 
method.
* * * * *
0
Par. 15. Section 1.704-3 is amended by adding a sentence at the end of 
paragraph (d)(2), revising the first sentence in paragraph (f), and 
adding three sentences at the end of paragraph (f) to read as follows:


Sec.  1.704-3  Contributed property.

* * * * *
    (d) * * *
    (2) * * * However, the additional first year depreciation deduction 
under section 168(k) is not a permissible method for purposes of the 
preceding sentence and, if a partnership has acquired property in a 
taxable year for which the additional first year depreciation deduction 
under section 168(k) has been used of the same type as the contributed 
property, the portion of the contributed property's book basis that 
exceeds its adjusted tax basis must be recovered under a reasonable 
method. See Sec.  1.168(k)-2(b)(3)(iv)(B).
* * * * *
    (f) * * * With the exception of paragraphs (a)(1), (a)(8)(ii) and 
(iii), and (a)(10) and (11) of this section, and of

[[Page 50150]]

the last sentence in paragraph (d)(2) of this section, this section 
applies to property contributed to a partnership and to restatements 
pursuant to Sec.  1.704-1(b)(2)(iv)(f) on or after December 21, 1993. * 
* * The last sentence of paragraph (d)(2) of this section applies to 
property contributed to a partnership on or after September 24, 2019. 
However, a taxpayer may choose to apply the last sentence in paragraph 
(d)(2) of this section for property contributed to a partnership on or 
after September 28, 2017. A taxpayer may rely on the last sentence in 
paragraph (d)(2) of this section in regulation project REG-104397-18 
(2018-41 I.R.B. 558) (see Sec.  601.601(d)(2)(ii)(b) of this chapter) 
for property contributed to a partnership on or after September 28, 
2017, and ending before September 24, 2019.
* * * * *

0
Par. 16. Section 1.743-1 is amended by adding three sentences to the 
end of paragraph (j)(4)(i)(B)(1), adding one new sentence at the end of 
paragraph (j)(4)(i)(B)(2), and adding three sentences at the end of 
paragraph (l) to read as follows:


Sec.  1.743-1  Optional adjustment to basis of partnership property.

* * * * *
    (j) * * *
    (4) * * *
    (i) * * *
    (B) * * *
    (1) * * * The partnership is allowed to deduct the additional first 
year depreciation under section 168(k) and Sec.  1.168(k)-2 for an 
increase in the basis of qualified property, as defined in section 
168(k) and Sec.  1.168(k)-2, under section 743(b) in a class of 
property, as defined in Sec.  1.168(k)-2(f)(1)(ii)(A) through (F), even 
if the partnership made the election under section 168(k)(7) and Sec.  
1.168(k)-2(f)(1) not to deduct the additional first year depreciation 
for all other qualified property of the partnership in the same class 
of property, as defined in Sec.  1.168(k)-2(f)(1)(ii)(A) through (F), 
and placed in service in the same taxable year, provided the section 
743(b) basis adjustment meets all requirements of section 168(k) and 
Sec.  1.168(k)-2. Further, the partnership may make an election under 
section 168(k)(7) and Sec.  1.168(k)-2(f)(1) not to deduct the 
additional first year depreciation for an increase in the basis of 
qualified property, as defined in section 168(k) and Sec.  1.168(k)-2, 
under section 743(b) in a class of property, as defined in Sec.  
1.168(k)-2(f)(1)(ii)(A) through (F), and placed in service in the same 
taxable year, even if the partnership does not make that election for 
all other qualified property of the partnership in the same class of 
property, as defined in Sec.  1.168(k)-2(f)(1)(ii)(A) through (F), and 
placed in service in the same taxable year. In this case, the section 
743(b) basis adjustment must be recovered under a reasonable method.
    (2) * * * The first sentence of this paragraph (j)(4)(i)(B)(2) does 
not apply to a partnership that is not a publicly traded partnership 
within the meaning of section 7704(b) with respect to any basis 
increase under section 743(b) that is recovered using the additional 
first year depreciation deduction under section 168(k).
* * * * *
    (l) * * * The last three sentences of paragraph (j)(4)(i)(B)(1) of 
this section, and the last sentence of paragraph (j)(4)(i)(B)(2) of 
this section, apply to transfers of partnership interests that occur on 
or after September 24, 2019. However, a partnership may choose to apply 
the last three sentences in paragraph (j)(4)(i)(B)(1) of this section, 
and the last sentence of paragraph (j)(4)(i)(B)(2) of this section, for 
transfers of partnership interests that occur on or after September 28, 
2017.
    A partnership may rely on the last three sentences in paragraph 
(j)(4)(i)(B)(1) of this section in regulation project REG-104397-18 
(2018-41 I.R.B. 558) (see Sec.  601.601(d)(2)(ii)(b) of this chapter) 
for transfers of partnership interests that occur on or after September 
28, 2017, and ending before September 24, 2019.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
    Approved: September 11, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-20036 Filed 9-17-19; 4:15 pm]
 BILLING CODE 4830-01-P