Additional First Year Depreciation Deduction, 71734-71770 [2020-21112]

Download as PDF 71734 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9916] RIN 1545–BP32 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). These final regulations reflect and further clarify the increased deduction and the expansion of qualified property, particularly to certain classes of used property, authorized by the Tax Cuts and Jobs Act. These final regulations generally affect taxpayers who depreciate qualified property acquired and placed in service after September 27, 2017. DATES: Effective date: These regulations are effective on January 11, 2021. Applicability dates: For dates of applicability, see §§ 1.168(b)–1(b)(2)(iv), 1.168(k)–2(h), and 1.1502–68(e). See SUPPLEMENTARY INFORMATION for an indepth discussion. FOR FURTHER INFORMATION CONTACT: Concerning §§ 1.168(b)–1 and 1.168(k)– 2, Elizabeth R. Binder at (202) 317–4869 or Kathleen Reed at (202) 317–4660 (not toll-free numbers); concerning § 1.1502– 68, Samuel G. Trammell at (202) 317– 6975 or Katherine H. Zhang at (202) 317–5363 (not toll-free numbers). SUPPLEMENTARY INFORMATION: jbell on DSKJLSW7X2PROD with RULES2 SUMMARY: Applicability A taxpayer may choose to apply §§ 1.168(k)–2 and 1.1502–68 of these final regulations, in their entirety, to depreciable property acquired and placed in service or certain plants planted or grafted, as applicable, after September 27, 2017, by the taxpayer during a taxable year ending on or after September 28, 2017, provided the taxpayer consistently applies all rules in these final regulations. However, once the taxpayer applies §§ 1.168(k)–2 and 1.1502–68 of these final regulations for a taxable year, the taxpayer must continue to apply §§ 1.168(k)–2 and 1.1502–68 of these final regulations for subsequent taxable years. Alternatively, a taxpayer may rely on the proposed regulations under section 168(k) in REG–106808–19 (84 FR 50152; 2019–41 VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 I.R.B. 912), for depreciable property acquired and placed in service or certain plants planted or grafted, as applicable, after September 27, 2017, by the taxpayer during a taxable year ending on or after September 28, 2017, and ending before the taxpayer’s first taxable year that begins on or after January 1, 2021, if the taxpayer follows the proposed regulations in their entirety, except for § 1.168(k)– 2(b)(3)(iii)(B)(5), and in a consistent manner. Background This document contains amendments to the Income Tax Regulations (26 CFR part 1) under sections 168(k) and 1502. Section 168(k) allows an additional first year depreciation deduction for qualified property in the property’s placed-in-service year. On December 22, 2017, section 168(k) was amended by sections 12001(b)(13), 13201, and 13204 of Public Law 115–97 (131 Stat. 2054), commonly referred to as the Tax Cuts and Jobs Act (TCJA). Section 13201 of the TCJA made several significant amendments to the additional first year depreciation deduction provisions in section 168(k) (additional first year depreciation deduction). First, the additional first year depreciation deduction percentage was increased from 50 to 100 percent. Second, the property eligible for the additional first year depreciation deduction was expanded, for the first time, to include certain used depreciable property and certain film, television, or live theatrical productions. Third, the placed-inservice date was extended from before January 1, 2020, to before January 1, 2027 (and 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)). Fourth, the date on which a specified plant may be planted or grafted by the taxpayer was extended from before January 1, 2020, to before January 1, 2027. The provisions of section 168(k), as amended by the TCJA, are explained in greater detail in the preamble to the final regulations published by the Department of the Treasury (Treasury Department) and the IRS as TD 9874 on September 24, 2019 (2019 Final Regulations) in the Federal Register (84 FR 50108). Section 13201(h) of the TCJA provides the effective dates of the amendments to section 168(k) made by section 13201 of the TCJA. Except as provided in section 13201(h)(2) of the TCJA, section 13201(h)(1) of the TCJA provides that these amendments apply to property acquired and placed in service after PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 September 27, 2017. However, section 13201(h) of the TCJA also provides that property is not treated as acquired after the date on which a written binding contract 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 TCJA 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), so that qualified improvement property placed in service after December 31, 2017, was not eligible for the additional first year depreciation deduction. However, section 2307 of the Coronavirus Aid, Relief, and Economic Security Act, Public Law 116–136, 134 Stat. 281 (March 27, 2020) (CARES Act) amended section 168(e)(3)(E) to provide that qualified improvement property is classified as 15-year property, thereby providing a 15-year recovery period under section 168(c) and making qualified improvement property again eligible for the additional first year depreciation deduction, consistent with the original intent of the TCJA. Section 2307 of the CARES Act is discussed in greater detail in part II.B of the Summary of Comments and Explanation of Revisions section in this preamble. Unless otherwise indicated, all references to section 168(k) hereinafter are references to section 168(k) as amended by the TCJA. On August 8, 2018, the 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) (2018 Proposed Regulations). After full consideration of the comments received on the 2018 Proposed Regulations and the testimony heard at the public hearing on November 28, 2018, the Treasury Department and the IRS published the 2019 Final Regulations adopting the 2018 Proposed Regulations with modifications in response to such comments and testimony. Concurrently with the publication of the 2019 Final Regulations, the Treasury Department and the IRS published an additional notice of proposed rulemaking (REG–106808–19) in the Federal Register (84 FR 50152) withdrawing certain provisions of the 2018 Proposed Regulations and proposing additional guidance under section 168(k) (2019 Proposed E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations Regulations). The Summary of Comments and Explanation of Revisions section of this preamble summarizes the provisions of the 2019 Proposed Regulations, which are explained in greater detail in the preamble to the 2019 Proposed Regulations. The Treasury Department and the IRS received written and electronic comments responding to the 2019 Proposed Regulations and held a public hearing on the 2019 Proposed Regulations on November 13, 2019. After full consideration of the comments received on the 2019 Proposed Regulations and the testimony heard at the public hearing, this Treasury decision adopts the 2019 Proposed Regulations with modifications in response to certain comments and testimony, as described in the Summary of Comments and Explanation of Revisions section. the definition of qualified property, (2) rules for consolidated groups, (3) rules regarding components acquired or selfconstructed after September 27, 2017, for larger self-constructed property for which manufacture, construction, or production began before September 28, 2017, (4) rules regarding the application of the mid-quarter convention, as determined under section 168(d), and (5) changes to the definitions in the 2019 Final Regulations for the terms qualified improvement property, predecessor, and class of property. Also, the rules for consolidated groups have been moved from § 1.168(k)–2(b)(3)(v) of the 2019 Proposed Regulations to new § 1.1502–68 of these final regulations. Part I of this Background section addresses operational rules. Part II of this Background section addresses definitions. Summary of Comments and Explanation of Revisions The Treasury Department and the IRS received written comments from five commenters in response to the 2019 Proposed Regulations. In connection with these comments, some commenters also provided comments on aspects of the 2019 Final Regulations. All comments were considered and are available at https://www.regulations.gov or upon request. The comments addressing the 2019 Proposed Regulations and 2019 Final Regulations are summarized in this Summary of Comments and Explanation of Revisions section. Because of the amendments to section 168(k) by the TCJA, the 2019 Final Regulations updated 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. The 2019 Final Regulations also made conforming amendments to the existing regulations. The 2019 Final Regulations described and clarified the statutory requirements that must be met for depreciable property to qualify for the additional first year depreciation deduction provided by section 168(k), and they provided guidance to taxpayers in determining the additional first year depreciation deduction and the amount of depreciation otherwise allowable for this property. These final regulations provide taxpayers with guidance regarding issues relating to the application of section 168(k) that are not addressed in the 2019 Final Regulations, along with clarifying changes to the 2019 Final Regulations. Specifically, these final regulations provide (1) rules relevant to A. Property Described in Section 168(k)(9)(B) Section 1.168(k)–2(b)(2)(ii)(G) of the 2019 Proposed Regulations provides that, for purposes of section 168(k)(9)(B), floor plan financing interest is not taken into account for the taxable year by a trade or business that has had floor plan financing indebtedness if the sum of the amounts calculated under section 163(j)(1)(A) and (B) for the trade or business for the taxable year equals or exceeds the business interest (which includes floor plan financing interest), as defined in section 163(j)(5), of the trade or business for the taxable year. If the business interest, which includes floor plan financing interest, exceeds the sum of the amounts calculated under section 163(j)(1)(A) and (B) for the taxable year, the floor plan financing interest is taken into account for the taxable year for purposes of section 168(k)(9)(B). See Example 7 in § 1.168(k)–2(b)(2)(iii)(G) of the 2019 Proposed Regulations. Floor plan financing indebtedness is defined in section 163(j)(9)(B) and § 1.163(j)– 1(b)(18) as indebtedness that is (i) used to finance the acquisition of motor vehicles held for sale or lease; and (ii) secured by the motor vehicles so acquired. Floor plan financing interest expense is defined in section 163(j)(9)(A) and § 1.163(j)–1(b)(19) as interest paid or accrued on floor plan financing indebtedness. A commenter on the 2019 Proposed Regulations requested that these final regulations allow a trade or business that has business interest expense, including floor plan financing interest expense, that exceeds the sum of the amounts calculated under section VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 I. Operational Rules PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 71735 163(j)(1)(A) and (B) for the taxable year, to choose to limit its interest expense deduction to the sum of the amounts under section 163(j)(1)(A) and (B), and not be precluded by section 168(k)(9)(B) from claiming the additional first year depreciation deduction. The Treasury Department and the IRS do not interpret section 163(j)(1) as allowing such an option. Consistent with the plain language of section 163(j)(1), § 1.163(j)– 2(b)(1) provides that the amount allowed as a deduction for business interest expense for the taxable year generally cannot exceed the sum of (1) the taxpayer’s business interest income for the taxable year, (2) 30 percent of the taxpayer’s adjusted taxable income for the taxable year, and (3) the taxpayer’s floor plan financing interest expense for the taxable year. Pursuant to section 2306(a) of the CARES Act, the adjusted taxable income percentage is increased from 30 to 50 percent for any taxable year beginning in 2019 or 2020, subject to certain exceptions. Because neither section 163(j)(1) nor § 1.163(j)–2(b) provide an option for a trade or business with floor plan financing indebtedness to include or exclude its floor plan financing interest expense in determining the amount allowed as a deduction for business interest expense for the taxable year, the Treasury Department and the IRS decline to adopt this comment. The commenter also requested that the Treasury Department and the IRS provide transition relief for taxpayers that treated, on their 2018 Federal income tax returns, section 163(j)(1) as providing an option for a trade or business with floor plan financing indebtedness to include or exclude its floor plan financing interest expense in determining the amount allowed as a deduction for business interest expense for the taxable year. Further, the commenter requested transition relief for taxpayers with a trade or business with floor plan financing indebtedness that want to revoke their elections not to claim the additional first year depreciation for property placed in service during 2018 in order to rely on the 2019 Proposed Regulations. The Treasury Department and the IRS intend to issue published guidance that will address these requests. B. Used Property 1. Depreciable Interest a. Five-Year Safe Harbor Section 1.168(k)–2(b)(3)(iii)(B)(1) of the 2019 Final Regulations provides that property is treated as used by the taxpayer or a predecessor at any time prior to acquisition by the taxpayer or E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 71736 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations 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, the 2019 Final Regulations also provide that only the five calendar years immediately prior to the taxpayer’s current placed-in-service year of the property are taken into account (Five-Year Safe Harbor). If the taxpayer and a predecessor have not been in existence for this entire five-year period, the 2019 Final Regulations provide that only the number of calendar years the taxpayer and the predecessor have been in existence are taken into account. Commenters requested clarification that the Five-Year Safe Harbor applies for purposes of the special rules for consolidated groups in § 1.168(k)– 2(b)(3)(v) of the 2019 Proposed Regulations. A commenter also requested clarification whether ‘‘the partnership’s current year’’ in § 1.168(k)–2(b)(3)(iii)(B)(5) of the 2019 Proposed Regulations (Partnership Lookthrough Rule) is the taxable year or the calendar year. These comments are addressed later in this Summary of Comments and Explanation of Revisions section. In connection with comments received on the Five-Year Safe Harbor and the Partnership Lookthrough Rule, the Treasury Department and the IRS reviewed the Five-Year Safe Harbor and determined that clarification of this safe harbor would be beneficial. One commenter requested clarification of the Five-Year Safe Harbor as to: (1) Whether the ‘‘placed-in-service year’’ is the taxable year or the calendar year; and (2) whether the portion of the calendar year covering the period up to the placed-inservice date of the property is taken into account. The commenter also requested clarification regarding the application of the Five-Year Safe Harbor to situations where the taxpayer or a predecessor was not in existence during the entire 5-year lookback period. Specifically, the commenter pointed out that the safe harbor in the 2019 Final Regulations could be read to apply only to those periods in the 5-year lookback period that both the taxpayer and a predecessor are in existence, and not to those periods in the 5-year lookback period during which the taxpayer or a predecessor, or both, were in existence and had a depreciable interest in the property later acquired and placed in service by the taxpayer. The commenter suggested that the Five-Year Safe Harbor VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 be clarified to say that the taxpayer and each predecessor is subject to a separate lookback period that begins no earlier than the date such person came into existence. The Treasury Department and the IRS intended the ‘‘placed-in-service year’’ to be the current calendar year in which the property is placed in service by the taxpayer. Also, the Treasury Department and the IRS intended the portion of that calendar year covering the period up to the placed-in-service date of the property to be considered in determining whether the taxpayer or a predecessor previously had a depreciable interest. This approach is consistent with an exception to the de minimis use rule in § 1.168(k)– 2(b)(3)(iii)(B)(4) of the 2019 Proposed Regulations, which is discussed in greater detail in part I.B.1.b of this Summary of Comments and Explanation of Revisions section. Pursuant to that exception, when a taxpayer places in service eligible property in Year 1, disposes of that property to an unrelated party in Year 1 within 90 calendar days of that placed-in-service date, and then reacquires the same property later in Year 1, the taxpayer is treated as having a prior depreciable interest in the property upon the taxpayer’s reacquisition of the property in Year 1. This rule would be superfluous if the Five-Year Safe Harbor did not consider the portion of the calendar year covering the period up to the placed-in-service date of the property. Accordingly, § 1.168(k)– 2(b)(3)(iii)(B)(1) is amended to clarify that the five calendar years immediately prior to the current calendar year in which the property is placed in service by the taxpayer, and the portion of such current calendar year before the placedin-service date of the property determined without taking into account the applicable convention, are taken into account to determine if the taxpayer or a predecessor had a depreciable interest in the property at any time prior to acquisition (lookback period). Section 1.168(k)– 2(b)(3)(iii)(B)(1) also is amended to adopt the suggestion of the commenter that each of the taxpayer and the predecessor be subject to a separate lookback period. These final regulations clarify that if the taxpayer or a predecessor, or both, have not been in existence during the entire lookback period, then only the portion of the lookback period during which the taxpayer or a predecessor, or both, have been in existence is taken into account to determine if the taxpayer or the predecessor had a depreciable interest in the property. More examples have PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 been added to clarify the application of the Five-Year Safe Harbor. b. De Minimis Use Section 1.168(k)–2(b)(3)(iii)(B)(4) of the 2019 Proposed Regulations provides an exception to the prior depreciable interest rule in the 2019 Final Regulations when the taxpayer disposes of property to an unrelated party within 90 calendar days after the taxpayer originally placed such property in service (De Minimis Use Rule). The 2019 Proposed Regulations also provide that the De Minimis Use Rule does not apply if the taxpayer reacquires and again places in service the property during the same taxable year the taxpayer disposed of the property. A commenter on the 2019 Proposed Regulations asked for clarification regarding the application of the De Minimis Use Rule in the following situations: (1) The taxpayer places in service property in Year 1, disposes of that property to an unrelated party in Year 1 within 90 calendar days of that original placed-in-service date, and then reacquires and again places in service the same property later in Year 1 and does not dispose of the property again in Year 1; (2) The taxpayer places in service property in Year 1, disposes of that property to an unrelated party in Year 2 within 90 calendar days of that original placed-in-service date, and then reacquires and again places in service the same property in Year 2 or later; and (3) The taxpayer places in service property in Year 1 and disposes of that property to an unrelated party in Year 1 within 90 calendar days of that original placed-in-service date, then the taxpayer reacquires and again places in service the same property later in Year 1 and disposes of that property to an unrelated party in Year 2 within 90 calendar days of the subsequent placedin-service date in Year 1, and the taxpayer reacquires and again places in service the same property in Year 4. In situation 1, the additional first year depreciation deduction is not allowable for the property when it was initially placed in service in Year 1 by the taxpayer pursuant to § 1.168(k)– 2(g)(1)(i) of the 2019 Final Regulations. The additional first year depreciation deduction also is not allowable when the same property is subsequently placed in service in Year 1 by the same taxpayer under the De Minimis Use Rule in the 2019 Proposed Regulations. The commenter asserted that the additional first year depreciation deduction should be allowable for the property when it is placed in service E:\FR\FM\10NOR2.SGM 10NOR2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 again in Year 1 and is not disposed of again in Year 1, because the additional first year depreciation deduction is not allowable for the property when it initially was placed in service in Year 1 by the taxpayer. The Treasury Department and the IRS agree with this comment if the property is originally acquired by the taxpayer after September 27, 2017. The Treasury Department and the IRS decline to adopt this comment with respect to property that was originally acquired by the taxpayer before September 28, 2017, as the exception to the De Minimis Use Rule was intended to prevent certain churning transactions involving such property. The Treasury Department and the IRS believe that property that is placed in service, disposed of, and reacquired in the same taxable year is more likely to be part of a predetermined churning plan. In situation 2, the additional first year depreciation deduction is allowable for the same property by the same taxpayer twice (in Year 1 when the property is initially placed in service, and in Year 2 when the property is placed in service again). This result is consistent with the De Minimis Use Rule in the 2019 Proposed Regulations, and this result is not changed in these final regulations. In situation 3, the De Minimis Use Rule provides only one 90-day period that is disregarded in determining whether the taxpayer had a depreciable interest in the property prior to its reacquisition. That 90-day period is measured from the original placed-inservice date of the property by the taxpayer. As a result, the second 90-day period in situation 3 (during which the taxpayer reacquired the property in Year 1, again placed it in service in Year 1, and then disposed of it in Year 2) is taken into account in determining whether the taxpayer previously used the property when the taxpayer again places in service the property in Year 4. The De Minimis Use Rule in these final regulations is clarified to reflect these results. These final regulations also include additional examples to illustrate the application of the De Minimis Use Rule in these situations and conforming changes to § 1.168(k)– 2(g)(1)(i) of the 2019 Final Regulations. 2. Application to Partnerships The Treasury Department and the IRS received several comments regarding the Partnership Lookthrough Rule in § 1.168(k)–2(b)(3)(iii)(B)(5) of the 2019 Proposed Regulations, which addresses the extent to which a partner is deemed to have a depreciable interest in property held by a partnership. The Partnership Lookthrough Rule provides VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 that a person is treated as having a depreciable interest in a portion of property prior to the person’s acquisition of the property if the person was a partner in a partnership at any time the partnership owned the property. The Partnership Lookthrough Rule further provides that the portion of property in which a partner is treated as having a depreciable interest is equal to the total share of depreciation deductions with respect to the property allocated to the partner as a percentage of the total depreciation deductions allocated to all partners during the current calendar year and the five calendar years immediately prior to the partnership’s current year. One commenter requested that the Treasury Department and the IRS withdraw the Partnership Lookthrough Rule and replace it with a rule that treats a taxpayer as having a depreciable interest in an item of property only if the taxpayer was a controlling partner in a partnership at any time the partnership owned the property during the applicable lookback period. The Treasury Department and the IRS agree with the commenter that the Partnership Lookthrough Rule should be withdrawn. The Treasury Department and the IRS have determined that the complexity of applying the Partnership Lookthrough Rule would place a significant administrative burden on both taxpayers and the IRS. For this reason, these final regulations do not retain the Partnership Lookthrough Rule. Therefore, under these final regulations, a partner will not be treated as having a depreciable interest in partnership property solely by virtue of being a partner in the partnership. The Treasury Department and the IRS have determined that a replacement rule that applies only to controlling partners is not necessary because the related party rule in section 179(d)(2)(A) applies to a direct purchase of partnership property by a current majority partner, and the series of related transactions rules in § 1.168(k)– 2(b)(3)(iii)(C) prevents avoidance of the related party rule through the use of intermediary parties. The same commenter recommended a number of changes to the Partnership Lookthrough Rule if it were to be retained. It is not necessary to address these comments, because these final regulations do not retain the Partnership Lookthrough Rule. Additionally, one commenter recommended that the Treasury Department and the IRS clarify the operation of the section 168(k) regulations with respect to section 743(b) adjustments after transfers of partnership interests in section 168(i)(7) PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 71737 transactions, as described in the 2019 Final Regulations. The Treasury Department and the IRS have determined that this comment is outside of the scope of these final regulations. 3. Series of Related Transactions Section 1.168(k)–2(b)(3)(iii)(C) of the 2019 Proposed Regulations provides special rules for a series of related transactions (Proposed Related Transactions Rule). The Proposed Related Transactions Rule generally provides that the relationship between the parties under section 179(d)(2)(A) or (B) in a series of related transactions is tested immediately after each step in the series, and between the original transferor and the ultimate transferee immediately after the last transaction in the series. The Proposed Related Transactions Rule also provides that the relationship between the parties in a series of related transactions is not tested in certain situations. For example, a party in the series that is neither the original transferor nor the ultimate transferee is disregarded in applying the relatedness test if the party placed in service and disposed of the property in the party’s same taxable year or did not place the property in service. The relationship between the parties also is not tested if the step is a transaction described in § 1.168(k)– 2(g)(1)(iii) (that is, a transfer of property in a transaction described in section 168(i)(7) in the same taxable year that the property is placed in service by the transferor). Finally, the 2019 Proposed Regulations provide that the Proposed Related Transactions Rule does not apply to syndication transactions or when all transactions in the series are described in § 1.168(k)–2(g)(1)(iii). A commenter stated that the Proposed Related Transactions Rule may disregard significant relationships that existed before the series, or that are formed as a result of the series. The commenter also stated that the rule does not address how relatedness should be tested when the relationship between the parties changes over the course of the series or when a party ceases to exist. The commenter recommended that the final regulations test relatedness immediately before the first step in the series of related transactions and immediately after the last step in the series, similar to § 1.197–2(h)(6)(ii)(B). The commenter also recommended simplifying the Proposed Related Transactions Rule and alleviating knowledge burdens imposed on transferees and the IRS as to whether a transfer is pursuant to a series of related transactions, the date that a transferee in E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 71738 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations a series placed the asset in service, and whether a transferee is related to a transferor. The Treasury Department and the IRS have determined that the rule in § 1.197–2(h)(6)(ii)(B) is not appropriate for testing relatedness for purposes of the additional first year depreciation deduction. Section 1.197–2(h)(6)(ii)(B) provides that relatedness is tested immediately before the first step in a series of related transactions and immediately after the last step in the series. The purpose of this rule is to prevent the churning of assets, and the relationship that is of importance is that of the first and last acquisition. In contrast, the purpose of the Proposed Related Transactions Rule is to determine whether each transferee in the series qualifies to claim the additional first year depreciation deduction for the assets and, therefore, testing for relatedness is done immediately after each step in the series. Testing for relatedness at no point in time other than immediately before the first step and immediately after the last step in the series would preclude all intermediaries in the series from claiming the additional first year depreciation deduction. Accordingly, the Treasury Department and the IRS do not adopt this recommendation. The commenter also recommended several alternative approaches to testing relatedness: (1) Any transferee in a series of related transactions tests its relatedness to every prior transferor in the series; or (2) a transferee tests its relatedness only to its immediate transferor if the transferee demonstrated that it did not know, or have reason to know, that the transfer occurred pursuant to a series of related transactions. The Treasury Department and the IRS have determined that requiring each transferee in a series of related transactions to test its relatedness to every prior transferor in the series would impose a significant administrative burden. Therefore, these final regulations do not adopt the commenter’s first alternative approach. The Treasury Department and the IRS also have determined that, because a series of related transactions generally is undertaken among the relevant parties pursuant to a preconceived plan, the rule in the commenter’s second alternative approach would have limited application. Because the application of this approach would depend upon the taxpayer’s demonstration that it did not know, and did not have reason to know, that a transfer occurred pursuant to a series, this rule also may be difficult for both VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 taxpayers and the IRS to administer. Furthermore, this approach fails to adequately address situations where the parties other than the original transferor and the ultimate transferee in a series may be related or may become related pursuant to the series. Thus, these final regulations do not adopt the commenter’s second alternative approach. However, the Treasury Department and the IRS agree that the Proposed Related Transactions Rule should be simplified. The Treasury Department and the IRS also agree that this rule should be modified to take into account changes in the relationship between the parties, including a party ceasing to exist, over the course of a series of related transactions. For example, assume that, pursuant to a series of related transactions, A transfers property to B, B transfers property to C, and C transfers property to D. Under the Proposed Related Transactions Rule, relatedness is tested after each step and between D and A. Assume further that, at the beginning of the series, C was related to A but, prior to acquiring the property, C ceases to be related to A, or A ceases to exist. The Proposed Related Transactions Rule does not address how to treat such changes. Accordingly, these final regulations provide that each transferee in a series of related transactions tests its relationship under section 179(d)(2)(A) or (B) with the transferor from which the transferee directly acquires the depreciable property (immediate transferor) and with the original transferor of the depreciable property in the series. The transferee is treated as related to the immediate transferor or the original transferor if the relationship exists either immediately before the first transfer of the depreciable property in the series or when the transferee acquires the property. Any transferor in a series of related transactions that ceases to exist during the series is deemed to continue to exist for purposes of testing relatedness. These final regulations also provide a special rule that disregards certain transitory relationships created pursuant to a series of related transactions. More specifically, if a party acquires depreciable property in a series of related transactions in which the acquiring party acquires stock, meeting the requirements of section 1504(a)(2), of a corporation in a fully taxable transaction, followed by a liquidation of the acquired corporation under section 331, any relationship created as part of such series of transactions is disregarded in determining whether any party is PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 related to such acquired corporation for purposes of testing relatedness. This rule is similar to § 1.197–2(h)(6)(iii) and properly reflects the change in ownership of depreciable property in a series of related transactions without taking into account certain transitory relationships the purpose of which is unrelated to the additional first year depreciation deduction. Finally, these final regulations provide that, if a transferee in a series of related transactions acquires depreciable property from a transferor that was not in existence immediately prior to the first transfer of the property in the series (new transferor), the transferee tests its relationship with the party from which the new transferor acquired the depreciable property. Examples illustrating these revised rules are provided in these final regulations. 4. Application to Members of a Consolidated Group a. The 2019 Proposed Regulations The 2019 Proposed Regulations provide special rules addressing the availability of the additional first year depreciation deduction upon the acquisition of depreciable property by a member of a consolidated group, as defined in § 1.1502–1(b) and (h), respectively. Under the 2019 Proposed Regulations, if a member acquires property in which the consolidated group had a depreciable interest at any time prior to the member’s acquisition of such property, then the member is treated as previously having a depreciable interest in such property (Group Prior Use Rule). This rule was first included in the 2018 Proposed Regulations to address situations in which property is disposed of by one member of a consolidated group and subsequently is acquired by another member of the same consolidated group, because the Treasury Department and the IRS had determined that allowing the additional first year depreciation deduction in such situations would not clearly reflect the income of the consolidated group. See 83 FR 39292, 39295 (Aug. 8, 2018). For purposes of the Group Prior Use Rule, a consolidated group is treated as having a depreciable interest in property during the time any current or former member of the group had a depreciable interest while a member of the group. See § 1.168(k)–2(b)(3)(v)(A) of the 2019 Proposed Regulations. Further, when members of a consolidated group acquire both depreciable property and the stock of a corporation that previously had a depreciable interest in such property E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations pursuant to the same series of related transactions, the 2019 Proposed Regulations treat the member that acquires the property as previously having a depreciable interest in such property (Stock and Asset Acquisition Rule). See § 1.168(k)–2(b)(3)(v)(B) of the 2019 Proposed Regulations. Like the Group Prior Use Rule, the Stock and Asset Acquisition Rule initially was included in the 2018 Proposed Regulations. As stated in the preamble to those regulations, the Treasury Department and the IRS have determined that, in substance, this series of related transactions is the same as a series of related transactions in which a consolidated group acquired the selling corporation, which subsequently reacquired the property in which it previously had a depreciable interest and then transferred it to another member of the consolidated group. In that situation, the additional first year depreciation deduction would not be allowed. See 83 FR 39292, 39295 (Aug. 8, 2018). Both the Group Prior Use Rule and the Stock and Asset Acquisition Rule are adopted in these final regulations with certain modifications, as discussed further in part I.B.4.b(2) of this Summary of Comments and Explanation of Revisions section. The 2019 Proposed Regulations also include rules addressing transfers of depreciable property between members of the same consolidated group. One such rule (Proposed Consolidated Asset Acquisition Rule) applies if a member (transferee member) acquires depreciable property from another member of the same consolidated group in a taxable transaction and, as part of the same series of related transactions, the transferee member then ceases to be a member of that group within 90 calendar days of the date of the property acquisition. Under the Proposed Consolidated Asset Acquisition Rule, the transferee member is treated as (1) acquiring the property one day after the date on which the transferee member ceases to be a member of the consolidated group (Deconsolidation Date) for all Federal income tax purposes, and (2) placing the property in service no earlier than one day after the Deconsolidation Date for purposes of depreciation and the investment credit allowed by section 38. See § 1.168(k)–2(b)(3)(v)(C) of the 2019 Proposed Regulations. The Treasury Department and the IRS also determined that, in general, deemed acquisitions of property pursuant to a section 338 election or a section 336(e) election should be subject to the same treatment as actual VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 acquisitions of property because such deemed acquisitions generally are respected as actually occurring for Federal income tax purposes. See §§ 1.336–2(e) and 1.338–1(a)(2); see also § 1.336–1(a)(1) (generally providing that, except to the extent inconsistent with section 336(e), the results of section 336(e) should coincide with those of section 338(h)(10)). Accordingly, the Treasury Department and the IRS proposed a rule analogous to the Proposed Consolidated Asset Acquisition Rule for deemed acquisitions of property pursuant to such an election (Proposed Consolidated Deemed Acquisition Rule, and together with the Proposed Consolidated Asset Acquisition Rule, the Proposed Consolidated Acquisition Rules). Section 338 and section 336(e) both provide elections to treat certain transfers of a target corporation’s stock as transfers of the target corporation’s assets. If a section 338 election is made for a ‘‘qualified stock purchase’’ (QSP), then the target corporation generally is treated as two separate corporations before and after the acquisition date for Federal income tax purposes. As a result of the election, ‘‘old target’’ is deemed to sell its assets to an unrelated person at the close of the acquisition date at fair market value, and ‘‘new target’’ is deemed to acquire those assets from an unrelated person at the beginning of the following day. See section 338(a). If the election is a section 338(h)(10) election, then old target is deemed to liquidate following the deemed sale of its assets. See § 1.338–1(a)(1). Generally, a similar sale and liquidation are deemed to occur if a section 336(e) election is made for a ‘‘qualified stock disposition’’ (QSD) of target corporation stock. However, if a section 336(e) election is made for a QSD described in section 355(d)(2) or (e)(2), then a different transaction is deemed to occur. In that case, old target is deemed to sell its assets to an unrelated party and then reacquire those assets from an unrelated party, and old target is not deemed to liquidate (saleto-self model). See § 1.336–2(b). The Proposed Consolidated Deemed Acquisition Rule changes certain aspects of the deemed acquisitions that result from a section 338 election or a section 336(e) election. This proposed rule applies if a member (transferee member) acquires, in a QSP or QSD, stock of another member (target) that holds depreciable property and, as part of the same series of related transactions, the transferee member and target cease to be members of the selling consolidated group within 90 calendar PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 71739 days of the QSP or QSD. Under this proposed rule, (1) the acquisition date or disposition date, as applicable, is treated as the day that is one day after the Deconsolidation Date for all Federal income tax purposes, and (2) new target is treated as placing the property in service no earlier than one day after the Deconsolidation Date for purposes of depreciation and the investment credit allowed by section 38. The Proposed Consolidated Deemed Acquisition Rule does not apply to QSDs described in section 355(d)(2) or (e)(2). See § 1.168(k)–2(b)(3)(v)(D) of the 2019 Proposed Regulations. b. Comments on Consolidated Group Rules in the 2019 Proposed Regulations The Treasury Department and the IRS received comments regarding the foregoing consolidated group rules in the 2019 Proposed Regulations. (1) The Proposed Consolidated Acquisition Rules (a) Issues Under the Proposed Consolidated Acquisition Rules The Proposed Consolidated Acquisition Rules were intended to make the additional first year depreciation deduction available to the buyer of depreciable property in an intercompany transaction, as defined in § 1.1502–13(b)(1)(i), if the buyer member leaves the consolidated group within 90 calendar days pursuant to the same series of related transactions that includes the property acquisition. As discussed in the preamble to the 2019 Proposed Regulations, the Treasury Department and the IRS have determined that, in substance, such a transaction should be treated the same as if the buyer member first left the consolidated group and then purchased the depreciable property (in which case the buyer member would be allowed to claim the additional first year depreciation deduction). See 84 FR 50152, 50156 (Sep. 24, 2019). Treating the property acquisition as occurring after the buyer member leaves the consolidated group reduces the likelihood that the transfer fails to satisfy the ‘‘purchase’’ requirements in section 179(d)(2) and (3), helps ensure that the buyer member is not attributed the seller member’s prior use of the property, and precludes the application of section 168(i)(7). Commenters appreciated the Proposed Consolidated Acquisition Rules. However, commenters also argued that, because these rules treat certain actual or deemed asset acquisitions as occurring on a date that is different than the date on which the E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 71740 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations acquisitions occurred up to 90 calendar days after the date of such an acquisition for all Federal income tax purposes, these rules create some uncertainty and raise certain implementation issues. Many of the questions raised by commenters regarding the Proposed Consolidated Acquisition Rules concern the period beginning on the date of the actual or deemed asset acquisition and ending on the Deconsolidation Date (interim period). In particular, commenters noted that tax items may arise during the interim period from both the depreciable property acquired by the transferee member and the consideration received by the transferor member. Commenters asked how income, deductions, or other tax items from the transferred depreciable property during the interim period should be reported, particularly if the asset acquisition occurs in one taxable year and the Deconsolidation Date occurs in the subsequent taxable year. Additionally, commenters suggested that the consideration used to acquire depreciable property from the transferor member may consist of stock or debt instruments that produce dividends or interest during the interim period. According to commenters, the Proposed Consolidated Acquisition Rules do not address how such income should be reported. Commenters also asked how changes in the depreciable property (or the seller consideration) during the interim period—such as a change in value, or a change in use that affects eligibility for the additional first year depreciation deduction—should be taken into account, and how tax items associated with the property should be reported if the transferor member leaves the selling group during the interim period. Commenters also raised questions about the interim period relating specifically to the Proposed Consolidated Deemed Acquisition Rule. Commenters noted that additional transaction steps, such as property transfers by the transferee member to target, or the assumption of additional liabilities of the transferee member by target, may occur between the date of the QSP and the Deconsolidation Date. If these transaction steps occur, commenters asked whether the aggregate deemed sale price (ADSP) and adjusted grossed-up basis (AGUB) (see §§ 1.338–4 and 1.338–5, respectively) are adjusted and, if so, how. Additionally, commenters asked about the interaction of the Proposed Consolidated Acquisition Rules with section 355. More specifically, if the transferee member is relying on the VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 acquired assets to satisfy the ‘‘active trade or business’’ requirements of section 355(b) in connection with the distribution of the transferee member’s stock, commenters asked whether the Proposed Consolidated Acquisition Rules could prevent the distribution from qualifying under section 355 because the asset acquisition would be treated as occurring one day after the transferee member has left the selling group. See section 355(b)(1)(A) (providing that the distributing corporation and the controlled corporation must be ‘‘engaged immediately after the distribution in the active conduct of a trade or business’’). The Treasury Department and the IRS appreciate the comments received with regard to the Proposed Consolidated Acquisition Rules. The Treasury Department and the IRS agree that these proposed rules could create uncertainty and raise implementation issues. As a result, these final regulations adopt an alternative approach (Delayed Bonus Approach) that would alleviate many of the concerns raised by commenters. See the discussion in part I.B.4.b(1)(e) of this Summary of Comments and Explanation of Revisions section. (b) The 90-Day Requirement The Proposed Consolidated Acquisition Rules apply only if, as part of the same series of related transactions, the transferee member leaves (or, in the case of a deemed asset purchase, the transferee member and target leave) the transferor member’s consolidated group within 90 calendar days of the date of the property acquisition (90-day requirement). See part I.B.4.a of this Summary of Comments and Explanation of Revisions section. The 90-day requirement was based in part on the rule for syndication transactions in section 168(k)(2)(E)(iii) and § 1.168(k)–2(b)(3)(vi) and (b)(4)(iv). By capping the period of time that could elapse between the property transfer date and the Deconsolidation Date, the 90-day requirement was intended to limit the scope of certain issues created by treating the asset acquisition as occurring after the actual transfer date under the Proposed Consolidated Acquisition Rules. See the discussion in part I.B.4.b(1)(a) of this Summary of Comments and Explanation of Revisions section. The Treasury Department and the IRS received several comments recommending the elimination of the 90-day requirement. The commenters generally argued that, in many cases, the 90-day requirement will be difficult for taxpayers to satisfy. In business transactions, an intercompany asset PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 transfer may be a preparatory step undertaken well in advance of the Deconsolidation Date, particularly if the transaction involves the transfer of legal title to assets. Additionally, delays in regulatory approval for the transaction may preclude the transferee member from leaving the consolidated group within 90 days. Moreover, one commenter argued that the rationale for the 90-day requirement for syndication transactions differs from the rationale for such a requirement in the Proposed Consolidated Acquisition Rules. The commenter noted that the syndication exception in section 168(k)(2)(E)(iii) specifies a period of time that ownership of an asset (rather than the relationship between the transferor and transferee, as in the Proposed Consolidated Acquisition Rules) should be disregarded, and the commenter suggested that the primary authority for disregarding periods of transitory ownership is the step transaction doctrine rather than section 168(k). Commenters also suggested that the 90day requirement does not further the policy goals of section 168(k). In other words, so long as there is a series of related transactions, whether the asset acquisition and the deconsolidation occur within 90 days should not be determinative. Based on the foregoing, the commenters recommended removing the 90-day requirement and simply retaining the ‘‘series of related transactions’’ requirement. The Treasury Department and the IRS agree with commenters that the 90-day requirement would be difficult for taxpayers to satisfy in many ordinarycourse business transactions. The Treasury Department and the IRS also have determined that the Delayed Bonus Approach would eliminate many of the aforementioned issues with the Proposed Consolidated Acquisition Rules by respecting the date on which each transaction in the series actually occurs. Consequently, the Delayed Bonus Approach does not include a 90day requirement. See the discussion in part I.B.4.b(1)(e) of this Summary of Comments and Explanation of Revisions section. (c) Assets to Which the Proposed Consolidated Acquisition Rules Apply Under the 2019 Proposed Regulations, the Proposed Consolidated Acquisition Rules apply to actual or deemed acquisitions of ‘‘depreciable property,’’ regardless of whether such property is of a type that is eligible for the additional first year depreciation deduction (eligible property) or of a type that is ineligible for the additional first year depreciation deduction (ineligible E:\FR\FM\10NOR2.SGM 10NOR2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 property). For example, under a literal reading of the Proposed Consolidated Asset Acquisition Rule, a member’s acquisition of several parcels of depreciable real estate that is not eligible property from another member would be subject to this rule (assuming that all other requirements for application of this rule are satisfied), even though none of the transferred property is eligible property. Similarly, a member’s acquisition of the stock of a target corporation whose assets largely consist of depreciable real estate that is not eligible property would be subject to the Proposed Consolidated Deemed Acquisition Rule (again, assuming that all other requirements for application of this rule are satisfied), even though most of the target corporation’s assets are not eligible property. One commenter recommended that the final regulations limit the application of the Proposed Consolidated Acquisition Rules to actual or deemed acquisitions of eligible property. The commenter explained that application of the Proposed Consolidated Acquisition Rules to ineligible property would not further the purposes of section 168(k) and might lack statutory authority. The commenter also asserted that such an application might create a trap for unwary taxpayers who do not consult the regulations under section 168(k) when planning transfers of ineligible property. The Treasury Department and the IRS agree that the Proposed Consolidated Acquisition Rules should apply only to eligible property. Thus, the Delayed Bonus Approach applies solely to depreciable property, as defined in § 1.168(b)–1(a)(1), that meets the requirements in § 1.168(k)–2(b)(2), determined without regard to § 1.168(k)–2(b)(2)(ii)(C) (election not to claim the additional first year depreciation for a class of property) except on the day after the Deconsolidation Date. See the discussion in part I.B.4.b(1)(e) of this Summary of Comments and Explanation of Revisions section. (d) Application of the Proposed Consolidated Deemed Acquisition Rule to Qualified Stock Dispositions Described in Section 355(d)(2) or (e)(2) The Proposed Consolidated Deemed Acquisition Rule does not apply to QSDs described in section 355(d)(2) or (e)(2). As explained in part 2(D)(iv) of the Explanation of Provisions section in the 2019 Proposed Regulations and part II(C)(2)(c) of the Summary of Comments and Explanation of Revisions section in the 2019 Final Regulations, the Treasury VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 Department and the IRS determined that this limitation would be appropriate because the rules applicable to such QSDs do not treat a new target corporation as acquiring assets from an unrelated person. See § 1.336–2(b)(2). One commenter argued that, although the sale-to-self model in § 1.336–2(b)(2) could be construed as violating the ‘‘no prior use’’ requirement in section 168(k)(2)(E)(ii)(I) and § 1.168(k)– 2(b)(3)(iii)(A)(1), this model should not control eligibility for the additional first year depreciation deduction, for several reasons. First, the commenter argued that there is no policy rationale under section 168(k) for treating QSDs described in section 355(d)(2) or (e)(2) differently than other transactions for which an election under section 336(e) is made. Second, the commenter argued that the sale-to-self model was not intended to be applied, and has not been applied, for all Federal income tax purposes. See, for example, § 1.336– 2(b)(2)(ii)(C) (for purposes of section 197(f)(9), section 1091, and any other provision designated in the Internal Revenue Bulletin by the Internal Revenue Service, old target in its capacity as the deemed seller of assets is treated as separate and distinct from, and unrelated to, old target in its capacity as the deemed acquirer of assets). Third, the commenter suggested that taxpayers will structure around the exclusion for these QSDs in order to avail themselves of the Proposed Consolidated Deemed Acquisition Rule. Thus, the commenter recommended expanding this rule to include all types of QSD for which an election under section 336(e) is made. The Treasury Department and the IRS do not agree with the commenter’s recommendation to expand the scope of the Proposed Consolidated Deemed Acquisition Rule to include all types of QSD for which an election under section 336(e) is made. In general, a section 336(e) election should not affect the tax consequences to which the purchaser or the distributee would have been subject with respect to the acquisition of target stock if a section 336(e) election had not been made. See § 1.336–2(c). As explained in the preamble to the final section 336(e) regulations, the Treasury Department and the IRS believe that ‘‘the predominant feature of the section 336(e) election with respect to a section 355(d)(2) or (e)(2) transaction is the section 355 transaction.’’ 78 FR 28347, 28469 (May 15, 2013). Following such a transaction, the controlled corporation (that is, old target) generally remains in existence, and it retains its earnings and profits and other tax attributes. Because PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 71741 old target remains in existence under this construct, such attributes would include old target’s prior use of its depreciable property. Accordingly, the Treasury Department and the IRS decline to expand the scope of the Proposed Consolidated Deemed Acquisition Rule. (e) Alternative Approaches Commenters recommended several alternative approaches to alleviate the uncertainties and implementation issues raised by the Proposed Consolidated Acquisition Rules. This part I.B.4.b(1)(e) of this Summary of Comments and Explanation of Revisions section discusses each alternative approach. (i) Delayed Bonus Approach The first alternative approach recommended by commenters (Delayed Bonus Approach) would treat the asset acquisition as occurring on the date such acquisition actually occurred for all Federal income tax purposes and, thus, as generally being subject to all Federal income tax rules that ordinarily would apply (with the exception of the series of related transactions rules in § 1.168(k)–2(b)(3)(iii)(C)). For example, during the interim period, the transferee member would recognize depreciation on all depreciable transferred assets (including the eligible property), and the transferor member would recognize gain or loss in accordance with section 168(i)(7) and § 1.1502–13(c)(2). Absent additional rules, the transferee member would not be able to claim the additional first year depreciation deduction (see sections 179(d)(2)(A) and (B) and the Group Prior Use Rule). To enable the transferee member to claim this deduction, the Delayed Bonus Approach treats the transferee member as (1) selling the eligible property to an unrelated third party one day after the Deconsolidation Date for an amount equal to the member’s basis in the eligible property at such time, and then (2) acquiring identical, but different, eligible property from another unrelated third party for the same amount (deemed sale and purchase of eligible property). For this purpose, the transferee member’s basis in the eligible property on the day after the Deconsolidation Date is the value of the consideration paid by the transferee member for the property less any depreciation deductions taken by the member with respect to such property during the interim period. The Treasury Department and the IRS have determined that the Delayed Bonus Approach would achieve the objectives of the Proposed Consolidated Acquisition Rules (that is, permitting E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 71742 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations additional first year depreciation to the transferee member after the member leaves the selling group pursuant to a series of related transactions) while creating fewer collateral consequences. Moreover, because the Delayed Bonus Approach would respect the asset acquisition as occurring on the actual acquisition date for all Federal income tax purposes, this approach would provide taxpayers with greater certainty regarding the tax consequences of the acquisition and the treatment of tax items arising during the interim period. Thus, these final regulations adopt the Delayed Bonus Approach for actual and deemed acquisitions of eligible property that satisfy certain requirements. As noted in part I.B.4.b(1)(b) of this Summary of Comments and Explanation of Revisions section, the Delayed Bonus Approach does not include a 90-day requirement because this approach would not raise the same issues as the Proposed Consolidated Acquisition Rules. Furthermore, as noted in part I.B.4.b(1)(c) of this Summary of Comments and Explanation of Revisions section, the transferee member’s (or target’s) deemed sale and purchase of assets the day after the Deconsolidation Date under the Delayed Bonus Approach applies solely to eligible property (rather than to all depreciable assets). Under the Delayed Bonus Approach in these final regulations, the transferee member (or target) is treated as selling and then purchasing eligible property for cash. Accordingly, the deemed sale and purchase of eligible property cannot be characterized as an exchange of property that is eligible for nonrecognition treatment under section 1031. Moreover, in the deemed sale and purchase of eligible property, the transferee member (or target) is treated as acquiring used property (deemed replacement property). Accordingly, the original use of such property does not commence with the transferee member (or target). As a result, the deemed sale and purchase of eligible property does not allow the deemed replacement property to be eligible for federal income tax credits or deductions that require new property. For example, such property does not satisfy the original use requirement in section 48(a)(3)(B)(ii) for the energy credit. Because the cost of the deemed replacement property (and, consequently, the adjusted basis in such property) is identical to the transferee member’s (or target’s) adjusted basis in the eligible property, a question has arisen as to whether section 179(d)(3) and § 1.168(k)–2(b)(3)(iii)(A)(3) potentially could apply to prevent the VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 transferee member (or target) from claiming the additional first year depreciation deduction for such property. To avoid any potential uncertainty in this regard, these final regulations expressly provide that the acquisition of the deemed replacement property does not result in the basis in such property being determined, in whole or in part, by reference to the basis of other property held at any time by the transferee member or target. The Treasury Department and the IRS note that, under the Delayed Bonus Approach in these final regulations, the deemed sale and purchase of eligible property are treated as occurring for all Federal income tax purposes. Treating the deemed sale and purchase of eligible property as applicable solely for purposes of sections 168 and 179 (and not for all Federal income tax purposes) could lead to complications and inconsistencies. Under such an approach, taxpayers would be required to treat each piece of eligible property as two separate assets: (1) An asset that exists for purposes of sections 168 and 179; and (2) an asset that exists for all other Federal income tax purposes. Therefore, this approach could present difficulties in determining, for instance, (1) how any depreciation claimed with respect to the asset that exists for purposes of sections 168 and 179 affects the taxpayer’s adjusted basis in the asset that exists for all other Federal income tax purposes, and (2) how to calculate the gain or loss recognized on a future disposition of the eligible property. The Delayed Bonus Approach does not apply to property unless such property is eligible property as of the time of its acquisition by the transferee member, the Deconsolidation Date, and the day after the Deconsolidation Date. For this purpose, the status of acquired property as ‘‘eligible property’’ is generally determined without regard to § 1.168(k)–2(b)(2)(ii)(C) (property subject to an election not to claim the additional first year depreciation deduction for a class of property). As a result, a series of related transactions may be subject to the Delayed Bonus Approach even if the common parent of the selling consolidated group makes an election under section 168(k)(7) not to claim the additional first year depreciation deduction for a class of property placed in service by the transferee member for the short taxable year ending on the Deconsolidation Date. However, to avoid creating a trap for the unwary, the definition of ‘‘eligible property’’ takes into account any such election made for the taxable year that includes the day after the Deconsolidation Date. Accordingly, one PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 component in the definition of eligible property effectively provides that for such taxable year, the transferee member cannot have made an election under section 168(k)(7) not to claim the additional first year depreciation deduction for the class of property to which the acquired property belongs. By extension, the Delayed Bonus Approach does not apply to acquired property belonging to a class of property with respect to which the transferee makes an election under section 168(k)(7), for property placed in service in the taxable year that includes the day after the Deconsolidation Date. Additionally, these final regulations allow taxpayers to elect out of the application of the Delayed Bonus Approach with respect to all eligible property that otherwise would be subject to the Delayed Bonus Approach. If a taxpayer makes this election for a transaction, the taxpayer also is deemed to have made such an election for all other transactions in the same series of related transactions that otherwise would be subject to the Delayed Bonus Approach and that involve the same (or a related) transferee member or target. To provide clarity and uniformity with the other elections in § 1.168(k)–2, these final regulations provide that the election 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. A commenter requested confirmation that the deemed sale and purchase of eligible property under the Delayed Bonus Approach would not prevent the transferee member’s deconsolidation in a stock distribution from qualifying under section 355. In other words, if such eligible property comprises the transferee member’s entire trade or business, the deemed sale and purchase might be viewed as precluding the distribution from satisfying the ‘‘active trade or business’’ requirement in section 355(b). See section 355(b)(2)(C) (a corporation is treated as engaged in the active conduct of a trade or business only if, among other things, such trade or business was not acquired in a recognition transaction during the fiveyear period ending on the date of the distribution). The Treasury Department and the IRS are considering this issue and request comments for purposes of potential future guidance. (ii) Other Alternative Approaches The second alternative approach recommended by commenters (Modified Consolidated Acquisition Approach) would be identical to the Proposed Consolidated Acquisition Rules, except E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations that the asset acquisition would not be treated as occurring on the day after the Deconsolidation Date for all Federal income tax purposes. Instead, the asset acquisition would be treated as occurring on the day after the Deconsolidation Date solely for purposes of determining (1) whether the requirements of section 168(k) are satisfied and, if so, (2) the amount, location, and timing of the transferee member’s (or new target’s) additional first year depreciation deduction with respect to the depreciable property. For all other Federal income tax purposes, the asset acquisition would be treated as occurring on the date such acquisition actually occurred. The third alternative approach recommended by commenters (Frozen Depreciation Approach) is the same as the Delayed Bonus Approach, except that the transferee member would not be permitted to claim depreciation deductions during the interim period for the acquired assets (and the transferor member would not be required to take into account gain or loss from the asset acquisition under § 1.1502–13(c)). The Treasury Department and the IRS have determined that, although the Modified Consolidated Acquisition Approach would address certain issues and uncertainties created by the Proposed Consolidated Acquisition Rules, this approach would create other issues and uncertainties by delaying the asset acquisition date for purposes of section 168(k) but not for other Federal income tax purposes. For instance, if the Modified Consolidated Acquisition Approach were applied to a deemed asset acquisition pursuant to a section 338(h)(10) election, the acquisition date would be delayed until one day after the Deconsolidation Date for purposes of section 168(k), but old target would be deemed to sell its assets and liquidate pursuant to § 1.338(h)(10)–1(d)(4)(i) on the actual acquisition date for all other Federal income tax purposes. This duality could complicate the calculation and allocation of the ADSP and AGUB among the target’s assets by creating two separate acquisition dates, and thus two different dates on which such calculation and allocation must be determined. Therefore, these final regulations do not adopt the Modified Consolidated Acquisition Approach. Similarly, with respect to the Frozen Depreciation Approach, the Treasury Department and the IRS have determined that holding the transferee member’s depreciation deductions (and the transferor member’s gain or loss on the asset acquisition) in abeyance could create some of the same issues as those identified by commenters with regard to VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 the Proposed Consolidated Acquisition Rules. Such issues include the proper manner for reporting transactions that are part of a series of related transactions spanning multiple taxable years, and the appropriate way to account for changes in the depreciable property during the interim period. Accordingly, if the Frozen Depreciation Approach were to be adopted, the 90day requirement might be required to limit the scope of such issues. Thus, these final regulations also do not adopt this approach. (2) Application of the Five-Year Safe Harbor As discussed in part I.B.1.a of this Summary of Comments and Explanation of Revisions section, the Five-Year Safe Harbor in § 1.168(k)–2(b)(3)(iii)(B)(1) of these final regulations provides that, in determining if the taxpayer or a predecessor previously had a depreciable interest in property, ‘‘only the five calendar years immediately prior to the current calendar year in which the property is placed in service by the taxpayer, and the portion of such current calendar year before the placedin-service date of the property without taking into account the applicable convention, are taken into account.’’ Commenters requested confirmation that the Five-Year Safe Harbor applies for purposes of the Group Prior Use Rule and the Stock and Asset Acquisition Rule. The Treasury Department and the IRS did not intend to require a different (and longer) ‘‘look back’’ period for consolidated group members than for other taxpayers. Accordingly, these final regulations clarify the Group Prior Use Rule to provide that a member of a consolidated group is treated as having a depreciable interest in property only if the group had a depreciable interest within the ‘‘lookback period.’’ This period, which is defined in these final regulations in accordance with the FiveYear Safe Harbor, includes both the five calendar years immediately prior to the current calendar year in which the property is placed in service by the member and the portion of such current calendar year before the placed-inservice date of the property, without taking into account the applicable convention. Similarly, these final regulations clarify that the Stock and Asset Acquisition Rule applies only if the corporation that joins the consolidated group had a depreciable interest in the property within the lookback period. These final regulations have modified Examples 26, 27, and 30 in § 1.168(k)–2(b)(3)(vii) of the 2019 Proposed Regulations (Examples 1, 2, PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 71743 and 3 in § 1.1502–68(d) of these final regulations) accordingly. (3) Request for Additional Examples One commenter requested several additional examples to clarify the application of the aforementioned special rules for consolidated groups. One such example would illustrate that the Group Prior Use Rule does not apply to situations in which an asset is acquired by a former group member (other than the member that directly held the asset) following the termination of the group. Another such example would address the consequences of an asset acquisition by one member of a consolidated group if, in an unrelated transaction, a corporation that previously had a depreciable interest in the property becomes a member of the same consolidated group. The Treasury Department and the IRS agree that such examples would be helpful and have included them in these final regulations. (4) Movement of Consolidated Rules to Regulations Under Section 1502 The Treasury Department and the IRS have determined that moving the section 168(k) rules for consolidated groups to the regulations under section 1502 would facilitate the identification and application of these rules by practitioners. Thus, these rules have been moved from § 1.168(k)–2(b)(3)(v) of the 2019 Proposed Regulations to new § 1.1502–68. C. Acquisition of Property 1. Acquisition of a Trade or Business or an Entity Section 1.168(k)–2(b)(5)(iii)(G) of the 2019 Proposed Regulations provides that a contract to acquire all or substantially all of the assets of a trade or business or to acquire an entity is binding if it is enforceable under State law against the parties to the contract and that certain conditions do not prevent the contract from being a binding contract. This proposed rule also provides that it applies to a contract for the sale of stock of a corporation that is treated as an asset sale as a result of an election under section 338. The Treasury Department and the IRS are aware of potential questions regarding whether § 1.168(k)– 2(b)(5)(iii)(G) of the 2019 Proposed Regulations also applies to a contract for the sale of stock of a corporation that is treated as an asset sale as a result of an election under section 336(e). The Federal income tax consequences of a section 336(e) election made with respect to a qualified stock disposition E:\FR\FM\10NOR2.SGM 10NOR2 71744 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 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– 1(a)(1) and 1.336–2(b)(1). Accordingly, these final regulations clarify that § 1.168(k)–2(b)(5)(iii)(G) applies to a contract for the sale of stock of a corporation that is treated as an asset sale as a result of an election under section 336(e) made for a disposition described in § 1.336–2(b)(1). 2. Property Not Acquired Pursuant to a Written Binding Contract Section 1.168(k)–2(b)(5)(v) of the 2019 Proposed Regulations provides that, in general, the acquisition date of property that the taxpayer acquires pursuant to a contract that does not meet the definition of a written binding contract in § 1.168(k)–2(b)(5)(iii) of the 2019 Final Regulations is the date on which the taxpayer paid or incurred more than 10 percent of the total cost of the property, excluding the cost of any land and preliminary activities. A commenter on the 2019 Proposed Regulations requested the bifurcation of a particular type of contract that the taxpayer has determined does not meet the definition of a written binding contract in § 1.168(k)–2(b)(5)(iii) of the 2019 Final Regulations. The contract at issue is cancelable at any time by the taxpayer/ customer without penalty and requires the taxpayer to reimburse the contractor only for the costs the contractor has incurred, plus the contractor’s profit margin, prior to the date the contractor receives a notice of cancellation by the taxpayer. For such a contract, the commenter requested that the final regulations allow the contract to be bifurcated into a binding contract for the period prior to the effective date of section 13201 of the TCJA and a separate non-binding contract for the period after the effective date of section 13201 of the TCJA. If the final regulations allow such a bifurcation, the commenter asserted that, if more than 10 percent of the costs of the project are paid or incurred by the taxpayer before the effective date of section 13201 of the TCJA, none of such costs are eligible for the 100-percent additional first year depreciation deduction, but all costs paid or incurred by the taxpayer after the effective date of section 13201 of the TCJA would meet the acquisition date requirements for the 100-percent additional first year depreciation deduction. The Treasury Department and the IRS have determined that the change made in these final regulations to the component election (see part I.C.3 of this Summary of Comments and VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 Explanation of Revisions section) generally addresses this comment. Therefore, the Treasury Department and the IRS decline to provide a special rule for this particular type of contract. 3. Component Election Section 1.168(k)–2(c) of the 2019 Proposed Regulations allows a taxpayer to elect to treat one or more components acquired or self-constructed after September 27, 2017, of certain larger self-constructed property as being eligible for the additional first year depreciation deduction (Component Election). The larger self-constructed property must be qualified property under section 168(k)(2), as in effect before the enactment of the TCJA, for which the manufacture, construction, or production began before September 28, 2017. However, the election is not available for components of larger selfconstructed property when such components are not otherwise eligible for the additional first year depreciation deduction. a. Eligible Larger Self-Constructed Property Pursuant to § 1.168(k)–2(c)(2)(ii) of the 2019 Proposed Regulations, larger self-constructed property that is placed in service by the taxpayer after December 31, 2019, or larger selfconstructed property described in section 168(k)(2)(B) or (C), as in effect on the day before enactment of the TCJA, that is placed in service after December 31, 2020, is not eligible larger self-constructed property. Accordingly, any components of such property that are acquired or self-constructed after September 27, 2017, do not qualify for the Component Election. A commenter on the 2019 Proposed Regulations requested that the final regulations remove this cut-off date for when the larger self-constructed property must be placed in service because it does not reflect the intent of section 13201 of the TCJA of promoting capital investment, modernization, and growth. If a taxpayer constructs a building, the Treasury Department and the IRS are aware that taxpayers have questioned whether the larger self-constructed property is the building or the tangible personal property constructed as part of the building. After considering these comments and the comment for property not acquired pursuant to a written binding contract (see part I.C.2 of this Summary of Comments and Explanation of Revisions section), the Treasury Department and the IRS have determined to expand the larger self-constructed property that is eligible for the Component Election. PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 These final regulations provide that eligible larger self-constructed property also includes property that is manufactured, constructed, or produced for the taxpayer by another person under a written contract that does not meet the definition of a binding contract under § 1.168(k)–2(b)(5)(iii) of the 2019 Final Regulations (written non-binding contract) and 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. Further, these final regulations remove the requirement that the larger selfconstructed property be qualified property under section 168(k)(2), as in effect on the day before the enactment of the TCJA, and instead provide that the larger self-constructed property must be (i) MACRS property with a recovery period of 20 years or less, computer software, water utility property, or qualified improvement property under section 168(k)(3) as in effect on the day before the enactment date of the TCJA, and (ii) qualified property under § 1.168(k)–2(b) of the 2019 Final Regulations and these final regulations, determined without regard to the acquisition date requirement in § 1.168(k)–2(b)(5), for which the taxpayer begins the manufacture, construction, or production before September 28, 2017. As a result of this change, the cut-off dates for when the larger self-constructed property must be placed in service by the taxpayer now align with the placed-in-service dates under section 168(k)(6) and § 1.168(k)– 2(b)(4)(i). Because the Component Election is an exception to the acquisition date requirements in § 1.168(k)–2(b)(5)(iv) of the 2019 Final Regulations and § 1.168(k)–2(b)(5)(v) of these final regulations, and such rules do not apply to qualified film, television, and live theatrical productions, the Treasury Department and the IRS have determined to retain the rule in § 1.168(k)–2(c) of the 2019 Proposed Regulations to exclude these productions from being eligible for the Component Election. With regard to the taxpayers’ question of whether the larger self-constructed property is the building constructed by the taxpayer or the tangible personal property constructed as part of the building, all tangible personal property constructed as part of that building generally is MACRS property with a recovery period of 20 years or less. As a result, the Treasury Department and the IRS have determined that such tangible personal property is the larger self-constructed property for purposes E:\FR\FM\10NOR2.SGM 10NOR2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations of the Component Election if the construction of all tangible personal property of the building began before September 28, 2017, and any eligible component of such tangible personal property is eligible for the Component Election. Accordingly, these final regulations clarify that all property that is constructed as part of residential rental property, nonresidential real property, or an improvement to such property, and that is MACRS property with a recovery period of 20 years or less, computer software, water utility property, or qualified improvement property under section 168(k)(3) as in effect on the day before the enactment date of the TCJA, is the larger selfconstructed property for purposes of the Component Election. jbell on DSKJLSW7X2PROD with RULES2 b. Eligible Components To be eligible for the Component Election, § 1.168(k)–2(c)(3) of the 2019 Proposed Regulations provides that a component of the larger self-constructed property must be qualified property under § 1.168(k)–2(b) of the 2019 Final Regulations and these final regulations that is acquired or self-constructed by the taxpayer after September 27, 2017. These final regulations retain this rule. In addition, these final regulations clarify that the acquisition date of a component acquired pursuant to a written binding contract is determined under § 1.168(k)–2(b)(5)(ii)(B) of the 2019 Final Regulations. If a component is acquired or self-constructed pursuant to a written non-binding contract, these final regulations provide that the rules under § 1.168(k)–2(b)(5)(v) of these final regulations determine the acquisition date of such component or when manufacture, construction, or production of such component begins. These final regulations also include a conforming change to § 1.168(k)– 2(b)(5)(v) clarifying that these rules apply to property that is selfconstructed pursuant to a written nonbinding contract, and amend § 1.168(k)– 2(d)(3) to provide a rule similar to the rule in § 1.168(k)–2(b)(5)(v) for property that is described in section 168(k)(2)(B) or (C) and is not acquired pursuant to a written binding contract. D. Property Described in Section 168(k)(2)(B) Section 1.168(k)–2(e)(1)(iii) of the 2019 Proposed Regulations provides that rules similar to the rules in section 4.02(1)(b) of Notice 2007–36 (2007–17 I.R.B. 1000) apply for determining the amounts of unadjusted depreciable basis attributable to the manufacture, construction, or production of property described in section 168(k)(2)(B) before VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 January 1, 2027. These final regulations clarify that such rules apply regardless of whether the manufacture, construction, or production of such property is pursuant to a written binding contract or a written nonbinding contract. II. Definitions A. Depreciable Property Section 1.168(b)–1(a)(1) defines the term ‘‘depreciable property’’ for purposes of section 168. See also § 1.168(k)–2(b)(1). In connection with its comments on the special rules for consolidated groups in § 1.168(k)– 2(b)(3)(v) of the 2019 Proposed Regulations, a commenter requested the final regulations provide either an explicit definition of that term or an alternate term that is expressly limited to property the nature of which is eligible for the additional first year depreciation deduction. The definition of ‘‘depreciable property’’ in § 1.168(b)–1(a)(1) is the same definition of that term in § 1.168(k)–1(a)(2)(i) for purposes of section 168(k) as in effect before the enactment of the TCJA. The Treasury Department and the IRS are not aware of problems with applying the definition under either § 1.168(b)– 1(a)(1) or § 1.168(k)–1(a)(2)(i). Moreover, the Treasury Department and the IRS have determined that such definition clearly describes which property is depreciable property. Accordingly, the Treasury Department and the IRS decline to adopt this comment. However, the rules in § 1.1502–68 for consolidated groups use the term ‘‘eligible property’’ to identify the types of depreciable property eligible for the additional first year depreciation deduction. B. Qualified Improvement Property Section 1.168(b)–1(a)(5) of the 2019 Final Regulations defines the term ‘‘qualified improvement property’’ for purposes of section 168. Section 168(e)(6), as amended by section 13204 of the TCJA, and § 1.168(b)–1(a)(5)(i)(A) and (a)(5)(ii) provide the definition of that term for improvements placed in service after December 31, 2017. Section 2307 of the CARES Act amended section 168(e)(3)(E), (e)(6), and (g)(3)(B). Section 2307(a)(1)(A) of the CARES Act added a new clause (vii) to the end of section 168(e)(3)(E) to provide that qualified improvement property is classified as 15-year property. Section 2307(a)(1)(B) of the CARES Act amended the definition of qualified improvement property in section 168(e)(6) by providing that the improvement must be PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 71745 ‘‘made by the taxpayer.’’ In addition, section 2307(a)(2) of the CARES Act amended the table in section 168(g)(3)(B) to provide a recovery period of 20 years for qualified improvement property for purposes of the alternative depreciation system under section 168(g). These amendments to section 168(e) and (g) are effective as if included in section 13204 of the TCJA and, therefore, apply to property placed in service after December 31, 2017. As a result of these changes by section 2307 of the CARES Act, these final regulations amend § 1.168(b)– 1(a)(5)(i)(A) to provide that the improvement must be made by the taxpayer. The Treasury Department and the IRS are aware of questions regarding the meaning of ‘‘made by the taxpayer’’ with respect to third-party construction of the improvement and the acquisition of a building in a transaction described in section 168(i)(7)(B) (pertaining to treatment of transferees in certain nonrecognition transactions) that includes an improvement previously made by, and placed in service by, the transferor or distributor of the building. In this regard, the Treasury Department and the IRS believe that an improvement is made by the taxpayer if the taxpayer makes, manufactures, constructs, or produces the improvement for itself or if the improvement is made, manufactured, constructed, or produced for the taxpayer by another person under a written contract. In contrast, if a taxpayer acquires nonresidential real property in a taxable transaction and such nonresidential real property includes an improvement previously placed in service by the seller of such nonresidential real property, the improvement is not made by the taxpayer. Consistent with section 168(i)(7) (pertaining to treatment of transferees in certain nonrecognition transactions), the Treasury Department and the IRS also believe that if a transferee taxpayer acquires nonresidential real property in a transaction described in section 168(i)(7)(B) (for example, section 351 or 721), any improvement that was previously made by, and placed in service by, the transferor or distributor of such nonresidential real property and that is qualified improvement property in the hands of the transferor or distributor is treated as being made by the transferee taxpayer, and thus is qualified improvement property in the hands of the transferee taxpayer, but only for the portion of its basis in such property that does not exceed the transferor’s or distributor’s adjusted depreciable basis of this property. E:\FR\FM\10NOR2.SGM 10NOR2 71746 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations However, because the basis is determined by reference to the transferor’s or distributor’s adjusted basis in the improvement, the transferee taxpayer’s acquisition 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 § 1.168(k)–2(b)(3)(iii). Accordingly, the qualified improvement property is not eligible for the additional first year depreciation deduction in the hands of the transferee taxpayer, except as provided in § 1.168(k)–2(g)(1)(iii). An example has been added to § 1.168(k)–2(b)(2)(iii) to illustrate the eligibility of qualified improvement property for the additional first year depreciation deduction. jbell on DSKJLSW7X2PROD with RULES2 C. Predecessor and Class of Property Section 1.168(k)–2(a)(2)(iv)(B) of the 2019 Final Regulations defines a predecessor as including 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. A commenter requested clarification of whether this definition was intended to apply only with respect to the specific property transferred or more broadly. The Treasury Department and the IRS intended the definition of a ‘‘predecessor’’ in § 1.168(k)– 2(a)(2)(iv)(B) of the 2019 Final Regulations to be property-specific. Similarly, the Treasury Department and the IRS intended the definition of a ‘‘class of property’’ in § 1.168(k)– 2(f)(1)(ii)(G) of the 2019 Final Regulations (regarding basis adjustments in partnership assets under section 743(b)) to be partner-specific. Accordingly, these final regulations amend § 1.168(k)–2(a)(2)(iv)(B) of the 2019 Final Regulations to substitute ‘‘the’’ for ‘‘an’’, and these final regulations amend § 1.168(k)– 2(f)(1)(ii)(G) of the 2019 Final Regulations to substitute ‘‘Each’’ for ‘‘A’’. Pursuant to § 1.168(k)–2(a)(2)(iv)(E) of the 2019 Final Regulations, a transferor of an asset to a trust is a predecessor with respect to the trust. The Treasury Department and the IRS intended that this provision apply only to transfers involving carryover basis. Because § 1.168(k)–2(a)(2)(iv)(B) of the 2019 Final Regulations applies to such transfers, these final regulations remove § 1.168(k)–2(a)(2)(iv)(E) of the 2019 Final Regulations. VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 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 https://www.irs.gov. Applicability Date The definition of qualified improvement property in § 1.168(b)– 1(a)(5)(i)(A) of these final regulations applies to depreciable property placed in service by the taxpayer after December 31, 2017. Sections 1.168(k)–2 and 1.1502–68 of these final regulations apply to depreciable property, including certain components, acquired after September 27, 2017, and placed in service, or certain plants planted or grafted, as applicable, by the taxpayer during or after the taxpayer’s taxable year that begins on or after January 1, 2021. However, a taxpayer may choose to apply §§ 1.168(k)–2 and 1.1502–68 of these final regulations to depreciable property, including certain components, acquired and placed in service after September 27, 2017, or certain plants planted or grafted after September 27, 2017, as applicable, by the taxpayer during a taxable year ending on or after September 28, 2017, provided the taxpayer applies all rules in §§ 1.168(k)– 2 and 1.1502–68 (to the extent relevant) in their entirety and in a consistent manner. See section 7805(b)(7). In the case of property described in § 1.1502–68(e)(2)(i) of these final regulations that is acquired in a transaction that satisfies the requirements of § 1.1502–68(c)(1)(ii) or (c)(2)(ii) of these final regulations, the taxpayer may apply §§ 1.168(k)–2 and 1.1502–68 of these final regulations for such property only if the rules are applied, in their entirety and in a consistent manner, by all parties to the transaction, including the transferor member, the transferee member, and the target, as applicable, and the consolidated groups of which they are members, for the taxable year(s) in which the transaction occurs and the taxable year(s) that includes the day after the deconsolidation date, as defined in § 1.1502–68(a)(2)(iii) of these final regulations. Additionally, once a taxpayer applies §§ 1.168(k)–2 and 1.1502–68 of these final regulations, in their entirety, for a taxable year, the taxpayer must continue to apply §§ 1.168(k)–2 and 1.1502–68 of these final regulations, in their entirety, PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 for the taxpayer’s subsequent taxable years. Alternatively, a taxpayer may rely on the proposed regulations under section 168(k) in regulation project REG– 106808–19 (84 FR 50152; 2019–41 I.R.B. 912), with respect to depreciable property, including certain components, acquired and placed in service after September 27, 2017, or certain plants planted or grafted after September 27, 2017, as applicable, by the taxpayer during a taxable year ending on or after September 28, 2017, and before the taxpayer’s first taxable year that begins on or after January 1, 2021, if (1) the taxpayer follows the proposed regulations in their entirety, except for the Partnership Lookthrough Rule in proposed § 1.168(k)–2(b)(3)(iii)(B)(5), and in a consistent manner, and (2) all members of a consolidated group consistently rely on the same set of rules. Further, if such property is acquired in a transaction described in proposed § 1.168(k)–2(b)(3)(v)(C) or (D), the taxpayer may rely on the proposed regulations under section 168(k) for such property only if the rules are followed, in their entirety and in a consistent manner, by all parties to the transaction, including the transferor member, the transferee member, and the target, as applicable, and the consolidated groups of which they are members, for the taxable year(s) in which the transaction occurs and the taxable year(s) that includes the day after the Deconsolidation Date. For this purpose, the terms transferor member, transferee member, and target have the meaning provided in proposed § 1.168(k)–2(b)(3)(v)(C) and (D), and the term Deconsolidation Date has the meaning provided in proposed § 1.168(k)–2(b)(3)(v)(C)(1). Special Analyses I. Regulatory Planning and Review— Economic Analysis Executive Orders 12866, 13563, and 13771 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 final regulations have been designated as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, E:\FR\FM\10NOR2.SGM 10NOR2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations 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. jbell on DSKJLSW7X2PROD with RULES2 A. Background i. Bonus Depreciation In general, section 168(k) allows taxpayers to immediately deduct some portion of investment in certain types of capital assets referred to as the ‘‘bonus percentage.’’ This provision is colloquially referred to as ‘‘bonus depreciation.’’ Public Law 115–97, commonly referred to as the Tax Cuts and Jobs Act (TCJA), increased the bonus percentage from 50 percent to 100 percent for qualified property acquired after September 27, 2017, which accelerates depreciation deductions relative to previous law. The TCJA also removed the ‘‘original use’’ requirement, meaning that taxpayers could claim bonus depreciation on certain ‘‘used’’ property. The TCJA 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 certain firms (primarily automobile dealerships) with ‘‘floor plan financing indebtedness’’ as defined under section 163(j). Furthermore, section 168(k)(2)(a)(ii)(IV) and (V) allowed qualified film, television, and live theatrical productions (as defined under Section 181) to qualify for bonus depreciation. The Treasury Department and the IRS promulgated regulations under § 1.168(k)–2 to generally provide structure and clarity for the implementation of section 168(k). Such regulations were proposed as REG– 104397–18 (2018 Proposed Regulations) and finalized as TD 9874 (2019 Final Regulations). However, the Treasury Department and the IRS determined that there remained several outstanding issues requiring clarification that should be subject to notice and comment. In response, the Treasury Department and the IRS issued an additional notice of proposed rulemaking as REG 106808–19 (2019 Proposed Regulations). These final regulations finalize the 2019 Proposed Regulations with only minor changes. These final regulations (these regulations) address ambiguities related to the operation of section 168(k)(9), which describes property that is VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 ineligible for bonus depreciation. Second, these regulations create a de minimis rule which provides that a taxpayer will be deemed not to have had a prior depreciable interest in a property—and thus that property will be eligible for bonus depreciation in that taxpayer’s hands (assuming it otherwise qualifies)—if the taxpayer previously disposed of that property within 90 days of the date on which that property was originally placed in service. Third, these regulations provide for the treatment of an asset acquisition as part of a sale of a member of a consolidated group from one group to another. Fourth, these regulations clarify the treatment of a series of related transactions. Finally, these regulations provide an election to treat certain components of larger selfconstructed property as eligible for the increased bonus percentage even if the construction of such larger selfconstructed property began before September 28, 2017. B. Economic Analysis 1. No-Action Baseline In this analysis, the Treasury Department and the IRS assess the benefits and costs of these regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these regulations. 2. Summary of Economic Effects These regulations provide certainty and consistency in the application of section 168(k) by providing definitions and clarifications regarding the statute’s terms and rules. In the absence of the guidance provided in these regulations, the chance that different taxpayers might interpret the statute differently is exacerbated. For example, two similarly situated taxpayers might interpret the statutory provisions pertaining to the definition of property eligible for bonus depreciation differently, with one taxpayer pursuing a project that another comparable taxpayer might decline because of a different interpretation of whether property is eligible for bonus depreciation under 168(k). If this second taxpayer’s activity is more profitable, an economic loss arises. Similar situations may arise under each of the provisions addressed by these regulations. Certainty and clarity over tax treatment generally also reduce compliance costs for taxpayers and increase overall economic performance. An economic loss might also arise if all taxpayers have similar interpretations under the baseline of the tax treatment of particular deductible items but those interpretations differ PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 71747 slightly from the interpretation Congress intended for deductions of these items. For example, these regulations may specify a tax treatment that few or no taxpayers would adopt in the absence of specific guidance but that nonetheless advances Congressional intent. In these cases, guidance provides value by bringing economic decisions closer in line with the intent and purpose of the statute. While no guidance can curtail all differential or inaccurate interpretations of the statute, these regulations significantly mitigate the chance for differential or inaccurate interpretations and thereby increase economic efficiency. Because these regulations clarify the tax treatment of bonus depreciation for certain taxpayers, there is the possibility that business decisions may change as a result of these regulations relative to the no-action baseline. Averaged across taxpayers in the economy, these regulations will tend to expand the pool of property that is eligible for bonus depreciation, thus reducing effective tax rates for affected taxpayers, relative to the no-action baseline. This reduction in effective tax rates, viewed in isolation, is generally projected to increase economic activity by these taxpayers relative to the no-action baseline. 3. Economic Analysis of Specific Provisions i. Property Excluded From Bonus by Section 168(k)(9) Section 168(k)(9) provides that property used by certain businesses is not eligible for bonus depreciation. These businesses include certain rateregulated utilities and certain firms (primarily motor vehicle dealerships) with floor plan financing indebtedness and total interest expense that exceeds certain thresholds. These regulations clarify that those taxpayers that lease property to such businesses described by section 168(k)(9) may claim bonus depreciation, so long as other requirements of section 168(k) are met. This approach broadly follows existing normalization rules (which pre-date TCJA and which provide generally for the reconciliation of tax income and book income for regulatory purposes for utilities), which provide that lessors to public utilities are not bound by such rules so long as they themselves are not a public utility. The Treasury Department and the IRS expect that this guidance will be easy for taxpayers to interpret and comply with. To the extent that lessors can claim bonus depreciation, it is plausible that the market-clearing lease price for E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 71748 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations such assets will fall, potentially enabling some expansions of output and contributing to economic growth. These regulations next clarify which businesses fall under the umbrella of section 168(k)(9)(A) (utilities) and section 168(k)(9)(B) (firms with floor plan financing indebtedness). In regards to section 168(k)(9)(A), which applies to property that is ‘‘primarily used’’ in certain utilities businesses, these regulations provide that the ‘‘primary use’’ of property is consistent with how primary use is determined in existing regulations under section 167. This application should be familiar to taxpayers, and thus relatively easy to comply with. The statutory language of section 168(k)(9)(B) is somewhat ambiguous, requiring more substantive clarifications. First, section 168(k)(9)(B) provides that firms with floor plan financing indebtedness are ineligible for bonus depreciation ‘‘if the floor plan financing interest [from such indebtedness] was taken into account under [section 163(j)(1)(C)].’’ These regulations clarify that such interest is in fact ‘‘taken into account’’ only if the firm in fact received a benefit from section 163(j)(1)(C)—i.e., if total business interest expense (including floor plan financing interest) exceeds business interest income plus 30 percent (50 percent for taxable years beginning during 2019 and 2020) of adjusted taxable income. This decision allows more firms to claim bonus depreciation than if the Treasury Department and the IRS had made the opposite interpretation (deeming all firms with floor plan financing interest to be ineligible for bonus depreciation, regardless of whether the firm received a benefit from section 163(j)(1)(C)). However, the Treasury Department and the IRS expect that most taxpayers would have interpreted the phrase ‘‘taken into account’’ in the same manner as these regulations in the absence of these regulations, implying that the economic effects of this provision are modest. An additional ambiguity in section 168(k)(9)(B) pertains to the length of time that the section applies to a given firm. The section refers to a ‘‘trade or business that has had floor plan financing indebtedness . . . if the floor plan financing interest related to such indebtedness was taken into account under [section 163(j)(1)(C)]’’ (emphasis added). Consider a firm (Example A) that received a benefit from section 163(j)(C)(1) in the 2021 tax year (meaning that its interest deduction would have been smaller if not for section 163(j)(C)(1)) but not in the 2022 VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 tax year or any other later year. The Treasury Department and the IRS considered two options to address the length of time to which this designation would apply: (i) In perpetuity, such that such businesses would be forever ineligible for bonus depreciation; or (ii) annually; that is, section 168(k)(9)(B) is determined on an annual basis. Under this option, the firm in Example A would not be eligible for bonus depreciation in 2021, but so long as the other requirements were met, it would be eligible for bonus depreciation in 2022. These regulations adopt the second option. This interpretation enables more firms to be eligible for bonus depreciation in more years, relative to the alternative regulatory approach, and would thus potentially increase investment by such firms. The Treasury Department and the IRS expect that a substantial proportion of taxpayers would have come to a different conclusion regarding the interpretation of this timing in the absence of these regulations. Therefore, this provision could be expected to affect economic activity by these taxpayers relative to the no-action baseline. The Treasury Department and the IRS engaged in an analysis of these effects based on historical tax data, parameter values from the economic literature for the effect of bonus depreciation on investment, and assumptions regarding taxpayer interpretations in the absence of these regulations. This analysis projects that this provision will cause investment to increase in this industry by no greater than $55 million in any year, and approximately $25 million per year on average over the period from 2019–2028, relative to the no-action baseline. Additionally, this analysis projects that some share of this increased investment will reduce investment in other industries through crowd-out effects. ii. Prior Depreciable Interest In general, to be statutorily eligible for bonus depreciation, a given property may not have been owned and depreciated by the same firm in the past. This requirement has the effect of penalizing any tax-driven ‘‘churning’’ of assets, whereby a firm could sell and soon thereafter repurchase the same asset in order to claim the 100 percent deduction. The 2019 Final Regulations defined ‘‘ownership’’ for this purpose as having a prior depreciable interest. These regulations create an exception that provides that a taxpayer does not have a prior depreciable interest in a given property if the taxpayer disposed of the property within 90 days of the PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 initial date when the property was placed in service (additional requirements apply to the extent the original acquisition occurred prior to September 28, 2017). The Treasury Department and the IRS instituted this rule to address situations where temporary ownership of property is necessary to facilitate certain lease arrangements so that the property subsequently purchased off-lease is not ineligible for bonus depreciation and to coordinate with the syndication transaction rules of section 168(k)(2)(E)(iii). The Treasury Department and the IRS do not anticipate substantial economic effects of this provision. Nevertheless, it will generally have the effect of causing more property to be eligible for bonus depreciation (increasing incentives to invest) relative to the no-action baseline. This provision is not expected to meaningfully increase tax-driven or economically wasteful churning of assets relative to the no-action baseline. iii. Group Prior Use Rule These regulations clarify several aspects of the ‘‘Group Prior Use Rule’’ as introduced in the 2018 Proposed Regulations. Under that rule, all members of a consolidated group are treated as having had a depreciable interest in a property if any member of the consolidated group had such a depreciable interest. First, these final regulations clarify that the rule ceases to be in effect once the consolidated group terminates as a result of joining another consolidated group. Second, these regulations clarify that the Group Prior Use Rule does not apply to a corporation after it deconsolidates from the consolidated group, so long as that corporation did not in fact previously own that property. As is the case with the prior use rules generally, the Treasury Department and the IRS do not anticipate large economic effects as a result of this section of these regulations relative to the no-action baseline. iv. Purchases of Assets as Part of Acquisition of Entire Business These regulations clarify the procedure for certain purchases of assets by a given corporation from a related party that are a part of an integrated plan involving the selling of that corporation from one group to another. Specifically, these regulations provide that the deduction for bonus depreciation is allowed in such circumstances and should be claimed by the acquiring group. These regulations provide for a similar treatment in the case of deemed acquisitions in the case of an election under section 338(h)(10) E:\FR\FM\10NOR2.SGM 10NOR2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations or section 336(e). These rules cause the tax treatment to reflect the economic reality, in which the acquiring group is bearing the economic outlay of the asset purchase, and that acquiring group had no economic prior depreciable interest. By aligning the tax consequences with the economic allocations, this treatment minimizes potential distortions caused by the anti-churning rules relative to the no-action baseline. jbell on DSKJLSW7X2PROD with RULES2 v. Component Rule Election In 2010, Congress increased the bonus percentage from 50 percent to 100 percent for property placed in service between September 9, 2010 and December 31, 2011. In 2011, the IRS issued Revenue Procedure 2011–26 to allow taxpayers to elect to have the 100 percent bonus rate apply to components of larger self-constructed property whose construction began before September 9, 2010, so long as (1) the components were acquired (or selfconstructed) after that date and (2) the larger self-constructed property itself otherwise qualifies for bonus depreciation generally. These regulations provide an analogous rule, replacing September 9, 2010 with September 28, 2017. This provision will allow more property to qualify for 100 percent bonus depreciation relative to the no-action baseline. Furthermore, this provision provides neutrality between taxpayers who acquire distinct, smaller pieces of depreciable property and those taxpayers that invest a similar amount in fewer, larger pieces of depreciable property whose construction takes place over a longer period of time. By treating similar taxpayers (and similar choices) similarly, this rule enhances economic efficiency by minimizing tax-related distortions. However, the Treasury Department and the IRS project these rules to have only a modest effect on future economic decisions relative to the no-action baseline. These rules affect only taxpayers (1) that acquire (or self-construct) components after September 27, 2017 and (2) that began construction of the larger selfconstructed property prior to September 28, 2017 (approximately 32 months ago). The Treasury Department and the IRS expect relatively few taxpayers to be affected by this provision going forward. vi. Series of Related Transactions The 2018 Proposed Regulations provided that, in a series of related transactions, the relationship between the transferor and transferee of an asset was determined only after the final transaction in the series (Series of Related Transactions Rule). Commenters VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 had expressed confusion regarding whether this rule applies to testing whether parties are related under section 179(d)(2), or whether it applies more broadly (e.g., in determining whether the taxpayer had a prior depreciable interest). These regulations clarify that this Series of Related Transactions Rule is intended only to test the relatedness of the parties involved in the series of related transactions. These regulations further revise the Series of Related Transactions Rule to address its application in various situations. Under these regulations, relatedness is tested after each step of the series of related transactions and between the original transferor in the series and the direct transferor, with a substantial exception that any intermediary (i.e., a taxpayer other than the original transferor or ultimate transferee) is disregarded so long as that intermediary (1) never places the property in service or (2) disposes of the property in the same taxable year in which it was placed in service. Testing relatedness after each step in the transaction allows certain intermediaries in the series to claim bonus depreciation if they maintained use of the property for a non-trivial length of time. The Treasury Department and the IRS do not predict substantial economic effects of this provision relative to the no-action baseline. vii. Miscellaneous These regulations put forward rules to the extent existing regulations apply in slightly new contexts. In particular, these regulations clarify when a binding contract is in force to acquire all or substantially all the assets of a trade or business. Additionally, consistent with the rules of § 1.168(d)–1(b)(4), these regulations provide that, for the purpose of determining whether the mid-quarter convention applies, depreciable basis is not reduced by the amount of bonus depreciation. The Treasury Department and the IRS do not anticipate large economic effects of these clarifications relative to the noaction baseline, though the additional clarity provided by these regulations will likely reduce compliance burdens. 4. Number of Affected Taxpayers The most substantial components of these regulations affect the ability of dealers of motor vehicles to claim bonus depreciation. Based on data from tax year 2017, the Treasury Department and the IRS estimate that there are approximately 94,000 taxpayers in that industry who may be affected by these PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 71749 regulations based on the taxpayer’s voluntarily reported NAICS code. Of this 94,000, 14,000 are filers of Form 1120, 42,000 are filers of Form 1120S, 12,000 are filers of Form 1065, and 26,000 are filers of Form 1040. Additionally, other components of these regulations may have a very slight effect on all taxpayers that claim bonus depreciation. Including such taxpayers, these regulations may affect approximately 2.85 million taxpayers, including 160,000 filers of Form 1120, 560,000 filers of Form 1120S, 400,000 filers of Form 1065, and 1.75 million filers of Form 1040. II. Paperwork Reduction Act The collections of information in these final regulations are in §§ 1.168(k)–2(c) and 1.1502–68(c)(4). The collection of information in § 1.168(k)–2(c) is an election that a taxpayer may make to treat one or more components acquired or selfconstructed after September 27, 2017, of certain larger self-constructed property as being eligible for the 100-percent additional first year depreciation deduction under section 168(k). The larger self-constructed property must be MACRS property with a recovery period of 20 years or less, computer software, water utility property, or qualified improvement property placed in service by the taxpayer after September 27, 2017, and before January 1, 2018, that is qualified property under section 168(k)(2) for which the manufacture, construction, or production began before September 28, 2017. The election is made by attaching a statement to a Federal income tax return indicating that the taxpayer is making the election under § 1.168(k)–2(c) and whether the taxpayer is making the election for all or some of the components described in § 1.168(k)–2(c). The collection of information in § 1.1502–68(c)(4) is an election that a taxpayer may make to not claim the additional first year depreciation deduction for qualified property, and which § 1.1502–68(c)(1) or (2) would otherwise require the taxpayer to claim such deduction when a member of a consolidated group acquires from another member property eligible for the additional first year depreciation deduction (or stock of a third member holding such property), and the acquirer member (and acquired member, if applicable) then leaves the consolidated group. To make the election, the corporation must attach a statement to its timely filed federal income tax return (including extensions) for the taxable year that begins after the date on which it leaves the consolidated group. The E:\FR\FM\10NOR2.SGM 10NOR2 71750 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations statement must describe the transaction(s) to which § 1.1502–68(c)(1) or (2) would apply and state that the corporation elects not to claim the additional first year depreciation deduction for any property transferred in such transaction(s). For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) (PRA), the reporting burden associated with § 1.168(k)–2(c) will be reflected in the PRA submission associated with income tax returns in the Form 1120 series, Form 1040 series, Form 1041 series, and Form 1065 series (for OMB control numbers, see chart at the end of this part II of this Special Analysis section). The estimate for the number of impacted filers with respect to the collection of information described in this part is 0 to 41,775 respondents. Partial data was available to directly estimate the upper bound for the number of impacted filers. The upper bound estimate is based on the change in volume of federal income tax return filers that amended a 2017 or 2018 filing a nonzero entry on Form 4562 Line 14 (additional first year depreciation deduction). For purposes of the PRA, the reporting burden associated with § 1.1502–68(c)(4) will be reflected in the PRA submission associated with income tax returns in the Form 1120 series (for OMB control number, see chart at the end of this part II of this Special Analysis section). The estimate for the number of impacted filers with respect to the collection of information described in this part is 0 to 500 respondents. Partial data was available to estimate the upper bound for the number of impacted filers. The upper bound estimate is based on the observed volume of federal income tax return filers that are a subsidiary corporation of a parent, have a history of reporting depreciation on a Form 4562, and based on the parent’s consolidated federal tax return filing in 2017 and 2018, the subsidiary deconsolidated from the consolidated group. The IRS estimates the number of affected filers to be the following: TAX FORMS IMPACTED Number of respondents (estimated) Collection of information Section 1.168(k)–2(c) Election for components of larger self-constructed property for which the manufacture, construction, or production begins before September 28, 2017. Section 1.1502–68(c)(4) Election to not claim the additional first year depreciation deduction under § 1.1502–68(c)(1) or (2) for property owned by a subsidiary corporation of a consolidated group that is qualified property after the subsidiary corporation leaves the consolidated group. 0–41,775 0–500 Forms to which the information may be attached Form 1120 series, Form 1040 series, Form 1041 series, and Form 1065 series. Form 1120 series. jbell on DSKJLSW7X2PROD with RULES2 Source: IRS:RAAS:KDA (CDW 5–16–20 for § 1.168(k)–2(c) election and CDW 5–15–20 for § 1.1502–68(c)(4)(i) election). The current status of the PRA submissions related to the tax forms that will be revised as a result of the information collections in the section 168(k) regulations and the section 1502 regulations is provided in the accompanying table. As described earlier, 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 3.344 billion hours and total estimated monetized costs of $61.558 billion ($2019)), 1545–0074 (which represents a total estimated burden time, including all other related forms and schedules for individuals, of 1.721 billion hours and total estimated monetized costs of $33.267 billion ($2019)), 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 IRS is currently in the process of revising the methodology it uses to estimate burden and costs for OMB control number 1545–0092. It is VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 expected that future estimates under this OMB control number will include dollar estimates of annual burden costs to taxpayers calculated using this revised methodology. The overall burden estimates provided for the OMB control numbers below are aggregate amounts that relate to the entire package of forms associated with the applicable OMB control number and will in the future include, but not isolate, the estimated burden of the tax forms that will be created or revised as a result of the information collections in the regulations. These numbers are therefore unrelated to the future calculations needed to assess the burden imposed by the regulations. These burdens have been reported for other regulations that rely on the same OMB control numbers to conduct information collections under the PRA, and the Treasury Department and the IRS urge readers to recognize that these numbers are duplicates and to guard against over counting the burden that the regulations that cite these OMB control numbers imposed prior to the TCJA. 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, PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 including that of any new information collections, related to the requirements under the regulations. For the OMB control numbers discussed earlier, the Treasury Department and the IRS estimate PRA burdens on a taxpayertype basis rather than a provisionspecific basis. Those estimates would capture changes made by the TCJA 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 these final regulations, including estimates for how much time it would take to comply with the paperwork burdens described earlier for each relevant form and ways for the IRS to minimize the paperwork burden. In addition, when available, drafts of IRS forms are posted for comment at https:// apps.irs.gov/app/picklist/list/ draftTaxForms.htm. IRS forms are available at https://www.irs.gov/formsinstructions. Forms will not be finalized until after they have been approved by OMB under the PRA. E:\FR\FM\10NOR2.SGM 10NOR2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations Form Type of filer OMB No(s). Form 1040 ..................... Individual (NEW Model) 1545–0074 71751 Status Approved by OIRA through 1/31/2021. Link: https://www.federalregister.gov/documents/2019/09/30/2019-21066/proposed-collection-comment-request-forform-1040-form-1040nr-form-1040nr-ez-form-1040x-1040-sr-and Form 1041 ..................... Trusts and estates ........ 1545–0092 Approved by OIRA through 5/3/2022. Link: https://www.federalregister.gov/documents/2018/04/04/2018-06892/proposed-collection-comment-request-forform-1041 Forms 1065 and 1120 ... Business (NEW Model) 1545–0123 Approved by OIRA through 1/31/2021. Link: https://www.federalregister.gov/documents/2019/09/30/2019-21068/proposed-collection-comment-request-forforms-1065-1066-1120-1120-c-1120-f-1120-h-1120-nd-1120-s 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 burden in § 1.168(k)–2(c) generally affects taxpayers that elect to have the 100-percent additional first year depreciation deduction apply to components that are acquired or selfconstructed after September 27, 2017, of depreciable property for which the manufacture, construction, or production began before September 28, 2017. The election is made by attaching a statement to a Federal income tax Form Form Form Form Form return indicating that the taxpayer is making the election under § 1.168(k)– 2(c) and whether the taxpayer is making this election for all or some of the components described in § 1.168(k)– 2(c). The reporting burden in § 1.1502– 68(c)(4) generally affects taxpayers that elect to not claim the additional first year depreciation deduction for qualified property, and which § 1.1502– 68(c)(1) or (2) would otherwise require the taxpayer to claim such deduction when a member of a consolidated group acquires from another member property eligible for the additional first year depreciation deduction (or stock of a third member holding such property), and the acquirer member (and acquired member, if applicable) then leaves the consolidated group. To make the election, the corporation must attach a statement to its timely filed federal income tax return (including Gross receipts of $25 million or less extensions) for the taxable year that begins after the date on which it leaves the consolidated group. The statement must describe the transaction(s) to which § 1.1502–68(c)(1) or (2) would apply and state that the corporation elects not to claim the additional first year depreciation deduction for any property transferred in such transaction(s). For purposes of the PRA, the Treasury Department and the IRS estimate that there are 0 to 41,775 respondents of all sizes that are likely to be impacted by the collection of information in § 1.168(k)–2(c). 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(c) to be the following: Gross receipts over $25 million 1040 ....................................... 1065 ....................................... 1120 ....................................... 1120S .................................... 0–7,000 Respondents (estimated) ............................ 0–12,000 Respondents (estimated) .......................... 0–1,500 Respondents (estimated) ............................ 0–19,000 Respondents (estimated) .......................... 0–25 Respondents (estimated). 0–500 Respondents (estimated). 0–750 Respondents (estimated). 0–1,000 Respondents (estimated). Total ......................................... 0–39,500 Respondents (estimated) .......................... 0–2,275 Respondents (estimated). Source: IRS:RAAS:KDA (CDW 5–6–20). For purposes of the PRA, the Treasury Department and the IRS estimate that there are 0 to 500 respondents of all sizes that are likely to be impacted by the collection of information in § 1.1502–68(c)(4). Only a small number 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 Form Gross receipts of $25 million or less Form 1120 ....................................... 0–67 Respondents (estimated) ................................. Department and the IRS estimate the number of filers affected by § 1.1502– 68(c)(4)(i) to be the following: Gross receipts over $25 million 0–433 Respondents (estimated). jbell on DSKJLSW7X2PROD with RULES2 Source: IRS:RAAS:KDA (CDW 5–15–2020). 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 18:19 Nov 09, 2020 Jkt 253001 that §§ 1.168(k)–2(c) and 1.1502– 68(c)(4) will not have a significant economic impact on a substantial number of small entities. As a result of PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 all changes in these final regulations, the Treasury Department and the IRS estimate that individual taxpayers who have gross receipts of $25 million or less E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 71752 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations and experience an increase in burden will incur an average increase of 0 to 3 hours, and business taxpayers that have gross receipts of $25 million or less and experience an increase in burden will incur an average increase of 0 to 2 hours (Source: IRS:RAAS (8–28–2019)). Because the elections in §§ 1.168(k)–2(c) and 1.1502–68(c)(4) are one of several changes in these final regulations, the Treasury Department and the IRS expect the average increase in burden to be less for the collections of information in §§ 1.168(k)–2(c) and 1.1502–68(c)(4) than the average increase in burden in the preceding sentence. The Treasury Department and the IRS also note that many taxpayers with gross receipts of $25 million or less may experience a reduction in burden as a result of all changes in these final regulations. Additionally: (1) Many small businesses are not required to capitalize under section 263(a) the amount paid or incurred for the acquisition of depreciable tangible property that costs $5,000 or less if the business has an applicable financial statement or costs $500 or less if the business does not have an applicable financial statement, pursuant to § 1.263(a)–1(f)(1); (2) many small businesses are no longer required to capitalize under section 263A the costs to construct, build, manufacture, install, improve, raise, or grow depreciable property if their average annual gross receipts are $26,000,000 or less (2020 inflation adjusted amount); and (3) a small business that capitalizes costs of depreciable tangible property may deduct under section 179 up to $1,040,000 (2020 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 $2,590,000 (2020 inflation adjusted amount). Therefore, the Treasury Department and the IRS have determined that a substantial number of small entities will not be subject to these final regulations. Further, §§ 1.168(k)–2(c) and 1.1502– 68(c)(4) apply only if the taxpayer chooses to make an election. Finally, no comments regarding the economic impact of these regulations on small entities were received. Accordingly, the Secretary of the Treasury’s delegate certifies 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 the Office of Advocacy of the Small Business Administration for comment on its impact on small VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 business, and no comments were received from the Chief Counsel for the Office of Advocacy of the Small Business Administration. 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. Accordingly, the Treasury Department and IRS are adopting these final regulations with the delayed effective date generally prescribed under the Congressional Review Act. 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. PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 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 is amended by adding an entry for § 1.1502–68 in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * * * * * * Section 1.1502–68 also issued under 26 U.S.C. 1502. * * * * * Par. 2. Section 1.168(b)–1 is amended by: ■ 1. Revising paragraph (a)(5)(i)(A); ■ 2. In paragraph (b)(2)(i), removing ‘‘paragraphs (b)(2)(ii) and (iii)’’ and adding ‘‘paragraphs (b)(2)(ii) through (iv)’’ in its place; and ■ 3. Adding paragraph (b)(2)(iv). The addition and revision read as follows: ■ § 1.168(b)–1 Definitions. (a) * * * (5) * * * (i) * * * (A) For purposes of section 168(e)(6), the improvement is made by the taxpayer and is placed in service by the taxpayer after December 31, 2017; * * * * * (b) * * * (2) * * * (iv) Addition of language in paragraph (a)(5)(i)(A) of this section. The language ‘‘is made by the taxpayer and’’ in paragraph (a)(5)(i)(A) of this section applies to property placed in service by the taxpayer after December 31, 2017. ■ Par. 3. Section 1.168(k)–0 is amended under § 1.168(k)–2 by: ■ 1. Adding entries for (b)(3)(iii)(C), (b)(3)(v), (b)(5)(iii)(G), (b)(5)(v), (c), (c)(1) and (2), (c)(2)(i) through (iv), (c)(3), (c)(3)(i) through (iii), (c)(4), (c)(4)(i) and (ii), (c)(5), (c)(5)(i) and (ii), (c)(6), (c)(6)(i) and (ii), (c)(7), (c)(7)(i) and (ii), and (c)(8) and (c)(9); ■ 2. Revising the entry for (d)(3)(iv); ■ 3. Adding entries for (d)(4), (f)(7), and (g)(11); ■ 4. Revising the entries for (h)(2) and (3); and ■ 5. Adding entries for (h)(3)(i) through (iii). The additions and revisions read as follows: § 1.168(k)–0 * E:\FR\FM\10NOR2.SGM * Table of contents. * 10NOR2 * * Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations (iii) Bound by early application. § 1.168(k)–2 Additional first year depreciation deduction for property acquired and placed in service after September 27, 2017. * * * * * (b) * * * (3) * * * (iii) * * * (C) Special rules for a series of related transactions. * * * * * (v) Application to members of a consolidated group. * * * * * (5) * * * (iii) * * * (G) Acquisition of a trade or business or an entity. * * * * * (v) Determination of acquisition date for property not acquired pursuant to a written binding contract. * * * * * (c) Election for components of larger selfconstructed property for which the manufacture, construction, or production begins before September 28, 2017. (1) In general. (2) Eligible larger self-constructed property. (i) In general. (ii) Residential rental property or nonresidential real property. (iii) Beginning of manufacture, construction, or production. (iv) Exception. (3) Eligible components. (i) In general. (ii) Acquired components. (iii) Self-constructed components. (4) Special rules. (i) Installation costs. (ii) Property described in section 168(k)(2)(B). (5) Computation of additional first year depreciation deduction. (i) Election is made. (ii) Election is not made. (6) Time and manner for making election. (i) Time for making election. (ii) Manner of making election. (7) Revocation of election. (i) In general. (ii) Automatic 6-month extension. (8) Additional procedural guidance. (9) Examples. (d) * * * (3) * * * (iv) Determination of acquisition date for property not acquired pursuant to a written binding contract. (4) Examples. jbell on DSKJLSW7X2PROD with RULES2 * * * * * (f) * * * (7) Additional procedural guidance. (g) * * * (11) Mid-quarter convention. (h) * * * (2) Applicability of this section for prior taxable years. (3) Early application of this section and § 1.1502–68. (i) In general. (ii) Early application to certain transactions. VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 Par. 4. Section 1.168(k)–2 is amended by: ■ 1. At the end of paragraph (a)(1), removing the period and adding ‘‘, except as provided in paragraph (c) of this section.’’ in its place; ■ 2. In paragraph (a)(2)(iv)(B), removing ‘‘an asset’’ and adding ‘‘the asset’’ in its place; ■ 3. After the semicolon at the end of paragraph (a)(2)(iv)(C), adding the word ‘‘or’’; ■ 4. In paragraph (a)(2)(iv)(D), removing ‘‘; or’’ and adding a period in its place; ■ 5. Removing paragraph (a)(2)(iv)(E); ■ 6. Revising paragraphs (b)(2)(ii)(F) and (G); ■ 7. Adding paragraphs (b)(2)(iii)(F) through (I); ■ 8. Revising the second and third sentences in paragraph (b)(3)(iii)(B)(1); ■ 9. Adding paragraphs (b)(3)(iii)(B)(4), (b)(3)(iii)(C), (b)(3)(v), and (b)(3)(vii)(Y) through (OO); ■ 10. Revising the last sentence in paragraph (b)(5)(ii)(A); ■ 11. In the first sentence in paragraph (b)(5)(iii)(A), removing the word ‘‘A’’ at the beginning of the sentence and adding ‘‘Except as provided in paragraph (b)(5)(iii)(G) of this section, a’’ in its place; ■ 12. In the first sentence in paragraph (b)(5)(iii)(B), removing the word ‘‘A’’ at the beginning of the sentence and adding ‘‘Except as provided in paragraph (b)(5)(iii)(G) of this section, a’’ in its place; ■ 13. Adding paragraph (b)(5)(iii)(G); ■ 14. In the fourth sentence in paragraph (b)(5)(iv)(C)(1), removing the period at the end of the sentence and adding ‘‘, except as provided in paragraph (c) of this section.’’ in its place; ■ 15. In the fourth sentence in paragraph (b)(5)(iv)(C)(2), removing the period at the end of the sentence and adding ‘‘, except as provided in paragraph (c) of this section.’’ in its place; ■ 16. Adding paragraph (b)(5)(v); ■ 17. Revising the second sentence in paragraph (b)(5)(viii) introductory text; ■ 18. Adding paragraph (c); ■ 19. Redesignating paragraph (d)(3)(iv) as paragraph (d)(4) and adding new paragraph (d)(3)(iv); ■ 20. Adding three sentences at the end of paragraph (e)(1)(iii); ■ 21. In paragraph (f)(1)(ii)(D), removing ‘‘(a)(5)(ii),’’ and adding ‘‘(a)(5)(ii) (acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer after September 27, 2017, and before January 1, 2018),’’ in its place; ■ 22. In paragraph (f)(1)(ii)(G), removing the word ‘‘A’’ at the beginning of the ■ PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 71753 sentence and adding the word ‘‘Each’’ in its place; ■ 23. Adding paragraph (f)(7); ■ 24. In paragraph (g)(1)(i): ■ i. In the first sentence, after ‘‘paragraphs (g)(1)(ii) and (iii) of this section’’ adding ‘‘and by the application of paragraph (b)(3)(iii)(B)(4) of this section’’; and ■ ii. In the last sentence, removing the period at the end of the sentence and adding ‘‘, except as otherwise provided by the application of paragraph (b)(3)(iii)(B) of this section.’’ in its place; ■ 25. Adding paragraph (g)(11); and ■ 26. Revising paragraphs (h)(1), (2), and (3). The additions and revisions read as follows: § 1.168(k)–2 Additional first year depreciation deduction for property acquired and placed in service after September 27, 2017. * * * * * (b) * * * (2) * * * (ii) * * * (F) Primarily used in a trade or business described in section 163(j)(7)(A)(iv) and §§ 1.163(j)– 1(b)(15)(i) and 1.163(j)– 10(c)(3)(iii)(C)(3), and placed in service by the taxpayer in any taxable year beginning after December 31, 2017. For purposes of section 168(k)(9)(A) and this paragraph (b)(2)(ii)(F), the term primarily used has the same meaning as that term is used in § 1.167(a)– 11(b)(4)(iii)(b) and (e)(3)(iii) for classifying property. This paragraph (b)(2)(ii)(F) does not apply to property that is leased to a lessee’s trade or business described in section 163(j)(7)(A)(iv) and §§ 1.163(j)– 1(b)(15)(i) and 1.163(j)– 10(c)(3)(iii)(C)(3), by a lessor’s trade or business that is not described in section 163(j)(7)(A)(iv) and §§ 1.163(j)– 1(b)(15)(i) and 1.163(j)–10(c)(3)(iii)(C)(3) for the taxable year; or (G) Used in a trade or business that has had floor plan financing indebtedness, as defined in section 163(j)(9)(B) and § 1.163(j)–1(b)(18), if the floor plan financing interest expense, as defined in section 163(j)(9)(A) and § 1.163(j)–1(b)(19), 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. Solely for purposes of section 168(k)(9)(B) and this paragraph (b)(2)(ii)(G), floor plan financing interest expense is taken into account for the taxable year by a trade or business that has had floor plan financing E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 71754 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations indebtedness only if the business interest expense, as defined in section 163(j)(5) and § 1.163(j)–1(b)(3), of the trade or business for the taxable year (which includes floor plan financing interest expense) exceeds the sum of the amounts calculated under section 163(j)(1)(A) and (B) for the trade or business for the taxable year. If the trade or business has taken floor plan financing interest expense into account pursuant to this paragraph (b)(2)(ii)(G) for a taxable year, this paragraph (b)(2)(ii)(G) applies to any property placed in service by that trade or business in that taxable year. This paragraph (b)(2)(ii)(G) does not apply to property that is leased to a lessee’s trade or business that has had floor plan financing indebtedness, by a lessor’s trade or business that has not had floor plan financing indebtedness during the taxable year or that has had floor plan financing indebtedness but did not take into account floor plan financing interest expense for the taxable year pursuant to this paragraph (b)(2)(ii)(G). (iii) * * * (F) Example 6. In 2019, a financial institution buys new equipment for $1 million and then leases this equipment to a lessee that primarily uses the equipment in a trade or business described in section 163(j)(7)(A)(iv) and §§ 1.163(j)–1(b)(15)(i) and 1.163(j)– 10(c)(3)(iii)(C)(3). The financial institution is not described in section 163(j)(7)(A)(iv) and §§ 1.163(j)– 1(b)(15)(i) and § 1.163(j)– 10(c)(3)(iii)(C)(3). As a result, paragraph (b)(2)(ii)(F) of this section does not apply to this new equipment. Assuming all other requirements are met, the financial institution’s purchase price of $1 million for the new equipment qualifies for the additional first year depreciation deduction under this section. (G) Example 7. During its taxable year beginning in 2020, F, a corporation that is an automobile dealer, buys new computers for $50,000 for use in its trade or business of selling automobiles. For purposes of section 163(j), F has the following for 2020: $700 of adjusted taxable income, $40 of business interest income, $400 of business interest expense (which includes $100 of floor plan financing interest expense). The sum of the amounts calculated under section 163(j)(1)(A) and (B) for F for 2020 is $390 ($40 + ($700 × 50 percent)). F’s business interest expense, which includes floor plan financing interest expense, for 2020 is $400. As a result, F’s floor plan financing interest expense is taken into account by F for 2020 pursuant to paragraph (b)(2)(ii)(G) of this section. Accordingly, F’s purchase VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 price of $50,000 for the computers does not qualify for the additional first year depreciation deduction under this section. (H) Example 8. The facts are the same as in Example 7 in paragraph (b)(2)(iii)(G) of this section, except F buys new computers for $30,000 for use in its trade or business of selling automobiles and, for purposes of section 163(j), F has $1,300 of adjusted taxable income. The sum of the amounts calculated under section 163(j)(1)(A) and (B) for F for 2020 is $690 ($40 + ($1,300 × 50 percent)). F’s business interest expense, which includes floor plan financing interest expense, for 2020 is $400. As a result, F’s floor plan financing interest expense is not taken into account by F for 2020 pursuant to paragraph (b)(2)(ii)(G) of this section. Assuming all other requirements are met, F’s purchase price of $30,000 for the computers qualifies for the additional first year depreciation deduction under this section. (I) Example 9. (1) G, a calendar-year taxpayer, owns an office building for use in its trade or business and G placed in service such building in 2000. In November 2018, G made and placed in service an improvement to the inside of such building at a cost of $100,000. In January 2019, G entered into a written contract with H for H to construct an improvement to the inside of the building. In March 2019, H completed construction of the improvement at a cost of $750,000 and G placed in service such improvement. Both improvements to the building are section 1250 property and are not described in § 1.168(b)–1(a)(5)(ii). (2) Both the improvement to the office building made by G in November 2018 and the improvement to the office building that was constructed by H for G in 2019 are improvements made by G under § 1.168(b)–1(a)(5)(i)(A). Further, each improvement is made to the inside of the office building, is section 1250 property, and is not described in § 1.168(b)–1(a)(5)(ii). As a result, each improvement meets the definition of qualified improvement property in section 168(e)(6) and § 1.168(b)– 1(a)(5)(i)(A) and (a)(5)(ii). Accordingly, each improvement is 15-year property under section 168(e)(3) and is described in § 1.168(k)–2(b)(2)(i)(A). Assuming all other requirements of this section are met, each improvement made by G qualifies for the additional first year depreciation deduction for G under this section. (3) * * * (iii) * * * (B) * * * PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 (1) * * * To determine if the taxpayer or a predecessor had a depreciable interest in the property at any time prior to the acquisition, only the five calendar years immediately prior to the current calendar year in which the property is placed in service by the taxpayer, and the portion of such current calendar year before the placed-in-service date of the property without taking into account the applicable convention, are taken into account (lookback period). If either the taxpayer or a predecessor, or both, have not been in existence for the entire lookback period, only the portion of the lookback period during which the taxpayer or a predecessor, or both, as applicable, have been in existence is taken into account to determine if the taxpayer or a predecessor had a depreciable interest in the property at any time prior to the acquisition. * * * (4) De minimis use of property. If a taxpayer acquires and places in service property, the taxpayer or a predecessor did not previously have a depreciable interest in the property, the taxpayer disposes of the property to an unrelated party within 90 calendar days after the date the property was originally placed in service by the taxpayer, without taking into account the applicable convention, and the taxpayer reacquires and again places in service the property, then the taxpayer’s depreciable interest in the property during that 90-day period is not taken into account for determining whether the property was used by the taxpayer or a predecessor at any time prior to its reacquisition by the taxpayer under paragraphs (b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of this section. If the taxpayer originally acquired the property before September 28, 2017, as determined under § 1.168(k)–1(b)(4), and the taxpayer reacquires and again places in service the property during the same taxable year the taxpayer disposed of the property to the unrelated party, then this paragraph (b)(3)(iii)(B)(4) does not apply. For purposes of this paragraph (b)(3)(iii)(B)(4), an unrelated party is a person not described in section 179(d)(2)(A) or (B), and § 1.179– 4(c)(1)(ii) or (iii) or (c)(2). (C) Special rules for a series of related transactions—(1) In general. Solely for purposes of paragraph (b)(3)(iii) of this section, each transferee in a series of related transactions tests its relationship under section 179(d)(2)(A) or (B) with the transferor from which the transferee directly acquires the depreciable property (immediate transferor) and with the original transferor of the depreciable property in the series. The transferee is treated as related to the immediate transferor or the original E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations transferor if the relationship exists either when the transferee acquires, or immediately before the first transfer of, the depreciable property in the series. A series of related transactions may include, for example, a transfer of partnership assets followed by a transfer of an interest in the partnership that owned the assets; or a disposition of property and a disposition, directly or indirectly, of the transferor or transferee of the property. For special rules that may apply when the transferor and transferee of the property are members of a consolidated group, as defined in § 1.1502–1(h), see § 1.1502–68. (2) Special rules—(i) Property placed in service and disposed of in same taxable year or property not placed in service. Any party in a series of related transactions that is neither the original transferor nor the ultimate transferee is disregarded (disregarded party) for purposes of testing the relationships under paragraph (b)(3)(iii)(C)(1) of this section if the party places in service and disposes of the depreciable property subject to the series, other than in a transaction described in paragraph (g)(1)(iii) of this section, during the party’s same taxable year, or if the party does not place in service the depreciable property subject to the series for use in the party’s trade or business or production of income. In either case, the party to which the disregarded party disposed of the depreciable property tests its relationship with the party from which the disregarded party acquired the depreciable property and with the original transferor of the depreciable property in the series. If the series has consecutive disregarded parties, the party to which the last disregarded party disposed of the depreciable property tests its relationship with the party from which the first disregarded party acquired the depreciable property and with the original transferor of the depreciable property in the series. The rules for testing the relationships in paragraph (b)(3)(iii)(C)(1) of this section continue to apply for the other transactions in the series. (ii) All section 168(i)(7) transactions. This paragraph (b)(3)(iii)(C) does not apply if all transactions in a series of related transactions are described in paragraph (g)(1)(iii) of this section (section 168(i)(7) transactions in which property is transferred in the same taxable year that the property is placed in service by the transferor). (iii) One or more section 168(i)(7) transactions. Any step in a series of related transactions that is neither the original step nor the ultimate step is disregarded (disregarded step) for purposes of testing the relationships VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 under paragraph (b)(3)(iii)(C)(1) of this section if the step is a transaction described in paragraph (g)(1)(iii) of this section. In this case, the relationship is not tested between the transferor and transferee of that transaction. Instead, the relationship is tested between the transferor in the disregarded step and the party to which the transferee in the disregarded step disposed of the depreciable property, the transferee in the disregarded step and the party to which the transferee in the disregarded step disposed of the depreciable property, and the original transferor of the depreciable property in the series and the party to which the transferee in the disregarded step disposed of the depreciable property. If the series has consecutive disregarded steps, the relationship is tested between the transferor in the first disregarded step and the party to which the transferee in the last disregarded step disposed of the depreciable property, the transferee in the last disregarded step and the party to which the transferee in the last disregarded step disposed of the depreciable property, and the original transferor of the depreciable property in the series and the party to which the transferee in the last disregarded step disposed of the depreciable property. The rules for testing the relationships in paragraph (b)(3)(iii)(C)(1) of this section continue to apply for the other transactions in the series. (iv) Syndication transaction. This paragraph (b)(3)(iii)(C) does not apply to a syndication transaction described in paragraph (b)(3)(vi) of this section. (v) Certain relationships disregarded. If a party acquires depreciable property in a series of related transactions in which the party acquires stock, meeting the requirements of section 1504(a)(2), of a corporation in a fully taxable transaction followed by a liquidation of the acquired corporation under section 331, any relationship created as part of such series of related transactions is disregarded in determining whether any party is related to such acquired corporation for purposes of testing the relationships under paragraph (b)(3)(iii)(C)(1) of this section. (vi) Transferors that cease to exist for Federal tax purposes. Any transferor in a series of related transactions that ceases to exist for Federal tax purposes during the series is deemed, for purposes of testing the relationships under paragraph (b)(3)(iii)(C)(1) of this section, to be in existence at the time of any transfer in the series. (vii) Newly created party. If a transferee in a series of related transactions acquires depreciable property from a transferor that was not PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 71755 in existence immediately prior to the first transfer of such property in such series (new transferor), the transferee tests its relationship with the party from which the new transferor acquired such property and with the original transferor of the depreciable property in the series for purposes of paragraph (b)(3)(iii)(C)(1) of this section. If the series has consecutive new transferors, the party to which the last new transferor disposed of the depreciable property tests its relationship with the party from which the first new transferor acquired the depreciable property and with the original transferor of the depreciable property in the series. The rules for testing the relationships in paragraph (b)(3)(iii)(C)(1) of this section continue to apply for the other transactions in the series. (viii) Application of paragraph (g)(1) of this section. Paragraph (g)(1) of this section applies to each step in a series of related transactions. * * * * * (v) Application to members of a consolidated group. For rules applicable to the acquisition of depreciable property by a member of a consolidated group, see § 1.1502–68. * * * * * (vii) * * * (Y) Example 25. (1) JL is a fiscal year taxpayer with a taxable year ending June 30. On April 22, 2020, JL acquires and places in service a new machine for use in its trade or business. On May 1, 2022, JL sells this machine to JM, an unrelated party, for use in JM’s trade or business. JM is a fiscal year taxpayer with a taxable year ending March 31. On February 1, 2023, JL buys the machine from JM and places the machine in service. JL uses the machine in its trade or business for the remainder of its taxable year ending June 30, 2023. (2) JL’s acquisition of the machine on April 22, 2020, satisfies the original use requirement in paragraph (b)(3)(ii) of this section. Assuming all other requirements are met, JL’s purchase price of the machine qualifies for the additional first year depreciation deduction for JL for the taxable year ending June 30, 2020, under this section. (3) JM placed in service the machine on May 1, 2022, and disposed of it on February 1, 2023. As a result, JM placed in service and disposed of the machine during the same taxable year (JM’s taxable year beginning April 1, 2022, and ending March 31, 2023). Accordingly, JM’s acquisition of the machine on May 1, 2022, does not qualify for the additional first year E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 71756 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations depreciation deduction pursuant to paragraph (g)(1)(i) of this section. (4) Pursuant to paragraph (b)(3)(iii)(B)(1) of this section, the lookback period is calendar years 2018 through 2022 and January 1, 2023, through January 31, 2023, to determine if JL had a depreciable interest in the machine when JL reacquired it on February 1, 2023. As a result, JL’s depreciable interest in the machine during the period April 22, 2020, to April 30, 2022, is taken into account for determining whether the machine was used by JL or a predecessor at any time prior to its reacquisition by JL on February 1, 2023. Accordingly, the reacquisition of the machine by JL on February 1, 2023, does not qualify for the additional first year depreciation deduction. (Z) Example 26. (1) EF has owned and had a depreciable interest in Property since 2012. On January 1, 2016, EF contributes assets (not including Property) to existing Partnership T in a transaction described in section 721, in exchange for a partnership interest in Partnership T, and Partnership T placed in service these assets for use in its trade or business. On July 1, 2016, EF sells Property to EG, a party unrelated to either EF or Partnership T. On April 1, 2018, Partnership T buys Property from EG and places it in service for use in its trade or business. (2) EF is not Partnership T’s predecessor with respect to Property within the meaning of paragraph (a)(2)(iv)(B) of this section. Pursuant to paragraph (b)(3)(iii)(B)(1) of this section, the lookback period is 2013–2017, plus January through March 2018, to determine if Partnership T had a depreciable interest in Property that Partnership T acquired on April 1, 2018. EF need not be examined in the lookback period to see if EF had a depreciable interest in Property, because EF is not Partnership T’s predecessor. Because Partnership T did not have a depreciable interest in Property in the lookback period prior to its acquisition of Property on April 1, 2018, Partnership T’s acquisition of Property on April 1, 2018, satisfies the used property acquisition requirement of paragraph (b)(3)(iii)(B)(1) of this section. Assuming all other requirements of this section are satisfied, Partnership T’s purchase price of Property qualifies for the additional first year depreciation deduction under this section. (AA) Example 27. (1) The facts are the same as in Example 26 of paragraph (b)(3)(vii)(Z)(1) of this section, except that on January 1, 2016, EF’s contribution of assets to Partnership T VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 includes Property. On July 1, 2016, Partnership T sells Property to EG. (2) Partnership T’s acquisition of Property on January 1, 2016, does not satisfy the original use requirement of § 1.168(k)–1(b)(3) and is not eligible for the additional first year depreciation deduction under section 168(k) as in effect prior to the enactment of the Act. (3) With respect to Partnership T’s acquisition of Property on April 1, 2018, EF is Partnership T’s predecessor with respect to Property within the meaning of paragraph (a)(2)(iv)(B) of this section. Pursuant to paragraph (b)(3)(iii)(B)(1) of this section, the lookback period is 2013–2017, plus January through March 2018, to determine if EF or Partnership T had a depreciable interest in Property that Partnership T acquired on April 1, 2018. Because EF had a depreciable interest in Property from 2013 to 2015 and Partnership T had a depreciable interest in Property from January through June 2016, Partnership T’s acquisition of Property on April 1, 2018, does not satisfy the used property acquisition requirement of paragraph (b)(3)(iii)(B)(1) of this section and is not eligible for the additional first year depreciation deduction. (BB) Example 28. (1) X Corporation has owned and had a depreciable interest in Property since 2012. On January 1, 2015, X Corporation sold Property to Q, an unrelated party. Y Corporation is formed July 1, 2015. On January 1, 2016, Y Corporation merges into X Corporation in a transaction described in section 368(a)(1)(A). On April 1, 2018, X Corporation buys Property from Q and places it in service for use in its trade or business. (2) Pursuant to paragraph (a)(2)(iv)(A) of this section, Y Corporation is X Corporation’s predecessor. Pursuant to paragraph (b)(3)(iii)(B)(1) of this section, the lookback period is 2013–2017, plus January through March 2018, to determine if Y Corporation or X Corporation had a depreciable interest in Property that X Corporation acquired on April 1, 2018. Y Corporation did not have a depreciable interest in Property at any time during the lookback period. Because X Corporation had a depreciable interest in Property from 2013 through 2014, X Corporation’s acquisition of Property on April 1, 2018, does not satisfy the used property acquisition requirement of paragraph (b)(3)(iii)(B)(1) of this section and is not eligible for the additional first year depreciation deduction. (CC) Example 29. (1) Y Corporation has owned and had a depreciable interest in Property since 2012. On January 1, 2015, Y Corporation sells Property to Q, an unrelated party. X PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 Corporation is formed on July 1, 2015. On January 1, 2016, Y Corporation merges into X Corporation in a transaction described in section 368(a)(1)(A). On April 1, 2018, X Corporation buys Property from Q and places it in service for use in its trade or business. (2) Pursuant to paragraph (a)(2)(iv)(A) of this section, Y Corporation is X Corporation’s predecessor. Pursuant to paragraph (b)(3)(iii)(B)(1) of this section, the lookback period is 2013–2017, plus January through March 2018, to determine if X Corporation or Y Corporation had a depreciable interest in Property that X Corporation acquired on April 1, 2018. Because Y Corporation had a depreciable interest in Property from 2013 through 2014, X Corporation’s acquisition of Property on April 1, 2018, does not satisfy the used property acquisition requirement of paragraph (b)(3)(iii)(B)(1) of this section and is not eligible for the additional first year depreciation deduction. (DD) Example 30. (1) On September 5, 2017, Y, a calendar-year taxpayer, acquires and places in service a new machine (Machine #1), and begins using Machine #1 in its manufacturing trade or business. On November 1, 2017, Y sells Machine #1 to Z, then Z leases Machine #1 back to Y for 4 years, and Y continues to use Machine #1 in its manufacturing trade or business. The lease agreement contains a purchase option provision allowing Y to buy Machine #1 at the end of the lease term. On November 1, 2021, Y exercises the purchase option in the lease agreement and buys Machine #1 from Z. The lease between Y and Z for Machine #1 is a true lease for Federal tax purposes. (2) Because Y, a calendar-year taxpayer, placed in service and disposed of Machine #1 during 2017, Machine #1 is not eligible for the additional first year depreciation deduction for Y pursuant to § 1.168(k)–1(f)(1)(i). (3) The use of Machine #1 by Y prevents Z from satisfying the original use requirement of paragraph (b)(3)(ii) of this section. However, Z’s acquisition of Machine #1 satisfies the used property acquisition requirements of paragraph (b)(3)(iii) of this section. Assuming all other requirements are met, Z’s purchase price of Machine #1 qualifies for the additional first year depreciation deduction for Z under this section. (4) During 2017, Y sold Machine #1 within 90 calendar days of placing Machine #1 in service originally on September 5, 2017. Pursuant to paragraph (b)(3)(iii)(B)(4) of this section, Y’s depreciable interest in Machine #1 during that 90-day period is not taken E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations into account for determining whether Machine #1 was used by Y or a predecessor at any time prior to its reacquisition by Y on November 1, 2021. Accordingly, assuming all other requirements are met, Y’s purchase price of Machine #1 on November 1, 2021, qualifies for the additional first year depreciation deduction for Y under this section. (EE) Example 31. (1) On October 15, 2019, FA, a calendar-year taxpayer, buys and places in service a new machine for use in its trade or business. On January 10, 2020, FA sells this machine to FB for use in FB’s trade or business. FB is a calendar-year taxpayer and is not related to FA. On March 30, 2020, FA buys the machine from FB and places the machine in service. FA uses the machine in its trade or business for the remainder of 2020. (2) FA’s acquisition of the machine on October 15, 2019, satisfies the original use requirement in paragraph (b)(3)(ii) of this section. Assuming all other requirements are met, FA’s purchase price of the machine qualifies for the additional first year depreciation deduction for FA for the 2019 taxable year under this section. (3) Because FB placed in service the machine on January 10, 2020, and disposed of it on March 30, 2020, FB’s acquisition of the machine on January 10, 2020, does not qualify for the additional first year depreciation deduction pursuant to § 1.168(k)– 2(g)(1)(i). (4) FA sold the machine to FB in 2020 and within 90 calendar days of placing the machine in service originally on October 15, 2019. Pursuant to paragraph (b)(3)(iii)(B)(4) of this section, FA’s depreciable interest in the machine during that 90-day period is not taken into account for determining whether the machine was used by FA or a predecessor at any time prior to its reacquisition by FA on March 30, 2020. Accordingly, assuming all other requirements are met, FA’s purchase price of the machine on March 30, 2020, qualifies for the additional first year depreciation deduction for FA for the 2020 taxable year under this section. (FF) Example 32. (1) The facts are the same as in Example 31 of paragraph (b)(3)(vii)(EE)(1) of this section, except that on November 1, 2020, FB buys the machine from FA and places the machine in service. FB uses the machine in its trade or business for the remainder of 2020. (2) Because FA placed in service the machine on March 30, 2020, and disposed of it on November 1, 2020, FA’s reacquisition of the machine on March 30, 2020, does not qualify for the VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 additional first year depreciation deduction pursuant to paragraph (g)(1)(i) of this section. (3) During 2020, FB sold the machine to FA within 90 calendar days of placing the machine in service originally on January 10, 2020. After FB reacquired the machine on November 1, 2020, FB did not dispose of the property during the remainder of 2020. Pursuant to paragraph (b)(3)(iii)(B)(4) of this section, FB’s depreciable interest in the machine during that 90-day period is not taken into account for determining whether the machine was used by FB or a predecessor at any time prior to its reacquisition by FB on November 1, 2020. Accordingly, assuming all other requirements are met, FB’s purchase price of the machine on November 1, 2020, qualifies for the additional first year depreciation deduction for FB under this section. (GG) Example 33. (1) The facts are the same as in Example 32 of paragraph (b)(3)(vii)(FF)(1) of this section, except FB sells the machine to FC, an unrelated party, on December 31, 2020. (2) Because FB placed in service the machine on November 1, 2020, and disposed of it on December 31, 2020, FB’s reacquisition of the machine on November 1, 2020, does not qualify for the additional first year depreciation deduction pursuant to paragraph (g)(1)(i) of this section. (3) FC’s acquisition of the machine on December 31, 2020, satisfies the used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming all other requirements of this section are satisfied, FC’s purchase price of the machine qualifies for the additional first year depreciation deduction under this section. (HH) Example 34. (1) In August 2017, FD, a calendar-year taxpayer, entered into a written binding contract with X for X to manufacture a machine for FD for use in its trade or business. Before September 28, 2017, FD incurred more than 10 percent of the total cost of the machine. On February 8, 2020, X delivered the machine to FD and FD placed in service the machine. The machine is property described in section 168(k)(2)(B) as in effect on the day before the date of the enactment of the Act. FD’s entire unadjusted depreciable basis of the machine is attributable to the machine’s manufacture before January 1, 2020. FD uses the safe harbor test in § 1.168(k)– 1(b)(4)(iii)(B)(2) to determine when manufacturing of the machine began. On March 26, 2020, FD sells the machine to FE for use in FE’s trade or business. FE is a calendar-year taxpayer PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 71757 and is not related to FD. On November 7, 2020, FD buys the machine from FE and places in service the machine. FD uses the machine in its trade or business for the remainder of 2020. (2) Because FD incurred more than 10 percent of the cost of the machine before September 28, 2017, and FD uses the safe harbor test in § 1.168(k)– 1(b)(4)(iii)(B)(2) to determine when the manufacturing of the machine began, FD acquired the machine before September 28, 2017. If FD had not disposed of the machine on March 26, 2020, the cost of the machine would have qualified for the 30-percent additional first year depreciation deduction pursuant to section 168(k)(8), assuming all requirements are met under section 168(k)(2) as in effect on the day before the date of the enactment of the Act. However, because FD placed in service the machine on February 8, 2020, and disposed of it on March 26, 2020, FD’s acquisition of the machine on February 8, 2020, does not qualify for the additional first year depreciation deduction pursuant to § 1.168(k)– 1(f)(1)(i). (3) Because FE placed in service the machine on March 26, 2020, and disposed of it on November 7, 2020, FE’s acquisition of the machine on March 26, 2020, does not qualify for the additional first year depreciation deduction pursuant to paragraph (g)(1)(i) of this section. (4) During 2020, FD sold the machine to FE within 90 calendar days of placing the machine in service originally on February 8, 2020. After FD reacquired the machine on November 7, 2020, FD did not dispose of the machine during the remainder of 2020. FD originally acquired this machine before September 28, 2017. As a result, paragraph (b)(3)(iii)(B)(4) of this section does not apply. Pursuant to paragraph (b)(3)(iii)(B)(1) of this section, the lookback period is 2015 through 2019 and January 1, 2020, through November 6, 2020, to determine if FD had a depreciable interest in the machine when FD reacquired it on November 7, 2020. As a result, FD’s depreciable interest in the machine during the period February 8, 2020, to March 26, 2020, is taken into account for determining whether the machine was used by FD or a predecessor at any time prior to its reacquisition by FD on November 7, 2020. Accordingly, the reacquisition of the machine by FD on November 7, 2020, does not qualify for the additional first year depreciation deduction. (II) Example 35. (1) In a series of related transactions, a father sells a machine to an unrelated individual on E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 71758 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations December 15, 2019, who sells the machine to the father’s daughter on January 2, 2020, for use in the daughter’s trade or business. Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a transferee tests its relationship with the transferor from which the transferee directly acquires the depreciable property, and with the original transferor of the depreciable property in the series. The relationship is tested when the transferee acquires, and immediately before the first transfer of, the depreciable property in the series. As a result, the following relationships are tested under section 179(d)(2)(A): The unrelated individual tests its relationship to the father as of December 15, 2019; and the daughter tests her relationship to the unrelated individual as of January 2, 2020, and December 15, 2019, and to the father as of January 2, 2020, and December 15, 2019. (2) Because the individual is not related to the father within the meaning of section 179(d)(2)(A) and § 1.179– 4(c)(1)(ii) as of December 15, 2019, the individual’s acquisition of the machine satisfies the used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming the unrelated individual placed the machine in service for use in its trade or business in 2019 and all other requirements of this section are satisfied, the unrelated individual’s purchase price of the machine qualifies for the additional first year depreciation deduction under this section. (3) The individual and the daughter are not related parties within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(1)(ii) as of January 2, 2020, or December 15, 2019. However, the father and his daughter are related parties within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(1)(ii) as of January 2, 2020, or December 15, 2019. Accordingly, the daughter’s acquisition of the machine does not satisfy the used property acquisition requirements of paragraph (b)(3)(iii) of this section and is not eligible for the additional first year depreciation deduction. (JJ) Example 36. (1) The facts are the same as in Example 35 of paragraph (b)(3)(vii)(II)(1) of this section, except that instead of selling to an unrelated individual, the father sells the machine to his son on December 15, 2019, who sells the machine to his sister (the father’s daughter) on January 2, 2020. Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a transferee tests its relationship with the transferor from which the transferee directly acquires the depreciable property, and with the original transferor of the depreciable VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 property in the series. The relationship is tested when the transferee acquires, and immediately before the first transfer of, the depreciable property in the series. As a result, the following relationships are tested under section 179(d)(2)(A): The son tests his relationship to the father as of December 15, 2019; and the daughter tests her relationship to her brother as of January 2, 2020, and December 15, 2019, and to the father as of January 2, 2020, and December 15, 2019. (2) Because the father and his son are related parties within the meaning of section 179(d)(2)(A) and § 1.179– 4(c)(1)(ii) as of December 15, 2019, the son’s acquisition of the machine does not satisfy the used property acquisition requirements of paragraph (b)(3)(iii) of this section. Accordingly, the son’s acquisition of the machine is not eligible for the additional first year depreciation deduction. (3) The son and his sister are not related parties within the meaning of section 179(d)(2)(A) and § 1.179– 4(c)(1)(ii) as of January 2, 2020, or December 15, 2019. However, the father and his daughter are related parties within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(1)(ii) as of January 2, 2020, or December 15, 2019. Accordingly, the daughter’s acquisition of the machine does not satisfy the used property acquisition requirements of paragraph (b)(3)(iii) of this section and is not eligible for the additional first year depreciation deduction. (KK) Example 37. (1) In June 2018, BA, an individual, bought and placed in service a new machine from an unrelated party for use in its trade or business. In a series of related transactions, BA sells the machine to BB and BB places it in service on October 1, 2019, BB sells the machine to BC and BC places it in service on December 1, 2019, and BC sells the machine to BD and BD places it in service on January 2, 2020. BA and BB are related parties within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(1)(ii). BB and BC are related parties within the meaning of section 179(d)(2)(B) and § 1.179–4(c)(1)(iii). BC and BD are not related parties within the meaning of section 179(d)(2)(A) and § 1.179– 4(c)(1)(ii), or section 179(d)(2)(B) and § 1.179–4(c)(1)(iii). BA is not related to BC or to BD within the meaning of section 179(d)(2)(A) and § 1.179– 4(c)(1)(ii). All parties are calendar-year taxpayers. (2) BA’s purchase of the machine in June 2018 satisfies the original use requirement of paragraph (b)(3)(ii) of this section and, assuming all other requirements of this section are met, PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 BA’s purchase price of the machine qualifies for the additional first year depreciation deduction under this section. (3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a transferee tests its relationship with the transferor from which the transferee directly acquires the depreciable property, and with the original transferor of the depreciable property in the series. The relationship is tested when the transferee acquires, and immediately before the first transfer of, the depreciable property in the series. However, because BB placed in service and disposed of the machine in the same taxable year, BB is disregarded pursuant to paragraph (b)(3)(iii)(C)(2)(i) of this section. As a result, the following relationships are tested under section 179(d)(2)(A) and (B): BC tests its relationship to BA as of December 1, 2019, and October 1, 2019; and BD tests its relationship to BC as of January 2, 2020, and October 1, 2019, and to BA as of January 2, 2020, and October 1, 2020. (4) Because BA is not related to BC within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(1)(ii) as of December 1, 2019, or October 1, 2019, BC’s acquisition of the machine satisfies the used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming all other requirements of this section are satisfied, BC’s purchase price of the machine qualifies for the additional first year depreciation deduction under this section. (5) Because BC is not related to BD and BA is not related to BD within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(1)(ii), or section 179(d)(2)(B) and § 1.179–4(c)(1)(iii) as of January 2, 2020, or October 1, 2019, BD’s acquisition of the machine satisfies the used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming all other requirements of this section are satisfied, BD’s purchase price of the machine qualifies for the additional first year depreciation deduction under this section. (LL) Example 38. (1) In June 2018, CA, an individual, bought and placed in service a new machine from an unrelated party for use in his trade or business. In a series of related transactions, CA sells the machine to CB and CB places it in service on September 1, 2019, CB transfers the machine to CC in a transaction described in paragraph (g)(1)(iii) of this section and CC places it in service on November 1, 2019, and CC sells the E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations machine to CD and CD places it in service on January 2, 2020. CA and CB are not related parties within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(1)(ii). CB and CC are related parties within the meaning of section 179(d)(2)(B) and § 1.179–4(c)(1)(iii). CB and CD are related parties within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(1)(ii), or section 179(d)(2)(B) and § 1.179–4(c)(1)(iii). CC and CD are not related parties within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(1)(ii), or section 179(d)(2)(B) and § 1.179–4(c)(1)(iii). CA is not related to CC or to CD within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(1)(ii). All parties are calendar-year taxpayers. (2) CA’s purchase of the machine in June 2018 satisfies the original use requirement of paragraph (b)(3)(ii) of this section and, assuming all other requirements of this section are met, CA’s purchase price of the machine qualifies for the additional first year depreciation deduction under this section. (3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a transferee tests its relationship with the transferor from which the transferee directly acquires the depreciable property, and with the original transferor of the depreciable property in the series. The relationship is tested when the transferee acquires, and immediately before the first transfer of, the depreciable property in the series. However, because CB placed in service and transferred the machine in the same taxable year in a transaction described in paragraph (g)(1)(iii) of this section, the section 168(i)(7) transaction between CB and CC is disregarded pursuant to paragraph (b)(3)(iii)(C)(2)(iii) of this section. As a result, the following relationships are tested under section 179(d)(2)(A) and (B): CB tests its relationship to CA as of September 1, 2019; and CD tests its relationship to CB, CC, and CA as of January 2, 2020, and September 1, 2019. (4) Because CA is not related to CB within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(1)(ii) as of September 1, 2019, CB’s acquisition of the machine satisfies the used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming all other requirements of this section are satisfied, CB’s purchase price of the machine qualifies for the additional first year depreciation deduction under this section. Pursuant to paragraph (g)(1)(iii) of this section, CB is allocated 2/12 of its 100-percent additional first year depreciation deduction for the machine, VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 and CC is allocated the remaining portion of CB’s 100-percent additional first year depreciation deduction for the machine. (5) CC is not related to CD and CA is not related to CD within the meaning of section 179(d)(2)(A) and § 1.179– 4(c)(1)(ii), or section 179(d)(2)(B) and § 1.179–4(c)(1)(iii) as of January 2, 2020, or September 1, 2019. However, CB and CD are related parties within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(1)(ii), or section 179(d)(2)(B) and § 1.179–4(c)(1)(iii) as of January 2, 2020, or September 1, 2019. Accordingly, CD’s acquisition of the machine does not satisfy the used property acquisition requirements of paragraph (b)(3)(iii) of this section and is not eligible for the additional first year depreciation deduction. (MM) Example 39. (1) In a series of related transactions, on January 2, 2018, DA, a corporation, bought and placed in service a new machine from an unrelated party for use in its trade or business. As part of the same series, DB purchases 100 percent of the stock of DA on January 2, 2019, and such stock acquisition meets the requirements of section 1504(a)(2). DB and DA were not related prior to the acquisition within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(1)(ii) or section 179(d)(2)(B) and § 1.179–4(c)(1)(iii). Immediately after acquiring the DA stock, and DB liquidates DA under section 331. In the liquidating distribution, DB receives the machine that was acquired by DA on January 2, 2018. As part of the same series, on March 1, 2020, DB sells the machine to DC and DC places it in service. Throughout the series, DC is not related to DB or DA within the meaning of section 179(d)(2)(A) and § 1.179– 4(c)(1)(ii) or section 179(d)(2)(B) and § 1.179–4(c)(1)(iii). (2) DA’s purchase of the machine on January 2, 2018, satisfies the original use requirement of paragraph (b)(3)(ii) of this section and, assuming all other requirements of this section are met, DA’s purchase price of the machine qualifies for the additional first year depreciation deduction under this section. (3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a transferee tests its relationship with the transferor from which the transferee directly acquires the depreciable property, and with the original transferor of the depreciable property in the series. The relationship is tested when the transferee acquires, and immediately before the first transfer of, the depreciable property in the series. Although DA is no longer in existence as of the date DC acquires the machine, PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 71759 pursuant to paragraph (b)(3)(iii)(C)(2)(vi) of this section, DA is deemed to be in existence at the time of each transfer for purposes of testing relationships under paragraph (b)(3)(iii)(C)(1). As a result, the following relationships are tested under section 179(d)(2)(A) and (B): DB tests its relationship to DA as of January 2, 2019, and January 2, 2018; and DC tests its relationship to DB and DA as of March 1, 2020, and January 2, 2018. (4) Because DB acquired the machine in a series of related transactions in which DB acquired stock, meeting the requirements of section 1504(a)(2), of DA followed by a liquidation of DA under section 331, the relationship of DB and DA created thereof is disregarded for purposes of testing the relationship pursuant to paragraph (b)(3)(iii)(C)(2)(v) of this section. Therefore, DA is not related to DB within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(1)(ii) or section 179(d)(2)(B) and § 1.179– 4(c)(1)(iii) as of January 2, 2019, or January 2, 2018, and DB’s acquisition of the machine satisfies the used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming all other requirements of this section are satisfied, DB’s depreciable basis of the machine as a result of the liquidation of DA qualifies for the additional first year depreciation deduction under this section. (5) Because DC is not related to DB or DA within the meaning of section 179(d)(2)(A) and § 1.179–4(c)(1)(ii) or section 179(d)(2)(B) and § 1.179– 4(c)(1)(iii) as of March 1, 2020, or January 2, 2018, DC ’s acquisition of the machine satisfies the used property acquisition requirements of paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming all other requirements of this section are satisfied, DC ’s purchase price of the machine qualifies for the additional first year depreciation deduction. (NN) Example 40. (1) Pursuant to a series of related transactions, on January 2, 2018, EA bought and placed in service a new machine from an unrelated party for use in its trade or business. As part of the same series, EA sells the machine to EB and EB places it in service on January 2, 2019. As part of the same series, EB sells the machine to EC and EC places it in service on January 2, 2020. Throughout the series, EA is not related to EB or EC within the meaning of section 179(d)(2)(B) and § 1.179–4(c)(1)(iii). EB and EC were related parties within the meaning of section 179(d)(2)(B) and § 1.179– 4(c)(1)(iii) until July 1, 2019, at which time, they ceased to be related. E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 71760 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations (2) EA’s purchase of the machine on January 2, 2018, satisfies the original use requirement of paragraph (b)(3)(ii) of this section and, assuming all other requirements of this section are met, EA’s purchase price of the machines qualifies for the additional first year depreciation deduction under this section. (3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a transferee tests its relationship with the transferor from which the transferee directly acquires the depreciable property, and with the original transferor of the depreciable property in the series. The relationship is tested when the transferee acquires, and immediately before the first transfer of, the depreciable property in the series. As a result, the following relationships are tested under section 179(d)(2)(A) and (B): EB tests its relationship to EA as of January 2, 2019, and January 2, 2018; and EC tests its relationship to EA and EB as of January 2, 2020, and January 2, 2018. (4) Because EA is not related to EB within the meaning of section 179(d)(2)(B) and § 1.179–4(c)(1)(iii) as of January 2, 2019, or January 2, 2018, EB’s acquisition of the machine satisfies the used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming all other requirements of this section are satisfied, EB’s purchase price of the machine qualifies for the additional first year depreciation deduction under this section. (5) EC and EA are not related parties within the meaning of section 179(d)(2)(B) and § 1.179–4(c)(1)(iii) as of January 2, 2020, or January 2, 2018. Within the meaning of section 179(d)(2)(B) and § 1.179–4(c)(1)(iii), EC is not related to EB as of January 2, 2020; however, EC is related to EB as of January 2, 2018. Accordingly, EC ’s acquisition of the machine does not satisfy the used property acquisition requirement of paragraph (b)(3)(iii) of this section and is not eligible for the additional first year depreciation deduction. (OO) Example 41. (1) The facts are the same as in Example 40 of paragraph (b)(3)(vii)(NN)(1) of this section, except that instead of selling to EC, EB sells the machine to EE, and EE places in service on January 2, 2020, and EE sells the machine to EC and EC places in service on January 2, 2021. EE was not in existence until July 2019 and is not related to EA or EB. (2) EA’s purchase of the machine on January 2, 2018, satisfies the original use requirement of paragraph (b)(3)(ii) of this section and, assuming all other VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 requirements of this section are met, EA’s purchase price of the machine qualifies for the additional first year depreciation deduction under this section. (3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a transferee tests its relationship with the transferor from which the transferee directly acquires the depreciable property, and with the original transferor of the depreciable property in the series. The relationship is tested when the transferee acquires, and immediately before the first transfer of, the depreciable property in the series. However, because EE was not in existence immediately prior to the first transfer of the depreciable property in the series, EC tests its relationship with EB and EA pursuant to paragraph (b)(3)(iii)(C)(2)(vii) of this section. As a result, the following relationships are tested under section 179(d)(2)(A) and (B): EB tests its relationship to EA as of January 2, 2019, and January 2, 2018; EE tests its relationship to EA and EB as of January 2, 2020, and January 2, 2018; and EC tests its relationship to EA and EB as of January 2, 2021, and January 2, 2018. (4) Because EA is not related to EB within the meaning of section 179(d)(2)(B) and § 1.179–4(c)(1)(iii) as of January 2, 2019, or January 2, 2018, EB’s acquisition of the machine satisfies the used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming all other requirements of this section are satisfied, EB’s purchase price of the machine qualifies for the additional first year depreciation deduction under this section. (5) Because EE is not related to EA or EB within the meaning of section 179(d)(2)(B) and § 1.179–4(c)(1)(iii) as of January 2, 2020, or January 2, 2018, EE’s acquisition of the machine satisfies the used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming all other requirements of this section are satisfied, EE ’s purchase price of the machine qualifies for the additional first year depreciation deduction under this section. (6) Within the meaning of section 179(d)(2)(B) and § 1.179–4(c)(1)(iii), EC is not related to EA as of January 2, 2021, or January 2, 2018; however, EC is related to EB as of January 2, 2018. Accordingly, EC ’s acquisition of the machine does not satisfy the used property acquisition requirement of paragraph (b)(3)(iii) of this section and PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 is not eligible for the additional first year depreciation deduction. * * * * * (5) * * * (ii) * * * (A) * * * For determination of acquisition date, see paragraph (b)(5)(ii)(B) of this section for property acquired pursuant to a written binding contract, paragraph (b)(5)(iv) of this section for self-constructed property, and paragraph (b)(5)(v) of this section for property not acquired pursuant to a written binding contract. * * * * * (iii) * * * (G) Acquisition of a trade or business or an entity. A contract to acquire all or substantially all of the assets of a trade or business or to acquire an entity (for example, a corporation, a partnership, or a limited liability company) is binding if it is enforceable under State law against the parties to the contract. The presence of a condition outside the control of the parties, including, for example, regulatory agency approval, will not prevent the contract from being a binding contract. Further, the fact that insubstantial terms remain to be negotiated by the parties to the contract, or that customary conditions remain to be satisfied, does not prevent the contract from being a binding contract. This paragraph (b)(5)(iii)(G) also applies to a contract for the sale of the stock of a corporation that is treated as an asset sale as a result of an election under section 338 or under section 336(e) made for a disposition described in § 1.336–2(b)(1). * * * * * (v) Determination of acquisition date for property not acquired pursuant to a written binding contract. Except as provided in paragraphs (b)(5)(iv), (vi), and (vii) of this section, the acquisition date of property that the taxpayer acquires pursuant to a contract that does not meet the definition of a written binding contract in paragraph (b)(5)(iii) of this section, is the date on which the taxpayer paid, in the case of a cash basis taxpayer, or incurred, in the case of an accrual basis taxpayer, more than 10 percent of the total cost of the property, excluding the cost of any land and preliminary activities such as planning and designing, securing financing, exploring, or researching. The preceding sentence also applies to property that is manufactured, constructed, or produced for the taxpayer by another person under a written contract that does not meet the definition of a binding contract in paragraph (b)(5)(iii) of this section, and that is entered into prior to the manufacture, construction, or E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations production of the property for use by the taxpayer in its trade or business or for its production of income. This paragraph (b)(5)(v) does not apply to an acquisition described in paragraph (b)(5)(iii)(G) of this section. * * * * * (viii) * * * Unless the facts specifically indicate otherwise, assume that the parties are not related within the meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c), paragraph (c) of this section does not apply, and the parties do not have predecessors: * * * * * (c) Election for components of larger self-constructed property for which the manufacture, construction, or production begins before September 28, 2017—(1) In general. A taxpayer may elect to treat any acquired or selfconstructed component, as described in paragraph (c)(3) of this section, of the larger self-constructed property, as described in paragraph (c)(2) of this section, as being eligible for the additional first year depreciation deduction under this section, assuming all requirements of section 168(k) and this section are met. The taxpayer may make this election for one or more such components. (2) Eligible larger self-constructed property—(i) In general. Solely for purposes of this paragraph (c), a larger self-constructed property is property that is manufactured, constructed, or produced by the taxpayer for its own use in its trade or business or production of income. Solely for purposes of this paragraph (c), 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, or under a written contract that does not meet the definition of a binding contract 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 production of income is considered to be manufactured, constructed, or produced by the taxpayer. Except as provided in paragraph (c)(2)(iv) of this section, such larger self-constructed property must be property— (A) That is described in paragraph (b)(2)(i)(A), (B), (C), or (D) of this section. Solely for purposes of the preceding sentence, the requirement that property has to be acquired after September 27, 2017, is disregarded; (B) That meets the requirements under paragraph (b) of this section, determined without regard to the VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 acquisition date requirement in paragraph (b)(5) of this section; and (C) For which the taxpayer begins the manufacture, construction, or production before September 28, 2017. (ii) Residential rental property or nonresidential real property. If the taxpayer constructs, manufactures, or produces residential rental property or nonresidential real property, as defined in section 168(e)(2), or an improvement to such property, for use in its trade or business or production of income, all property that is constructed, manufactured, or produced as part of such residential rental property, nonresidential real property, or improvement, as applicable, and that is described in paragraph (c)(2)(i)(A) of this section is the larger self-constructed property for purposes of applying the rules in this paragraph (c). (iii) Beginning of manufacturing, construction, or production. Solely for purposes of paragraph (c)(2)(i)(C) of this section, the determination of when manufacture, construction, or production of the larger self-constructed property begins is made in accordance with the rules in paragraph (b)(5)(iv)(B) of this section if the larger selfconstructed property is manufactured, constructed, or produced by the taxpayer for its own use in its trade or business or production of income, or 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 production of income. If the larger selfconstructed property is manufactured, constructed, or produced for the taxpayer by another person under a written contract that does not meet the definition of a binding contract 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 production of income, the determination of when manufacture, construction, or production of the larger self-constructed property begins is made in accordance with the rules in paragraph (b)(5)(v) of this section. If the taxpayer enters into a written binding contract, as defined in paragraph (b)(5)(iii) of this section, before September 28, 2017, with another person to manufacture, construct, or produce the larger self-constructed property and the manufacture, construction, or production of this property begins after September 27, 2017, as determined under paragraph PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 71761 (b)(5)(iv)(B) of this section, this paragraph (c) does not apply. If the taxpayer enters into a written contract that does not meet the definition of a binding contract in paragraph (b)(5)(iii) of this section before September 28, 2017, with another person to manufacture, construct, or produce the larger self-constructed property and the manufacture, construction, or production of this property begins after September 27, 2017, as determined under paragraph (b)(5)(v) of this section, this paragraph (c) does not apply. (iv) Exception. This paragraph (c) does not apply to any larger selfconstructed property that is included in a class of property for which the taxpayer made an election under section 168(k)(7) (formerly section 168(k)(2)(D)(iii)) not to deduct the additional first year depreciation deduction. (3) Eligible components—(i) In general. Solely for purposes of this paragraph (c), a component of the larger self-constructed property, as described in paragraph (c)(2) of this section, must be qualified property under section 168(k)(2) and paragraph (b) of this section. Solely for purposes of the preceding sentence, a component will satisfy the acquisition date requirement in paragraph (b)(5) of this section if it satisfies the requirements in paragraph (c)(3)(ii) or (iii) of this section, as applicable. (ii) Acquired components. If a component of the larger self-constructed property is acquired pursuant to a written binding contract, as defined in paragraph (b)(5)(iii) of this section, the component must be acquired by the taxpayer after September 27, 2017, as determined under the rules in paragraph (b)(5)(ii)(B) of this section. If a component of the larger self-constructed property is acquired pursuant to a written contract that does not meet the definition of a binding contract in paragraph (b)(5)(iii) of this section, the component must be acquired by the taxpayer after September 27, 2017, as determined under the rules in paragraph (b)(5)(v) of this section. (iii) Self-constructed components. The manufacture, construction, or production of a component of a larger self-constructed property must begin after September 27, 2017. The determination of when manufacture, construction, or production of the component begins is made in accordance with the rules in— (A) Paragraph (b)(5)(iv)(B) of this section if the component is manufactured, constructed, or produced by the taxpayer for its own use in its trade or business or for its production of E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 71762 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations income, or 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 component for use by the taxpayer in its trade or business or for its production of income; or (B) Paragraph (b)(5)(v) of this section if the component is manufactured, constructed, or produced for the taxpayer by another person under a written contract that does not meet the definition of a binding contract in paragraph (b)(5)(iii) of this section, that is entered into prior to the manufacture, construction, or production of the component for use by the taxpayer in its trade or business or for its production of income. (4) Special rules—(i) Installation costs. If the taxpayer pays, in the case of a cash basis taxpayer, or incurs, in the case of an accrual basis taxpayer, costs, including labor costs, to install a component of the larger self-constructed property, as described in paragraph (c)(2) of this section, such costs are eligible for the additional first year depreciation under this section, assuming all requirements are met, only if the component being installed meets the requirements in paragraph (c)(3) of this section. (ii) Property described in section 168(k)(2)(B). The rules in paragraph (e)(1)(iii) of this section apply for determining the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of larger self-constructed property described in paragraph (c)(2) of this section and in section 168(k)(2)(B). (5) Computation of additional first year depreciation deduction—(i) Election is made. Before determining the allowable additional first year depreciation deduction for the larger self-constructed property, as described in paragraph (c)(2) of this section, for which the taxpayer makes the election specified in this paragraph (c) for one or more components of such property, the taxpayer must determine the portion of the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of the larger self-constructed property, including all components, attributable to the component that meets the requirements of paragraphs (c)(3) and (c)(4)(i) of this section (component basis). The additional first year depreciation deduction for the component basis is determined by multiplying such component basis by the applicable percentage for the placedin-service year of the larger selfconstructed property. The additional VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 first year depreciation deduction, if any, for the remaining unadjusted depreciable basis of the larger selfconstructed property, as described in paragraph (c)(2) of this section, is determined under section 168(k), as in effect on the day before the date of the enactment of the Act, and section 168(k)(8). For purposes of this paragraph (c), the remaining unadjusted depreciable basis of the larger selfconstructed property is equal to the unadjusted depreciable basis, as defined in § 1.168(b)–1(a)(3), of the larger selfconstructed property, including all components, reduced by the sum of the component basis of the components for which the taxpayer makes the election specified in this paragraph (c). (ii) Election is not made. If the taxpayer does not make the election specified in this paragraph (c), the additional first year depreciation deduction, if any, for the larger selfconstructed property, including all components, is determined under section 168(k), as in effect on the day before the date of the enactment of the Act, and section 168(k)(8). (6) Time and manner for making election—(i) Time for making election. The election specified in this paragraph (c) must be made by the due date, including extensions, of the Federal tax return for the taxable year in which the taxpayer placed in service the larger self-constructed property. (ii) Manner of making election. The election specified in this paragraph (c) must be made by attaching a statement to such return indicating that the taxpayer is making the election provided in this paragraph (c) and whether the taxpayer is making the election for all or some of the components described in paragraph (c)(3) of this section. The election is made separately by each person owning qualified property (for example, for each member of a consolidated group by the agent for the group (within the meaning of § 1.1502–77(a) and (c)), by the partnership (including a lower-tier partnership), or by the S corporation). (7) Revocation of election—(i) In general. Except as provided in paragraph (c)(7)(ii) of this section, the election specified in this paragraph (c), 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. The election specified PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 in this paragraph (c) 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 the election specified in this paragraph (c), an automatic extension of 6 months from the due date of the taxpayer’s Federal tax return, excluding extensions, for the placed-inservice year of the larger selfconstructed property is granted to revoke that election, provided the taxpayer timely filed the taxpayer’s Federal tax return for that placed-inservice year 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 in a manner that is consistent with the revocation of the election. (8) Additional procedural guidance. The IRS may publish procedural guidance in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter) that provides alternative procedures for complying with paragraph (c)(6) or (c)(7)(i) of this section. (9) Examples. The application of this paragraph (c) is illustrated by the following examples. Unless the facts specifically indicate otherwise, assume that the larger self-constructed property is described in paragraph (c)(2) of this section, the components that are acquired or self-constructed after September 27, 2017, are described in paragraph (c)(3) of this section, the taxpayer is an accrual basis taxpayer, and none of the costs paid or incurred after September 27, 2017, are for the installation of components that do not meet the requirements of paragraph (c)(3) of this section. (i) Example 1. (A) BC, a calendar year taxpayer, is engaged in a trade or business described in section 163(j)(7)(A)(iv) and §§ 1.163(j)– 1(b)(15)(i) and 1.163(j)– 10(c)(3)(iii)(C)(3). In December 2015, BC decided to construct an electric generation power plant for its own use. This plant is property described in section 168(k)(2)(B) as in effect on the day before the date of the enactment of the Act. However, the turbine for the plant had to be manufactured by another person for BC. In January 2016, BC entered into a written binding contract with CD to acquire the turbine. BC received the completed turbine in August 2017 at which time BC incurred the cost of the turbine. The cost of the turbine is 11 percent of the total cost of the electric generation power plant to be constructed by BC. BC began E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations constructing the electric generation power plant in October 2017 and placed in service this new power plant, including all component parts, in 2020. (B) The larger self-constructed property is the electric generation power plant to be constructed by BC. For determining if the construction of this power plant begins before September 28, 2017, paragraph (b)(5)(iv)(B) of this section provides that manufacture, construction, or production of property begins when physical work of a significant nature begins. BC uses the safe harbor test in paragraph (b)(5)(iv)(B)(2) of this section to determine when physical work of a significant nature begins for the electric generation power plant. Because the turbine that was manufactured by CD for BC is more than 10 percent of the total cost of the electric generation power plant, physical work of a significant nature for this plant began before September 28, 2017. (C) The power plant is described in section 168(k)(9)(A) and paragraph (b)(2)(ii)(F) of this section and, therefore, is not larger self-constructed property eligible for the election pursuant to paragraph (c)(2)(i)(B) of this section. Accordingly, none of BC’s expenditures for components of the power plant that are acquired or selfconstructed after September 27, 2017, are eligible for the election specified in this paragraph (c). Assuming all requirements are met under section 168(k)(2) as in effect on the day before the date of the enactment of the Act, the unadjusted depreciable basis of the power plant, including all components, attributable to its construction before January 1, 2020, is eligible for the 30percent additional first year depreciation deduction pursuant to section 168(k)(8). (ii) Example 2. (A) In August 2017, BD, a calendar-year taxpayer, entered into a written binding contract with CE for CE to manufacture a locomotive for BD for use in its trade or business. Before September 28, 2017, BD acquired or self-constructed components of the locomotive. These components cost $500,000, which is more than 10 percent of the total cost of the locomotive, and BD incurred such costs before September 28, 2017. After September 27, 2017, BD acquired or self-constructed components of the locomotive and these components cost $4,000,000. In February 2019, CE delivered the locomotive to BD and BD placed in service the locomotive. The total cost of the locomotive is $4,500,000. The locomotive is property described in section 168(k)(2)(B) as in effect on the day before the date of the VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 enactment of the Act. On its timely filed Federal income tax return for 2019, BD made the election specified in this paragraph (c). (B) The larger self-constructed property is the locomotive being manufactured by CE for BD. For determining if the manufacturing of this locomotive begins before September 28, 2017, paragraph (b)(5)(iv)(B) of this section provides that manufacture, construction, or production of property begins when physical work of a significant nature begins. BD uses the safe harbor test in paragraph (b)(5)(iv)(B)(2) of this section to determine when physical work of a significant nature begins for the locomotive. Because BD had incurred more than 10 percent of the total cost of the locomotive before September 28, 2017, physical work of a significant nature for this locomotive began before September 28, 2017. (C) Because BD made the election specified in this paragraph (c), the cost of $4,000,000 for the locomotive’s components acquired or selfconstructed after September 27, 2017, qualifies for the 100-percent additional first year depreciation deduction under this section, assuming all other requirements are met. The remaining cost of the locomotive is $500,000 and such amount qualifies for the 40-percent additional first year depreciation deduction pursuant to section 168(k)(8), assuming all other requirements in section 168(k) as in effect on the day before the date of the enactment of the Act are met. (iii) Example 3. (A) In February 2016, BF, a calendar-year taxpayer, entered into a written binding contract with CG for CG to manufacture a vessel for BF for use in its trade or business. Before September 28, 2017, BF acquired or selfconstructed components for the vessel. These components cost $30,000,000, which is more than 10 percent of the total cost of the vessel, and BF incurred such costs before September 28, 2017. After September 27, 2017, BF acquired or self-constructed components for the vessel and these components cost $15,000,000. In February 2021, CG delivered the vessel to BF and BF placed in service the vessel. The vessel is property described in section 168(k)(2)(B) as in effect on the day before the date of the enactment of the Act. The total cost of the vessel is $45,000,000. On its timely filed Federal income tax return for 2021, BF made the election specified in this paragraph (c). (B) The larger self-constructed property is the vessel being manufactured by CG for BF. For determining if the manufacturing of this PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 71763 vessel begins before September 28, 2017, paragraph (b)(5)(iv)(B) of this section provides that manufacture, construction, or production of property begins when physical work of a significant nature begins. BF uses the safe harbor test in paragraph (b)(5)(iv)(B)(2) of this section to determine when physical work of a significant nature begins for the vessel. Because BF had incurred more than 10 percent of the total cost of the vessel before September 28, 2017, physical work of a significant nature for this vessel began before September 28, 2017. (C) Because BF made the election specified in this paragraph (c), the cost of $15,000,000 for the vessel’s components acquired or selfconstructed after September 27, 2017, qualifies for the 100-percent additional first year depreciation deduction under this section, assuming all other requirements are met. Pursuant to section 168(k)(8) and because BF placed in service the vessel after 2020, none of the remaining cost of the vessel is eligible for any additional first year depreciation deduction under section 168(k) and this section nor under section 168(k) as in effect on the day before the date of the enactment of the Act. (iv) Example 4. (A) In March 2017, BG, a calendar year taxpayer, entered into a written contract with CH for CH to construct a building for BG to use in its retail business. This written contract does not meet the definition of a binding contract in paragraph (b)(5)(iii) of this section. In September 2019, the construction of the building was completed and placed in service by BG. The total cost is $10,000,000. Of this amount, $3,000,000 is the total cost for all section 1245 properties constructed as part of the building, and $7,000,000 is for the building. Under section 168(e), section 1245 properties in the total amount of $2,400,000 are 5-year property and in the total amount of $600,000 are 7-year property. The building is nonresidential real property under section 168(e). Before September 28, 2017, BG acquired or selfconstructed certain components and the total cost of these components is $500,000 for the section 1245 properties and $3,000,000 for the building. BG incurred these costs before September 28, 2017. After September 27, 2017, BG acquired or self-constructed the remaining components of the section 1245 properties and these components cost $2,500,000. BG incurred these costs of $2,500,000 after September 27, 2017. On its timely filed Federal income tax return for 2019, BG made the election specified in this paragraph (c). E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 71764 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations (B) All section 1245 properties are constructed as part of the construction of the building and are described in paragraph (b)(2)(i)(A) of this section. The building is not described in paragraph (b)(2)(i)(A), (B), (C), or (D) of this section. As a result, under paragraph (c)(2)(ii) of this section, the larger self-constructed property is all section 1245 properties with a total cost of $3,000,000. For determining if the construction of these section 1245 properties begins before September 28, 2017, paragraph (b)(5)(v) of this section provides that manufacture, construction, or production of property begins when the taxpayer incurs more than 10 percent of the total cost of the property. Because BG incurred more than 10 percent of the total cost of the section 1245 properties before September 28, 2017, construction of the section 1245 properties began before September 28, 2017. (C) Because BG made the election specified in this paragraph (c), the cost of $2,500,000 for the section 1245 components acquired or selfconstructed by BG after September 27, 2017, qualifies for the 100-percent additional first year depreciation deduction under this section, assuming all other requirements are met. The remaining cost of the section 1245 components is $500,000 and such amount qualifies for the 30-percent additional first year depreciation deduction pursuant to section 168(k)(8), assuming all other requirements in section 168(k), as in effect on the day before the date of the enactment of the Act, are met. Because the building is not qualified property under section 168(k), as in effect on the day before the date of the enactment of the Act, none of the cost of $7,000,000 for the building is eligible for any additional first year depreciation deduction under section 168(k) and this section or under section 168(k), as in effect on the day before the date of the enactment of the Act. (d) * * * (3) * * * (iv) Determination of acquisition date for property not acquired pursuant to a written binding contract. For purposes of the acquisition rules in paragraph (d)(1) of this section, the following property is acquired by the taxpayer before January 1, 2027, if the taxpayer paid, in the case of a cash basis taxpayer, or incurred, in the case of an accrual basis taxpayer, more than 10 percent of the total cost of the property before January 1, 2027, excluding the cost of any land and preliminary activities such as planning and designing, securing financing, exploring, or researching: VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 (A) Property that the taxpayer acquires pursuant to a contract that does not meet the definition of a written binding contract in paragraph (b)(5)(iii) of this section; or (B) Property that is manufactured, constructed, or produced for the taxpayer by another person under a written contract that does not meet the definition of a binding contract in paragraph (b)(5)(iii) of this section, and 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 production of income. * * * * * (e) * * * (1) * * * (iii) * * * The amounts of unadjusted depreciable basis attributable to the property’s manufacture, construction, or production before January 1, 2027, are referred to as ‘‘progress expenditures.’’ Rules similar to the rules in section 4.02(1)(b) of Notice 2007–36 (2007–17 I.R.B. 1000) (see § 601.601(d)(2)(ii)(b) of this chapter) apply for determining progress expenditures, regardless of whether the property 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, or under a written contract that does not meet the definition of a binding contract in paragraph (b)(5)(iii) of this section. The IRS may publish procedural guidance in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter) that provides alternative procedures for complying with this paragraph (e)(1)(iii). * * * * * (f) * * * (7) Additional procedural guidance. The IRS may publish procedural guidance in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter) that provides alternative procedures for complying with paragraph (f)(1)(iii), (f)(1)(iv), (f)(2)(ii), (f)(2)(iii), (f)(3)(ii), (f)(3)(iii), or (f)(5)(i) of this section. (g) * * * (11) Mid-quarter convention. In determining whether the mid-quarter convention applies for a taxable year under section 168(d)(3) and § 1.168(d)– 1, the depreciable basis, as defined in § 1.168(d)–1(b)(4), for the taxable year the qualified property is placed in service by the taxpayer is not reduced by the allowed or allowable additional first year depreciation deduction for that taxable year. See § 1.168(d)–1(b)(4). (h) * * * PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 (1) In general. Except as provided in paragraphs (h)(2) and (3) of this section, this section applies to— (i) Depreciable property acquired after September 27, 2017, by the taxpayer and placed in service by the taxpayer during or after the taxpayer’s taxable year that begins on or after January 1, 2021; (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 begins on or after January 1, 2021; and (iii) Components acquired or selfconstructed after September 27, 2017, of larger self-constructed property described in paragraph (c)(2) of this section and placed in service by the taxpayer during or after the taxpayer’s taxable year that begins on or after January 1, 2021. (2) Applicability of this section for prior taxable years. For taxable years beginning before January 1, 2021, see § 1.168(k)-2 as contained in 26 CFR part 1, revised as of April 1, 2020. (3) Early application of this section and § 1.1502–68—(i) In general. Subject to paragraphs (h)(3)(ii) and (iii) of this section, and provided that all members of a consolidated group consistently apply the same set of rules, a taxpayer may choose to apply both the rules of this section and the rules of § 1.1502–68 (to the extent relevant), in their entirety and in a consistent manner, to— (A) Depreciable property acquired after September 27, 2017, by the taxpayer and placed in service by the taxpayer during a taxable year ending on or after September 28, 2017; (B) A specified plant for which the taxpayer properly made an election to apply section 168(k)(5) and that is planted, or grafted to a plant that was previously planted, after September 27, 2017, by the taxpayer during a taxable year ending on or after September 28, 2017; and (C) Components acquired or selfconstructed after September 27, 2017, of larger self-constructed property described in paragraph (c)(2) of this section and placed in service by the taxpayer during a taxable year ending on or after September 28, 2017. (ii) Early application to certain transactions. In the case of property described in § 1.1502–68(e)(2)(i) that is acquired in a transaction that satisfies the requirements of § 1.1502–68(c)(1)(ii) or (c)(2)(ii), the taxpayer may apply the rules of this section and the rules of § 1.1502–68 (to the extent relevant), in their entirety and in a consistent manner, to such property only if those E:\FR\FM\10NOR2.SGM 10NOR2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations rules are applied, in their entirety and in a consistent manner, by all parties to the transaction, including the transferor member, the transferee member, and the target, as applicable, and the consolidated groups of which they are members, for the taxable year(s) in which the transaction occurs and the taxable year(s) that includes the day after the deconsolidation date, as defined in § 1.1502–68(a)(2)(iii). (iii) Bound by early application. Once a taxpayer applies the rules of this section and the rules of § 1.1502–68 (to the extent relevant), in their entirety, for a taxable year, the taxpayer must continue to apply the rules of this section and the rules of § 1.1502–68 (to the extent relevant), in their entirety, for the taxpayer’s subsequent taxable years. ■ Par. 5. Section 1.1502–68 is added immediately following § 1.1502–59A to read as follows: jbell on DSKJLSW7X2PROD with RULES2 § 1.1502–68 Additional first year depreciation deduction for property acquired and placed in service after September 27, 2017. (a) In general—(1) Overview. This section provides rules governing the availability of the additional first year depreciation deduction allowable under section 168(k) for qualified property that is acquired and placed in service after September 27, 2017, by a member of a consolidated group. Except as otherwise provided in paragraph (c) of this section, the rules in § 1.168(k)–2 apply to members of a consolidated group in addition to the rules in this section. Paragraph (a)(2) of this section provides definitions of terms used in this section. Paragraph (b) of this section provides rules addressing the application of § 1.168(k)–2(b)(3)(iii)(A)(1) (requiring that a taxpayer claiming the additional first year depreciation deduction for used property not previously have used the property) to members of a consolidated group. Paragraph (c) of this section provides rules addressing certain transfers of eligible property (as defined in paragraph (a)(2)(vii) of this section) between members of a consolidated group if the transferee member (as defined in paragraph (a)(2)(xii) of this section) leaves the group pursuant to the same series of related transactions. Paragraph (d) of this section provides examples illustrating the application of the rules of this section. Paragraph (e) of this section provides the applicability dates. (2) Definitions. The following definitions apply for purposes of this section. (i) Consolidated Asset Acquisition Rule. The term Consolidated Asset Acquisition Rule refers to the rule set VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 forth in paragraph (c)(1)(i) of this section addressing certain intercompany transfers of eligible property. (ii) Consolidated Deemed Acquisition Rule. The term Consolidated Deemed Acquisition Rule refers to the rule set forth in paragraph (c)(2)(i) of this section addressing certain intercompany transfers of the stock of target (as defined in paragraph (a)(2)(xi) of this section). (iii) Deconsolidation date. The term deconsolidation date means the date on which a transferee member ceases to be a member of a consolidated group. (iv) Designated transaction. The term designated transaction has the meaning provided in paragraph (c)(4)(i) of this section. (v) Deemed replacement property. The term deemed replacement property means used property that is identical to (but is separate and distinct from) the eligible property that the transferee member or target is deemed to sell to an unrelated party under the Consolidated Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule. For all Federal income tax purposes, the deemed purchase of deemed replacement property by the transferee member or target under paragraph (c)(1)(i)(B) or (c)(2)(i)(B) of this section, respectively, does not result in the basis in such property being determined, in whole or in part, by reference to the basis of other property held at any time by the transferee member or target. See section 179(d)(3) and § 1.168(k)– 2(b)(3)(iii)(A)(3). (vi) Deemed sale amount. The term deemed sale amount means an amount equal to the transferee member’s or the target’s adjusted basis in the eligible property immediately before the transferee member or target is deemed to sell the property to an unrelated party under the Consolidated Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule. (vii) Eligible property. The term eligible property means depreciable property (as defined in § 1.168(b)– 1(a)(1)) that meets the requirements in § 1.168(k)–2(b)(2), determined without regard to § 1.168(k)–2(b)(2)(ii)(C) (property subject to an election not to claim the additional first year depreciation for a class of property) except on the day after the deconsolidation date. (viii) Group Prior Use Rule. The term Group Prior Use Rule refers to the rule set forth in paragraph (b)(1) of this section addressing when a member of a consolidated group is attributed another member’s depreciable interest in property. PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 71765 (ix) Lookback Period. The term lookback period means, with respect to a member of a consolidated group, the period that includes the five calendar years immediately prior to the current calendar year in which the property is placed in service by such member, as well as the portion of such current calendar year before the date on which the member placed the property in service (without taking into account the applicable convention). (x) Stock and Asset Acquisition Rule. The term Stock and Asset Acquisition Rule refers to the rule set forth in paragraph (b)(2) of this section addressing when a member of a consolidated group is attributed a new member’s depreciable interest in property. (xi) Target. The term target means the member whose stock is transferred in a transaction that is subject to the Consolidated Deemed Acquisition Rule. (xii) Transferee member. The term transferee member means the member that acquires eligible property or target stock, respectively, in a transaction that is subject to the Consolidated Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule. (xiii) Transferor member. The term transferor member means the member that transfers eligible property or target stock, respectively, in a transaction that is subject to the Consolidated Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule. (b) Acquisitions of depreciable property by a member of a consolidated group—(1) General rule (Group Prior Use Rule). Solely for purposes of applying § 1.168(k)–2(b)(3)(iii)(A)(1), if a member of a consolidated group acquires depreciable property in which the group had a depreciable interest at any time within the lookback period, the member is treated as having a depreciable interest in the property prior to the acquisition. For purposes of this paragraph (b)(1), a consolidated group is treated as having a depreciable interest in property during the time any current or previous member of the group had a depreciable interest in the property while a member of the group. For special rules that apply when a member of a consolidated group acquires depreciable property in an intercompany transaction (as defined in § 1.1502–13(b)(1)(i)) and then leaves the group pursuant to the same series of related transactions, see paragraph (c) of this section. (2) Certain acquisitions pursuant to a series of related transactions (Stock and Asset Acquisition Rule). Solely for purposes of applying § 1.168(k)– 2(b)(3)(iii)(A)(1), if a series of related E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 71766 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations transactions includes one or more transactions in which property is acquired by a member of a consolidated group, and one or more transactions in which a corporation that had a depreciable interest in the property (determined without regard to the application of the Group Prior Use Rule) within the lookback period becomes a member of the group, then the member that acquires the property is treated as having a depreciable interest in the property prior to the acquisition. (c) Certain intercompany transfers of eligible property followed by deconsolidation—(1) Acquisition of eligible property by a member that leaves the group—(i) General rule (Consolidated Asset Acquisition Rule). This paragraph (c)(1) applies to certain transactions pursuant to which one member of a consolidated group (transferee member) acquires from another member of the same consolidated group (transferor member) eligible property. Except as otherwise provided in paragraph (c)(3) or (4) of this section, if a transaction satisfies the requirements of paragraph (c)(1)(ii) of this section, then § 1.168(k)– 2(b)(3)(iii)(C) (providing special rules when depreciable property is acquired as part of a series of related transactions) does not apply to the transaction, and for all Federal income tax purposes— (A) The transferee member is treated as selling the eligible property to an unrelated person on the day after the deconsolidation date in exchange for an amount of cash equal to the deemed sale amount; and (B) Immediately after the deemed sale in paragraph (c)(1)(i)(A) of this section, the transferee member is treated as purchasing deemed replacement property from an unrelated person for an amount of cash equal to the deemed sale amount. (ii) Requirements. A transaction satisfies the requirements of this paragraph (c)(1)(ii) if— (A) The transferee member’s acquisition of the eligible property meets the requirements of § 1.168(k)– 2(b)(3)(iii)(A) without regard to section 179(d)(2)(A) or (B) and § 1.179– 4(c)(1)(ii) or (iii) or the Group Prior Use Rule; (B) As part of the same series of related transactions that includes the acquisition, the transferee member ceases to be a member of the consolidated group and ceases to be related, within the meaning of section 179(d)(2)(A) or (B) and § 1.179– 4(c)(1)(ii) or (iii), to the transferor member; and (C) The acquired eligible property continues to be eligible property on the VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 deconsolidation date and the day after the deconsolidation date. (2) Deemed acquisition of eligible property pursuant to an election under section 338 or 336(e) by a member that leaves the group—(i) General rule (Consolidated Deemed Acquisition Rule). This paragraph (c)(2) applies to certain transactions pursuant to which a transferee member acquires from a transferor member the stock of another member of the same consolidated group that holds eligible property (target) in either a qualified stock purchase for which a section 338 election is made or a qualified stock disposition described in § 1.336–2(b)(1) for which a section 336(e) election is made. Except as otherwise provided in paragraph (c)(3) or (4) of this section, if a transaction satisfies the requirements of paragraph (c)(2)(ii) of this section, then § 1.168(k)– 2(b)(3)(iii)(C) does not apply to the transaction, and for all Federal income tax purposes— (A) The target is treated as selling the eligible property to an unrelated person on the day after the deconsolidation date in exchange for an amount of cash equal to the deemed sale amount; and (B) Immediately after the deemed sale in paragraph (c)(2)(i)(A) of this section, the target is treated as purchasing deemed replacement property from an unrelated person for an amount of cash equal to the deemed sale amount. (ii) Requirements. A transaction satisfies the requirements of this paragraph (c)(2)(ii) if: (A) The target’s acquisition of the eligible property meets the requirements of § 1.168(k)–2(b)(3)(iii)(A) without regard to the Group Prior Use Rule; (B) As part of the same series of related transactions that includes the qualified stock purchase or qualified stock disposition, the transferee member and the target cease to be members of the transferor member’s consolidated group and cease to be related, within the meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c)(1)(ii) or (iii), to the transferor member; and (C) The target’s eligible property on the acquisition date (within the meaning of § 1.338–2(c)(1)) or the disposition date (within the meaning of § 1.336– 1(b)(8)) continues to be eligible property on the deconsolidation date and the day after the deconsolidation date. (3) Disposition of depreciable property pursuant to the same series of related transactions. Paragraph (c)(1) of this section does not apply if, following the acquisition of eligible property, the transferee member disposes of such property pursuant to the same series of related transactions that includes the property acquisition. Paragraph (c)(2) of PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 this section does not apply if, following the deemed acquisition of eligible property, the target disposes of such property pursuant to the same series of related transactions that includes the qualified stock purchase or qualified stock disposition. See § 1.168(k)– 2(b)(3)(iii)(C) for rules regarding the transfer of property in a series of related transactions. See also § 1.168(k)–2(g)(1) for rules regarding property placed in service and disposed of in the same taxable year. For purposes of this paragraph (c)(3), the deemed sale of eligible property by the transferee member or the target pursuant to paragraph (c)(1)(i)(A) or (c)(2)(i)(A) of this section is not treated as a ‘‘disposition’’ of such property. (4) Election to not apply paragraph (c)(1)(i) or (c)(2)(i) of this section—(i) In general. If a transaction satisfies the requirements of the Consolidated Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule in paragraph (c)(1)(ii) or (c)(2)(ii) of this section, respectively, the transferee member or the target nonetheless may elect not to apply the Consolidated Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule, respectively, to all eligible property that is acquired or deemed acquired in such transaction. If a transferee member or target makes an election under this paragraph (c)(4) with respect to any transaction (designated transaction), then— (A) The transferee member or target is deemed to have made such an election for all other transactions— (1) That satisfy the requirements of the Consolidated Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule; (2) That are part of the same series of related transactions as the designated transaction; and (3) In which the transferee member or target either is the same transferee member or target as in the designated transaction or is related, within the meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c)(1)(ii) or (iii), to the transferee member or target in the designated transaction immediately after the end of the series of related transactions; and (B) Any eligible property acquired or deemed acquired in the designated transaction and in any transactions described in paragraph (c)(4)(i)(A) of this section does not satisfy either the original use requirement or the used property acquisition requirements in § 1.168(k)–2(b)(3) and, thus, is not ‘‘qualified property’’ within the meaning of § 1.168(k)–2(b)(1). (ii) Time and manner for making election—(A) Time to make election. An E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations election under this paragraph (c)(4) must be made by the due date, including extensions, for the Federal tax return for the taxable year of the transferee member or target that begins on the day after the deconsolidation date. (B) Manner of making election. A transferee member or target, as applicable, makes the election under this paragraph (c)(4) by attaching a statement to its return for the taxable year that begins on the day after the deconsolidation date. The statement must describe the transaction(s) to which the Consolidated Asset Acquisition Rule or Consolidated Deemed Acquisition Rule otherwise would apply and state that the transferee member or the target, as applicable, is not claiming the additional first year depreciation deduction for any eligible property transferred in such transaction(s). If, at the time the election is made, the transferee member or the target is a member of a consolidated group, the statement is made by the agent for the group (within the meaning of § 1.1502– 77(a) and (c)) on behalf of the transferee member or the target and is attached to the consolidated return of the group for the taxable year of the group that includes the taxable year of the transferee member or target that begins on the day after the deconsolidation date. (C) Additional procedural guidance. The IRS may publish procedural guidance in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter) that provides alternative procedures for complying with paragraph (c)(4)(ii)(A) or (B) of this section. (iii) Revocation of election. An election specified in this paragraph (c)(4), 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 (c)(4) may not be revoked through a request under section 446(e) to change the taxpayer’s method of accounting. (d) Examples. For purposes of the examples in this section, unless otherwise stated: Parent, S, B, Controlled, and T are members of a consolidated group of which Parent is the common parent (Parent group); Parent owns all of the only class of stock VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 of each of S, B, Controlled, and T; X is the common parent of the X consolidated group (X group); no member of the X group is related, within the meaning of section 179(d)(2)(A) or (B) and § 1.179–4(c)(1)(ii) or (iii) (Related), to any member of the Parent group; G and U are corporations that are not Related to each other or to any member of the Parent group or the X group; the Equipment in each example is eligible property; no member of the Parent group or the X group has had a depreciable interest in the Equipment within the lookback period; § 1.168(k)– 2(b)(3)(iii)(A)(1) is referred to as the No Prior Use Requirement; and § 1.168(k)– 2(b)(3)(iii)(A)(2) is referred to as the Unrelated Party Requirement. The rules of this section are illustrated by the following examples. (1) Example 1: Intercompany sale of eligible property—(i) Facts. S has a depreciable interest in Equipment #1. In 2018, S sells Equipment #1 to B, and B places Equipment #1 in service in the same year. (ii) Analysis. B’s acquisition of Equipment #1 does not satisfy either the No Prior Use Requirement or the Unrelated Party Requirement. Under the Group Prior Use Rule, B is treated as previously having a depreciable interest in Equipment #1 because B (a member of the Parent group) acquired Equipment #1 and S, while a member of the Parent group, had a depreciable interest in Equipment #1 within the lookback period. In addition, B acquires Equipment #1 from S, and B and S are Related at the time of the acquisition. Accordingly, B is not eligible to claim the additional first year depreciation deduction for Equipment #1 in 2018. (2) Example 2: Sale outside of the consolidated group followed by a reacquisition within the lookback period—(i) Facts. S has a depreciable interest in Equipment #2. In 2018, S sells Equipment #2 to G. In 2019, in an unrelated transaction, B acquires Equipment #2 from G and places it in service in the same year. (ii) Analysis. B’s acquisition of Equipment #2 does not satisfy the No Prior Use Requirement as a result of the Group Prior Use Rule. Pursuant to the Group Prior Use Rule, B is treated as previously having a depreciable interest in Equipment #2 because B is a member of the Parent group and S, while a member of the Parent group, had a depreciable interest in Equipment #2 within the lookback period. Thus, B is not eligible to claim the additional first year depreciation deduction for Equipment #2 in 2019. The result would be the same if, after selling Equipment #2 to G, S had ceased to be a member PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 71767 of the Parent group prior to B’s acquisition of Equipment #2. (iii) Sale outside of the consolidated group followed by a reacquisition beyond the lookback period. The facts are the same as in paragraph (d)(2)(i) of this section, except that B acquires Equipment #2 and places it in service in 2024 instead of 2019. B’s acquisition of Equipment #2 satisfies the No Prior Use Requirement. B would not be treated as previously having a depreciable interest in Equipment #2 under the Group Prior Use Rule because the Parent group did not have a depreciable interest in Equipment #2 within the lookback period. Further, B itself did not have a prior depreciable interest in Equipment #2 within the lookback period. Assuming all other requirements in § 1.168(k)–2 are satisfied, B is eligible to claim the additional first year depreciation deduction for Equipment #2 in 2024. The result would be the same if S, rather than B, acquired and placed in service Equipment #2 in 2024. (3) Example 3: Acquisition of eligible property by the consolidated group followed by a corporation with a prior depreciable interest joining the group as part of the same series of related transactions—(i) Facts. G has a depreciable interest in Equipment #3. During 2018, G sells Equipment #3 to U. In a series of related transactions that does not include the 2018 sale, Parent acquires all of the stock of G in 2019. Later in 2019, B purchases Equipment #3 from U and places it in service immediately thereafter. (ii) Analysis. B’s acquisition of Equipment #3 does not satisfy the No Prior Use Requirement as a result of the Stock and Asset Acquisition Rule. In a series of related transactions, G became a member of the Parent group and B acquired Equipment #3. Because G had a depreciable interest in Equipment #3 within the lookback period, B is treated as having a depreciable interest in Equipment #3 under the Stock and Asset Acquisition Rule. Thus, B is not eligible to claim the additional first year depreciation deduction for Equipment #3 in 2019. (iii) B purchases Equipment #3 in 2024. The facts are the same as in paragraph (d)(3)(i) of this section, except that B acquires and places in service Equipment #3 in 2024 instead of 2019. B is not treated under the Stock and Asset Acquisition Rule as having a prior depreciable interest in Equipment #3 because G (which sold Equipment #3 to U in 2018) did not have a depreciable interest in Equipment #3 within the lookback period. In addition, B is not treated under the Group Prior Use Rule as having a prior depreciable interest in E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 71768 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations Equipment #3 at the time of the purchase because neither G nor any other member of the Parent group had a depreciable interest in Equipment #3 while a member of the Parent group within the lookback period. Further, B itself did not have a depreciable interest in Equipment #3 within the lookback period. Accordingly, B’s acquisition of Equipment #3 satisfies the No Prior Use Requirement. Assuming all other requirements in § 1.168(k)–2 are satisfied, B is eligible to claim the additional first year depreciation deduction for Equipment #3 in 2024. (iv) No series of related transactions. The facts are the same as in paragraph (d)(3)(i) of this section, except that Parent’s acquisition of the G stock and B’s purchase of Equipment #3 are not part of the same series of related transactions. Because B’s purchase of Equipment #3 and Parent’s acquisition of the G stock did not occur pursuant to the same series of related transactions, the Stock and Asset Acquisition Rule does not apply. In addition, B is not treated under the Group Prior Use Rule as having a prior depreciable interest in Equipment #3 at the time of the purchase because neither G nor any other member of the Parent group had a depreciable interest in Equipment #3 while a member of the Parent group within the lookback period. Further, B itself did not have a depreciable interest in Equipment #3 within the lookback period. Accordingly, B’s acquisition of Equipment #3 satisfies the No Prior Use Requirement. Assuming all other requirements in § 1.168(k)–2 are satisfied, B is eligible to claim the additional first year depreciation deduction for Equipment #3 in 2019. (4) Example 4: Termination of the consolidated group—(i) Facts. S owns Equipment #4. In 2018, S sells Equipment #4 to U. In 2019, X acquires all of the stock of Parent in a transaction that causes the Parent group to terminate and Parent, B, and S to become members of the X group. In 2020, in a transaction that is not part of a series of related transactions, B purchases Equipment #4 from U and places it in service in the same year. (ii) Analysis. B’s acquisition of Equipment #4 satisfies the No Prior Use Requirement. The Group Prior Use Rule does not apply to treat B as having a prior depreciable interest in Equipment #4 because B is a member of the X group and no member of the X group had a depreciable interest in Equipment #4 while a member of the X group within the lookback period. Further, B itself did not have a prior depreciable interest in Equipment #4 within the lookback period. Assuming all other requirements VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 in § 1.168(k)–2 are satisfied, B is eligible to claim the additional first year depreciation deduction for Equipment #4 in 2020. (iii) S purchases Equipment #4 in 2020. The facts are the same as in paragraph (d)(4)(i) of this section, except that S rather than B purchases and places in service Equipment #4 in 2020. S’s purchase of Equipment #4 does not satisfy the No Prior Use Requirement because S had a depreciable interest in Equipment #4 within the lookback period. Thus, S is not eligible to claim the additional first year depreciation deduction for Equipment #4 in 2020. (iv) Acquisitions are part of the same series of related transactions. The facts are the same as in paragraph (d)(4)(i) of this section, except that X’s acquisition of the Parent stock and B’s purchase of Equipment #4 are part of the same series of related transactions. Thus, pursuant to the same series of related transactions, S became a member of the X group and B (another member of the X group) acquired Equipment #4. Because S had a depreciable interest in Equipment #4 within the lookback period, B is treated as having a depreciable interest in Equipment #4 under the Stock and Asset Acquisition Rule. As a result, B’s acquisition of Equipment #4 does not satisfy the No Prior Use Requirement, and B is not eligible to claim the additional first year depreciation deduction for Equipment #4 in 2020. (5) Example 5: Intercompany sale of eligible property followed by sale of B stock as part of the same series of related transactions—(i) Facts. S has a depreciable interest in Equipment #5. On January 1, 2019, B purchases Equipment #5 from S and places it in service. On June 1, 2019, as part of the same series of related transactions that includes B’s purchase of Equipment #5, Parent sells all of the stock of B to X. Thus, B leaves the Parent group at the end of the day on June 1, 2019, and B is a member of the X group starting June 2, 2019. See § 1.1502–76(b). As of June 1, 2019, Equipment #5 remains eligible property. (ii) Analysis—(A) Application of the Consolidated Asset Acquisition Rule. B was a member of the Parent group when it acquired Equipment #5. Because S, another member of the Parent group, had a depreciable interest in Equipment #5 while a member of the group within the lookback period, B would be treated as having a prior depreciable interest in Equipment #5 under the Group Prior Use Rule and B’s acquisition of Equipment #5 would not satisfy the No Prior Use Requirement. However, B’s acquisition of Equipment #5 satisfies the PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 requirements of the Consolidated Asset Acquisition Rule in paragraph (c)(1)(ii) of this section. First, B’s acquisition of Equipment #5 meets the requirements of § 1.168(k)–2(b)(3)(iii)(A) without regard to the related-party tests under section 179(d)(2)(A) or (B) and § 1.179– 4(c)(1)(ii) or (iii) or the Group Prior Use Rule. Second, as part of the same series of related transactions that includes B’s acquisition of Equipment #5, B ceases to be a member of the Parent group and ceases to be Related to S. Third, Equipment #5 continues to be eligible property on the deconsolidation date (June 1, 2019). (B) Consequences of the Consolidated Asset Acquisition Rule. Under the Consolidated Asset Acquisition Rule, B is treated for all Federal income tax purposes as transferring Equipment #5 to an unrelated person on June 2, 2019, in exchange for an amount of cash equal to the deemed sale amount and, immediately thereafter, acquiring deemed replacement property (New Equipment #5) from an unrelated person for an amount of cash equal to the deemed sale amount. Accordingly, assuming all other requirements in § 1.168(k)–2 are satisfied, B is eligible to claim the additional first year depreciation for an amount equal to the deemed sale amount for the taxable year in which it places New Equipment #5 in service. (iii) Distribution of B. The facts are the same as in paragraph (d)(5)(i) of this section, except that, on June 1, 2019, Parent distributes the stock of B to its shareholders (which are not Related to S) in a distribution that qualifies for nonrecognition under section 355(a). Accordingly, the Consolidated Asset Acquisition Rule applies. As in paragraph (d)(5)(ii)(B) of this section, assuming all other requirements in § 1.168(k)–2 are satisfied, B is eligible to claim the additional first year depreciation deduction for an amount equal to the deemed sale amount for the taxable year in which it places New Equipment #5 in service. (iv) Equipment #5 ceases to be eligible property. The facts are the same as in paragraph (d)(5)(i) of this section, except that, on June 1, 2019, Equipment #5 is no longer eligible property. The Consolidated Asset Acquisition Rule does not apply because B’s acquisition of Equipment #5 fails to satisfy the requirement in paragraph (c)(1)(ii)(C) of this section that the acquired eligible property continue to be eligible property on the deconsolidation date. Therefore, B’s acquisition of Equipment #5 on January 1, 2019, fails to satisfy the No Prior Use Requirement. Under the Group Prior Use Rule, B is treated as E:\FR\FM\10NOR2.SGM 10NOR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations having a prior depreciable interest in Equipment #5 because B is a member of the Parent group and S, while a member of the Parent group, had a depreciable interest in Equipment #5 within the lookback period. Accordingly, B is not eligible to claim the additional first year depreciation deduction with respect to Equipment #5 in 2019. (6) Example 6: Intercompany sale of member stock for which a section 338(h)(10) election is made followed by sale of B stock as part of a series of related transactions—(i) Facts. S owns all of the stock of T, which has a depreciable interest in Equipment #6. On January 1, 2019, B purchases all of the T stock from S in a qualified stock purchase for which a section 338(h)(10) election is made. On June 1, 2019, as part of the same series of related transactions that includes B’s purchase of the T stock, Parent sells all of the stock of B to X. Thus, B and T leave the Parent group at the end of the day on June 1, 2019, and B and T are members of the X group starting June 2, 2019. See § 1.1502–76(b). As of June 1, 2019, Equipment #6 remains eligible property. (ii) Analysis—(A) Section 338(h)(10) election. Pursuant to the section 338(h)(10) election, Old T is treated as transferring all of its assets, including Equipment #6, to an unrelated person in a single transaction in exchange for consideration at the close of the acquisition date (January 1, 2019), and New T is treated as acquiring all of its assets, including Equipment #6, from an unrelated person in exchange for consideration. Old T is deemed to liquidate following the deemed asset sale. See § 1.338–1(a)(1). (B) Application of the Consolidated Deemed Acquisition Rule. New T was a member of the Parent group when New T acquired Equipment #6 from an unrelated person. Because Old T, another member of the Parent group, had a depreciable interest in Equipment #6 while a member of the group within the lookback period, New T would be treated as having a prior depreciable interest in Equipment #6 under the Group Prior Use Rule and New T’s acquisition of Equipment #6 would not satisfy the No Prior Use Requirement. However, New T’s acquisition of Equipment #6 satisfies the requirements of the Consolidated Deemed Acquisition Rule in paragraph (c)(2)(ii) of this section. First, New T’s acquisition of Equipment #6 meets the requirements of § 1.168(k)–2(b)(3)(iii)(A) without regard to the Group Prior Use Rule. Second, as part of the same series of related transactions that includes B’s qualified stock purchase of the T stock, B and New T cease to be members of the VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 Parent group and cease to be Related to S. Third, Equipment #6 continues to be eligible property on the deconsolidation date (June 1, 2019). (C) Consequences of the Consolidated Deemed Acquisition Rule. Under the Consolidated Deemed Acquisition Rule, New T is treated for all Federal income tax purposes as transferring Equipment #6 to an unrelated person on June 2, 2019, in exchange for an amount of cash equal to the deemed sale amount and, immediately thereafter, acquiring deemed replacement property (New Equipment #6) from an unrelated person for an amount of cash equal to the deemed sale amount. Accordingly, assuming all other requirements in § 1.168(k)–2 are satisfied, New T is eligible to claim the additional first year depreciation deduction for an amount equal to the deemed sale amount for the taxable year in which it places New Equipment #6 in service. (iii) T owns multiple assets. The facts are the same as in paragraph (d)(6)(i) of this section, except that, in addition to Equipment #6, T also owns Asset A (depreciable real estate that is not eligible property). With respect to Equipment #6, the results are the same as in paragraph (d)(6)(ii) of this section. However, the Consolidated Deemed Acquisition Rule does not apply to Asset A because it is not eligible property. Accordingly, New T is not treated as transferring Asset A to an unrelated person on June 2, 2019 and then, immediately thereafter, acquiring deemed replacement property for Asset A. If Equipment #6 had ceased to be eligible property as of June 1, 2019, the Consolidated Deemed Acquisition Rule also would not apply to Equipment #6. (7) Example 7: Section 355 transaction following a section 338(h)(10) transaction pursuant to the same series of related transactions—(i) Facts. T has a depreciable interest in Equipment #7. On January 1, 2019, Parent contributes all of the stock of T to B in exchange for common and nonvoting preferred stock of B and sells the non-voting preferred stock of B to U pursuant to a binding commitment entered into prior to the contribution (T Exchange). The non-voting preferred stock is not treated as ‘‘stock’’ for purposes of section 1504(a). See section 1504(a)(4). Parent and B jointly make an election under section 338(h)(10) with respect to the T Exchange. On June 1, 2019, as part of the same series of related transactions that includes the T Exchange, Parent contributes the stock of B and assets comprising an active trade or business (within the meaning of section 355(b)) to Controlled in exchange for Controlled common stock PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 71769 and then distributes the Controlled common stock to Parent’s shareholders in a distribution qualifying under section 355(a) (Controlled Distribution). In the Controlled Distribution, T and B cease to be Related to Parent. Equipment #7 remains eligible property on June 1, 2019. (ii) Section 338(h)(10) election. Immediately after the Controlled Distribution, Parent and B are not related as determined under section 338(h)(3)(A)(iii). Further, B’s basis in the T stock is not determined, in whole or in part, by reference to the adjusted basis of the T stock in the hands of Parent, and the stock is not acquired in an exchange to which section 351, 354, 355, or 356 applies. Accordingly, the T Exchange qualifies as a ‘‘purchase’’ within the meaning of section 338(h)(3). Pursuant to the section 338(h)(10) election, Old T is treated as transferring all of its assets, including Equipment #7, to an unrelated person in a single transaction in exchange for consideration at the close of the acquisition date (January 1, 2019), and New T is treated as acquiring all of its assets, including Equipment #7, from an unrelated person in exchange for consideration. Old T is deemed to liquidate following the deemed asset sale. See § 1.338–1(a)(1). (iii) Application of the Consolidated Deemed Acquisition Rule. New T was a member of the Parent group when New T acquired Equipment #7 from an unrelated person. Because Old T, another member of the Parent group, had a depreciable interest in Equipment #7 while a member of the group within the lookback period, New T would be treated as having a prior depreciable interest in Equipment #7 under the Group Prior Use Rule and New T’s acquisition of Equipment #7 would not satisfy the No Prior Use Requirement. However, New T’s acquisition of Equipment #7 satisfies the requirements of the Consolidated Deemed Acquisition Rule in paragraph (c)(2)(ii) of this section. Thus, New T is treated for all Federal income tax purposes as transferring Equipment #7 to an unrelated person on June 2, 2019, in exchange for an amount of cash equal to the deemed sale amount and, immediately thereafter, acquiring deemed replacement property (New Equipment #7) from an unrelated person for an amount of cash equal to the deemed sale amount. Accordingly, assuming all other requirements in § 1.168(k)–2 are satisfied, New T is eligible to claim the additional first year depreciation deduction for an amount equal to the deemed sale amount for the E:\FR\FM\10NOR2.SGM 10NOR2 71770 Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 taxable year in which it places New Equipment #7 in service. (e) Applicability dates—(1) In general. Except as provided in paragraph (e)(2) of this section, this section applies to— (i) Depreciable property acquired after September 27, 2017, by the taxpayer and placed in service by the taxpayer during or after the taxpayer’s taxable year that begins on or after January 1, 2021; (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 begins on or after January 1, 2021; and (iii) Components acquired or selfconstructed after September 27, 2017, of larger self-constructed property described in § 1.168(k)–2(c)(2) and placed in service by the taxpayer during or after the taxpayer’s taxable year that begins on or after January 1, 2021. (2) Early application of this section and § 1.168(k)–2—(i) In general. Subject to paragraphs (e)(2)(ii) and (iii) of this section, and provided that all members of a consolidated group consistently apply the same set of rules, a taxpayer VerDate Sep<11>2014 18:19 Nov 09, 2020 Jkt 253001 may choose to apply both the rules of this section and the rules of § 1.168(k)– 2, in their entirety and in a consistent manner, to— (A) Depreciable property acquired after September 27, 2017, by the taxpayer and placed in service by the taxpayer during a taxable year ending on or after September 28, 2017; (B) A specified plant for which the taxpayer properly made an election to apply section 168(k)(5) and that is planted, or grafted to a plant that was previously planted, after September 27, 2017, by the taxpayer during a taxable year ending on or after September 28, 2017; and (C) Components acquired or selfconstructed after September 27, 2017, of larger self-constructed property described in § 1.168(k)–2(c)(2) and placed in service by the taxpayer during a taxable year ending on or after September 28, 2017. (ii) Early application to certain transactions. In the case of property described in paragraph (e)(2)(i) of this section that is acquired in a transaction that satisfies the requirements of paragraph (c)(1)(ii) or (c)(2)(ii) of this section, the taxpayer may apply the PO 00000 Frm 00038 Fmt 4701 Sfmt 9990 rules of this section and the rules of § 1.168(k)–2, in their entirety and in a consistent manner, to such property only if those rules are applied, in their entirety and in a consistent manner, by all parties to the transaction (including the transferor member, the transferee member, and the target, as applicable) and the consolidated groups of which they are members, for the taxable year(s) in which the transaction occurs and the taxable year(s) that includes the day after the deconsolidation date. (iii) Bound by early application. Once a taxpayer applies the rules of this section and the rules of § 1.168(k)–2, in their entirety, for a taxable year, the taxpayer must continue to apply the rules of this section and the rules of § 1.168(k)–2, in their entirety, for the taxpayer’s subsequent taxable years. Sunita Lough, Deputy Commissioner for Services and Enforcement. Approved: September 16, 2020. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2020–21112 Filed 11–5–20; 4:15 pm] BILLING CODE 4830–01–P E:\FR\FM\10NOR2.SGM 10NOR2

Agencies

[Federal Register Volume 85, Number 218 (Tuesday, November 10, 2020)]
[Rules and Regulations]
[Pages 71734-71770]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-21112]



[[Page 71733]]

Vol. 85

Tuesday,

No. 218

November 10, 2020

Part III





 Department of the Treasury





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 Internal Revenue Service





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26 CFR Part 1





Additional First Year Depreciation Deduction; Final Rule

Federal Register / Vol. 85 , No. 218 / Tuesday, November 10, 2020 / 
Rules and Regulations

[[Page 71734]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9916]
RIN 1545-BP32


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). These final 
regulations reflect and further clarify the increased deduction and the 
expansion of qualified property, particularly to certain classes of 
used property, authorized by the Tax Cuts and Jobs Act. These final 
regulations generally affect taxpayers who depreciate qualified 
property acquired and placed in service after September 27, 2017.

DATES: Effective date: These regulations are effective on January 11, 
2021.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.168(b)-1(b)(2)(iv), 1.168(k)-2(h), and 1.1502-68(e). See 
SUPPLEMENTARY INFORMATION for an in-depth discussion.

FOR FURTHER INFORMATION CONTACT: Concerning Sec. Sec.  1.168(b)-1 and 
1.168(k)-2, Elizabeth R. Binder at (202) 317-4869 or Kathleen Reed at 
(202) 317-4660 (not toll-free numbers); concerning Sec.  1.1502-68, 
Samuel G. Trammell at (202) 317-6975 or Katherine H. Zhang at (202) 
317-5363 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Applicability

    A taxpayer may choose to apply Sec. Sec.  1.168(k)-2 and 1.1502-68 
of these final regulations, in their entirety, to depreciable property 
acquired and placed in service or certain plants planted or grafted, as 
applicable, after September 27, 2017, by the taxpayer during a taxable 
year ending on or after September 28, 2017, provided the taxpayer 
consistently applies all rules in these final regulations. However, 
once the taxpayer applies Sec. Sec.  1.168(k)-2 and 1.1502-68 of these 
final regulations for a taxable year, the taxpayer must continue to 
apply Sec. Sec.  1.168(k)-2 and 1.1502-68 of these final regulations 
for subsequent taxable years. Alternatively, a taxpayer may rely on the 
proposed regulations under section 168(k) in REG-106808-19 (84 FR 
50152; 2019-41 I.R.B. 912), for depreciable property acquired and 
placed in service or certain plants planted or grafted, as applicable, 
after September 27, 2017, by the taxpayer during a taxable year ending 
on or after September 28, 2017, and ending before the taxpayer's first 
taxable year that begins on or after January 1, 2021, if the taxpayer 
follows the proposed regulations in their entirety, except for Sec.  
1.168(k)-2(b)(3)(iii)(B)(5), and in a consistent manner.

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under sections 168(k) and 1502.
    Section 168(k) allows an additional first year depreciation 
deduction for qualified property in the property's placed-in-service 
year. On December 22, 2017, section 168(k) was amended by sections 
12001(b)(13), 13201, and 13204 of Public Law 115-97 (131 Stat. 2054), 
commonly referred to as the Tax Cuts and Jobs Act (TCJA).
    Section 13201 of the TCJA made several significant amendments to 
the additional first year depreciation deduction provisions in section 
168(k) (additional first year depreciation deduction). First, the 
additional first year depreciation deduction percentage was increased 
from 50 to 100 percent. Second, the property eligible for the 
additional first year depreciation deduction was expanded, for the 
first time, to include certain used depreciable property and certain 
film, television, or live theatrical productions. Third, the placed-in-
service date was extended from before January 1, 2020, to before 
January 1, 2027 (and 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)). Fourth, the date on 
which a specified plant may be planted or grafted by the taxpayer was 
extended from before January 1, 2020, to before January 1, 2027. The 
provisions of section 168(k), as amended by the TCJA, are explained in 
greater detail in the preamble to the final regulations published by 
the Department of the Treasury (Treasury Department) and the IRS as TD 
9874 on September 24, 2019 (2019 Final Regulations) in the Federal 
Register (84 FR 50108).
    Section 13201(h) of the TCJA provides the effective dates of the 
amendments to section 168(k) made by section 13201 of the TCJA. Except 
as provided in section 13201(h)(2) of the TCJA, section 13201(h)(1) of 
the TCJA provides that these amendments apply to property acquired and 
placed in service after September 27, 2017. However, section 13201(h) 
of the TCJA also provides that property is not treated as acquired 
after the date on which a written binding contract 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 TCJA 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), so that 
qualified improvement property placed in service after December 31, 
2017, was not eligible for the additional first year depreciation 
deduction. However, section 2307 of the Coronavirus Aid, Relief, and 
Economic Security Act, Public Law 116-136, 134 Stat. 281 (March 27, 
2020) (CARES Act) amended section 168(e)(3)(E) to provide that 
qualified improvement property is classified as 15-year property, 
thereby providing a 15-year recovery period under section 168(c) and 
making qualified improvement property again eligible for the additional 
first year depreciation deduction, consistent with the original intent 
of the TCJA. Section 2307 of the CARES Act is discussed in greater 
detail in part II.B of the Summary of Comments and Explanation of 
Revisions section in this preamble.
    Unless otherwise indicated, all references to section 168(k) 
hereinafter are references to section 168(k) as amended by the TCJA.
    On August 8, 2018, the 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) 
(2018 Proposed Regulations). After full consideration of the comments 
received on the 2018 Proposed Regulations and the testimony heard at 
the public hearing on November 28, 2018, the Treasury Department and 
the IRS published the 2019 Final Regulations adopting the 2018 Proposed 
Regulations with modifications in response to such comments and 
testimony.
    Concurrently with the publication of the 2019 Final Regulations, 
the Treasury Department and the IRS published an additional notice of 
proposed rulemaking (REG-106808-19) in the Federal Register (84 FR 
50152) withdrawing certain provisions of the 2018 Proposed Regulations 
and proposing additional guidance under section 168(k) (2019 Proposed

[[Page 71735]]

Regulations). The Summary of Comments and Explanation of Revisions 
section of this preamble summarizes the provisions of the 2019 Proposed 
Regulations, which are explained in greater detail in the preamble to 
the 2019 Proposed Regulations.
    The Treasury Department and the IRS received written and electronic 
comments responding to the 2019 Proposed Regulations and held a public 
hearing on the 2019 Proposed Regulations on November 13, 2019. After 
full consideration of the comments received on the 2019 Proposed 
Regulations and the testimony heard at the public hearing, this 
Treasury decision adopts the 2019 Proposed Regulations with 
modifications in response to certain comments and testimony, as 
described in the Summary of Comments and Explanation of Revisions 
section.

Summary of Comments and Explanation of Revisions

    The Treasury Department and the IRS received written comments from 
five commenters in response to the 2019 Proposed Regulations. In 
connection with these comments, some commenters also provided comments 
on aspects of the 2019 Final Regulations. All comments were considered 
and are available at https://www.regulations.gov or upon request. The 
comments addressing the 2019 Proposed Regulations and 2019 Final 
Regulations are summarized in this Summary of Comments and Explanation 
of Revisions section.
    Because of the amendments to section 168(k) by the TCJA, the 2019 
Final Regulations updated 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. The 2019 Final Regulations 
also made conforming amendments to the existing regulations. The 2019 
Final Regulations described and clarified the statutory requirements 
that must be met for depreciable property to qualify for the additional 
first year depreciation deduction provided by section 168(k), and they 
provided guidance to taxpayers in determining the additional first year 
depreciation deduction and the amount of depreciation otherwise 
allowable for this property.
    These final regulations provide taxpayers with guidance regarding 
issues relating to the application of section 168(k) that are not 
addressed in the 2019 Final Regulations, along with clarifying changes 
to the 2019 Final Regulations. Specifically, these final regulations 
provide (1) rules relevant to the definition of qualified property, (2) 
rules for consolidated groups, (3) rules regarding components acquired 
or self-constructed after September 27, 2017, for larger self-
constructed property for which manufacture, construction, or production 
began before September 28, 2017, (4) rules regarding the application of 
the mid-quarter convention, as determined under section 168(d), and (5) 
changes to the definitions in the 2019 Final Regulations for the terms 
qualified improvement property, predecessor, and class of property. 
Also, the rules for consolidated groups have been moved from Sec.  
1.168(k)-2(b)(3)(v) of the 2019 Proposed Regulations to new Sec.  
1.1502-68 of these final regulations.
    Part I of this Background section addresses operational rules. Part 
II of this Background section addresses definitions.

I. Operational Rules

A. Property Described in Section 168(k)(9)(B)

    Section 1.168(k)-2(b)(2)(ii)(G) of the 2019 Proposed Regulations 
provides that, for purposes of section 168(k)(9)(B), floor plan 
financing interest is not taken into account for the taxable year by a 
trade or business that has had floor plan financing indebtedness if the 
sum of the amounts calculated under section 163(j)(1)(A) and (B) for 
the trade or business for the taxable year equals or exceeds the 
business interest (which includes floor plan financing interest), as 
defined in section 163(j)(5), of the trade or business for the taxable 
year. If the business interest, which includes floor plan financing 
interest, exceeds the sum of the amounts calculated under section 
163(j)(1)(A) and (B) for the taxable year, the floor plan financing 
interest is taken into account for the taxable year for purposes of 
section 168(k)(9)(B). See Example 7 in Sec.  1.168(k)-2(b)(2)(iii)(G) 
of the 2019 Proposed Regulations. Floor plan financing indebtedness is 
defined in section 163(j)(9)(B) and Sec.  1.163(j)-1(b)(18) as 
indebtedness that is (i) used to finance the acquisition of motor 
vehicles held for sale or lease; and (ii) secured by the motor vehicles 
so acquired. Floor plan financing interest expense is defined in 
section 163(j)(9)(A) and Sec.  1.163(j)-1(b)(19) as interest paid or 
accrued on floor plan financing indebtedness.
    A commenter on the 2019 Proposed Regulations requested that these 
final regulations allow a trade or business that has business interest 
expense, including floor plan financing interest expense, that exceeds 
the sum of the amounts calculated under section 163(j)(1)(A) and (B) 
for the taxable year, to choose to limit its interest expense deduction 
to the sum of the amounts under section 163(j)(1)(A) and (B), and not 
be precluded by section 168(k)(9)(B) from claiming the additional first 
year depreciation deduction. The Treasury Department and the IRS do not 
interpret section 163(j)(1) as allowing such an option. Consistent with 
the plain language of section 163(j)(1), Sec.  1.163(j)-2(b)(1) 
provides that the amount allowed as a deduction for business interest 
expense for the taxable year generally cannot exceed the sum of (1) the 
taxpayer's business interest income for the taxable year, (2) 30 
percent of the taxpayer's adjusted taxable income for the taxable year, 
and (3) the taxpayer's floor plan financing interest expense for the 
taxable year. Pursuant to section 2306(a) of the CARES Act, the 
adjusted taxable income percentage is increased from 30 to 50 percent 
for any taxable year beginning in 2019 or 2020, subject to certain 
exceptions. Because neither section 163(j)(1) nor Sec.  1.163(j)-2(b) 
provide an option for a trade or business with floor plan financing 
indebtedness to include or exclude its floor plan financing interest 
expense in determining the amount allowed as a deduction for business 
interest expense for the taxable year, the Treasury Department and the 
IRS decline to adopt this comment.
    The commenter also requested that the Treasury Department and the 
IRS provide transition relief for taxpayers that treated, on their 2018 
Federal income tax returns, section 163(j)(1) as providing an option 
for a trade or business with floor plan financing indebtedness to 
include or exclude its floor plan financing interest expense in 
determining the amount allowed as a deduction for business interest 
expense for the taxable year. Further, the commenter requested 
transition relief for taxpayers with a trade or business with floor 
plan financing indebtedness that want to revoke their elections not to 
claim the additional first year depreciation for property placed in 
service during 2018 in order to rely on the 2019 Proposed Regulations. 
The Treasury Department and the IRS intend to issue published guidance 
that will address these requests.

B. Used Property

1. Depreciable Interest

a. Five-Year Safe Harbor
    Section 1.168(k)-2(b)(3)(iii)(B)(1) of the 2019 Final Regulations 
provides that property is treated as used by the taxpayer or a 
predecessor at any time prior to acquisition by the taxpayer or

[[Page 71736]]

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, 
the 2019 Final Regulations also provide that only the five calendar 
years immediately prior to the taxpayer's current placed-in-service 
year of the property are taken into account (Five-Year Safe Harbor). If 
the taxpayer and a predecessor have not been in existence for this 
entire five-year period, the 2019 Final Regulations provide that only 
the number of calendar years the taxpayer and the predecessor have been 
in existence are taken into account.
    Commenters requested clarification that the Five-Year Safe Harbor 
applies for purposes of the special rules for consolidated groups in 
Sec.  1.168(k)-2(b)(3)(v) of the 2019 Proposed Regulations. A commenter 
also requested clarification whether ``the partnership's current year'' 
in Sec.  1.168(k)-2(b)(3)(iii)(B)(5) of the 2019 Proposed Regulations 
(Partnership Lookthrough Rule) is the taxable year or the calendar 
year. These comments are addressed later in this Summary of Comments 
and Explanation of Revisions section.
    In connection with comments received on the Five-Year Safe Harbor 
and the Partnership Lookthrough Rule, the Treasury Department and the 
IRS reviewed the Five-Year Safe Harbor and determined that 
clarification of this safe harbor would be beneficial. One commenter 
requested clarification of the Five-Year Safe Harbor as to: (1) Whether 
the ``placed-in-service year'' is the taxable year or the calendar 
year; and (2) whether the portion of the calendar year covering the 
period up to the placed-in-service date of the property is taken into 
account. The commenter also requested clarification regarding the 
application of the Five-Year Safe Harbor to situations where the 
taxpayer or a predecessor was not in existence during the entire 5-year 
lookback period. Specifically, the commenter pointed out that the safe 
harbor in the 2019 Final Regulations could be read to apply only to 
those periods in the 5-year lookback period that both the taxpayer and 
a predecessor are in existence, and not to those periods in the 5-year 
lookback period during which the taxpayer or a predecessor, or both, 
were in existence and had a depreciable interest in the property later 
acquired and placed in service by the taxpayer. The commenter suggested 
that the Five-Year Safe Harbor be clarified to say that the taxpayer 
and each predecessor is subject to a separate lookback period that 
begins no earlier than the date such person came into existence.
    The Treasury Department and the IRS intended the ``placed-in-
service year'' to be the current calendar year in which the property is 
placed in service by the taxpayer. Also, the Treasury Department and 
the IRS intended the portion of that calendar year covering the period 
up to the placed-in-service date of the property to be considered in 
determining whether the taxpayer or a predecessor previously had a 
depreciable interest. This approach is consistent with an exception to 
the de minimis use rule in Sec.  1.168(k)-2(b)(3)(iii)(B)(4) of the 
2019 Proposed Regulations, which is discussed in greater detail in part 
I.B.1.b of this Summary of Comments and Explanation of Revisions 
section. Pursuant to that exception, when a taxpayer places in service 
eligible property in Year 1, disposes of that property to an unrelated 
party in Year 1 within 90 calendar days of that placed-in-service date, 
and then reacquires the same property later in Year 1, the taxpayer is 
treated as having a prior depreciable interest in the property upon the 
taxpayer's reacquisition of the property in Year 1. This rule would be 
superfluous if the Five-Year Safe Harbor did not consider the portion 
of the calendar year covering the period up to the placed-in-service 
date of the property.
    Accordingly, Sec.  1.168(k)-2(b)(3)(iii)(B)(1) is amended to 
clarify that the five calendar years immediately prior to the current 
calendar year in which the property is placed in service by the 
taxpayer, and the portion of such current calendar year before the 
placed-in-service date of the property determined without taking into 
account the applicable convention, are taken into account to determine 
if the taxpayer or a predecessor had a depreciable interest in the 
property at any time prior to acquisition (lookback period). Section 
1.168(k)-2(b)(3)(iii)(B)(1) also is amended to adopt the suggestion of 
the commenter that each of the taxpayer and the predecessor be subject 
to a separate lookback period. These final regulations clarify that if 
the taxpayer or a predecessor, or both, have not been in existence 
during the entire lookback period, then only the portion of the 
lookback period during which the taxpayer or a predecessor, or both, 
have been in existence is taken into account to determine if the 
taxpayer or the predecessor had a depreciable interest in the property. 
More examples have been added to clarify the application of the Five-
Year Safe Harbor.
b. De Minimis Use
    Section 1.168(k)-2(b)(3)(iii)(B)(4) of the 2019 Proposed 
Regulations provides an exception to the prior depreciable interest 
rule in the 2019 Final Regulations when the taxpayer disposes of 
property to an unrelated party within 90 calendar days after the 
taxpayer originally placed such property in service (De Minimis Use 
Rule). The 2019 Proposed Regulations also provide that the De Minimis 
Use Rule does not apply if the taxpayer reacquires and again places in 
service the property during the same taxable year the taxpayer disposed 
of the property. A commenter on the 2019 Proposed Regulations asked for 
clarification regarding the application of the De Minimis Use Rule in 
the following situations:
    (1) The taxpayer places in service property in Year 1, disposes of 
that property to an unrelated party in Year 1 within 90 calendar days 
of that original placed-in-service date, and then reacquires and again 
places in service the same property later in Year 1 and does not 
dispose of the property again in Year 1;
    (2) The taxpayer places in service property in Year 1, disposes of 
that property to an unrelated party in Year 2 within 90 calendar days 
of that original placed-in-service date, and then reacquires and again 
places in service the same property in Year 2 or later; and
    (3) The taxpayer places in service property in Year 1 and disposes 
of that property to an unrelated party in Year 1 within 90 calendar 
days of that original placed-in-service date, then the taxpayer 
reacquires and again places in service the same property later in Year 
1 and disposes of that property to an unrelated party in Year 2 within 
90 calendar days of the subsequent placed-in-service date in Year 1, 
and the taxpayer reacquires and again places in service the same 
property in Year 4.
    In situation 1, the additional first year depreciation deduction is 
not allowable for the property when it was initially placed in service 
in Year 1 by the taxpayer pursuant to Sec.  1.168(k)-2(g)(1)(i) of the 
2019 Final Regulations. The additional first year depreciation 
deduction also is not allowable when the same property is subsequently 
placed in service in Year 1 by the same taxpayer under the De Minimis 
Use Rule in the 2019 Proposed Regulations. The commenter asserted that 
the additional first year depreciation deduction should be allowable 
for the property when it is placed in service

[[Page 71737]]

again in Year 1 and is not disposed of again in Year 1, because the 
additional first year depreciation deduction is not allowable for the 
property when it initially was placed in service in Year 1 by the 
taxpayer. The Treasury Department and the IRS agree with this comment 
if the property is originally acquired by the taxpayer after September 
27, 2017. The Treasury Department and the IRS decline to adopt this 
comment with respect to property that was originally acquired by the 
taxpayer before September 28, 2017, as the exception to the De Minimis 
Use Rule was intended to prevent certain churning transactions 
involving such property. The Treasury Department and the IRS believe 
that property that is placed in service, disposed of, and reacquired in 
the same taxable year is more likely to be part of a predetermined 
churning plan.
    In situation 2, the additional first year depreciation deduction is 
allowable for the same property by the same taxpayer twice (in Year 1 
when the property is initially placed in service, and in Year 2 when 
the property is placed in service again). This result is consistent 
with the De Minimis Use Rule in the 2019 Proposed Regulations, and this 
result is not changed in these final regulations.
    In situation 3, the De Minimis Use Rule provides only one 90-day 
period that is disregarded in determining whether the taxpayer had a 
depreciable interest in the property prior to its reacquisition. That 
90-day period is measured from the original placed-in-service date of 
the property by the taxpayer. As a result, the second 90-day period in 
situation 3 (during which the taxpayer reacquired the property in Year 
1, again placed it in service in Year 1, and then disposed of it in 
Year 2) is taken into account in determining whether the taxpayer 
previously used the property when the taxpayer again places in service 
the property in Year 4.
    The De Minimis Use Rule in these final regulations is clarified to 
reflect these results. These final regulations also include additional 
examples to illustrate the application of the De Minimis Use Rule in 
these situations and conforming changes to Sec.  1.168(k)-2(g)(1)(i) of 
the 2019 Final Regulations.
2. Application to Partnerships
    The Treasury Department and the IRS received several comments 
regarding the Partnership Lookthrough Rule in Sec.  1.168(k)-
2(b)(3)(iii)(B)(5) of the 2019 Proposed Regulations, which addresses 
the extent to which a partner is deemed to have a depreciable interest 
in property held by a partnership. The Partnership Lookthrough Rule 
provides that a person is treated as having a depreciable interest in a 
portion of property prior to the person's acquisition of the property 
if the person was a partner in a partnership at any time the 
partnership owned the property. The Partnership Lookthrough Rule 
further provides that the portion of property in which a partner is 
treated as having a depreciable interest is equal to the total share of 
depreciation deductions with respect to the property allocated to the 
partner as a percentage of the total depreciation deductions allocated 
to all partners during the current calendar year and the five calendar 
years immediately prior to the partnership's current year.
    One commenter requested that the Treasury Department and the IRS 
withdraw the Partnership Lookthrough Rule and replace it with a rule 
that treats a taxpayer as having a depreciable interest in an item of 
property only if the taxpayer was a controlling partner in a 
partnership at any time the partnership owned the property during the 
applicable lookback period. The Treasury Department and the IRS agree 
with the commenter that the Partnership Lookthrough Rule should be 
withdrawn. The Treasury Department and the IRS have determined that the 
complexity of applying the Partnership Lookthrough Rule would place a 
significant administrative burden on both taxpayers and the IRS. For 
this reason, these final regulations do not retain the Partnership 
Lookthrough Rule. Therefore, under these final regulations, a partner 
will not be treated as having a depreciable interest in partnership 
property solely by virtue of being a partner in the partnership. The 
Treasury Department and the IRS have determined that a replacement rule 
that applies only to controlling partners is not necessary because the 
related party rule in section 179(d)(2)(A) applies to a direct purchase 
of partnership property by a current majority partner, and the series 
of related transactions rules in Sec.  1.168(k)-2(b)(3)(iii)(C) 
prevents avoidance of the related party rule through the use of 
intermediary parties.
    The same commenter recommended a number of changes to the 
Partnership Lookthrough Rule if it were to be retained. It is not 
necessary to address these comments, because these final regulations do 
not retain the Partnership Lookthrough Rule.
    Additionally, one commenter recommended that the Treasury 
Department and the IRS clarify the operation of the section 168(k) 
regulations with respect to section 743(b) adjustments after transfers 
of partnership interests in section 168(i)(7) transactions, as 
described in the 2019 Final Regulations. The Treasury Department and 
the IRS have determined that this comment is outside of the scope of 
these final regulations.
3. Series of Related Transactions
    Section 1.168(k)-2(b)(3)(iii)(C) of the 2019 Proposed Regulations 
provides special rules for a series of related transactions (Proposed 
Related Transactions Rule). The Proposed Related Transactions Rule 
generally provides that the relationship between the parties under 
section 179(d)(2)(A) or (B) in a series of related transactions is 
tested immediately after each step in the series, and between the 
original transferor and the ultimate transferee immediately after the 
last transaction in the series. The Proposed Related Transactions Rule 
also provides that the relationship between the parties in a series of 
related transactions is not tested in certain situations. For example, 
a party in the series that is neither the original transferor nor the 
ultimate transferee is disregarded in applying the relatedness test if 
the party placed in service and disposed of the property in the party's 
same taxable year or did not place the property in service. The 
relationship between the parties also is not tested if the step is a 
transaction described in Sec.  1.168(k)-2(g)(1)(iii) (that is, a 
transfer of property in a transaction described in section 168(i)(7) in 
the same taxable year that the property is placed in service by the 
transferor). Finally, the 2019 Proposed Regulations provide that the 
Proposed Related Transactions Rule does not apply to syndication 
transactions or when all transactions in the series are described in 
Sec.  1.168(k)-2(g)(1)(iii).
    A commenter stated that the Proposed Related Transactions Rule may 
disregard significant relationships that existed before the series, or 
that are formed as a result of the series. The commenter also stated 
that the rule does not address how relatedness should be tested when 
the relationship between the parties changes over the course of the 
series or when a party ceases to exist.
    The commenter recommended that the final regulations test 
relatedness immediately before the first step in the series of related 
transactions and immediately after the last step in the series, similar 
to Sec.  1.197-2(h)(6)(ii)(B). The commenter also recommended 
simplifying the Proposed Related Transactions Rule and alleviating 
knowledge burdens imposed on transferees and the IRS as to whether a 
transfer is pursuant to a series of related transactions, the date that 
a transferee in

[[Page 71738]]

a series placed the asset in service, and whether a transferee is 
related to a transferor.
    The Treasury Department and the IRS have determined that the rule 
in Sec.  1.197-2(h)(6)(ii)(B) is not appropriate for testing 
relatedness for purposes of the additional first year depreciation 
deduction. Section 1.197-2(h)(6)(ii)(B) provides that relatedness is 
tested immediately before the first step in a series of related 
transactions and immediately after the last step in the series. The 
purpose of this rule is to prevent the churning of assets, and the 
relationship that is of importance is that of the first and last 
acquisition. In contrast, the purpose of the Proposed Related 
Transactions Rule is to determine whether each transferee in the series 
qualifies to claim the additional first year depreciation deduction for 
the assets and, therefore, testing for relatedness is done immediately 
after each step in the series. Testing for relatedness at no point in 
time other than immediately before the first step and immediately after 
the last step in the series would preclude all intermediaries in the 
series from claiming the additional first year depreciation deduction. 
Accordingly, the Treasury Department and the IRS do not adopt this 
recommendation.
    The commenter also recommended several alternative approaches to 
testing relatedness: (1) Any transferee in a series of related 
transactions tests its relatedness to every prior transferor in the 
series; or (2) a transferee tests its relatedness only to its immediate 
transferor if the transferee demonstrated that it did not know, or have 
reason to know, that the transfer occurred pursuant to a series of 
related transactions.
    The Treasury Department and the IRS have determined that requiring 
each transferee in a series of related transactions to test its 
relatedness to every prior transferor in the series would impose a 
significant administrative burden. Therefore, these final regulations 
do not adopt the commenter's first alternative approach.
    The Treasury Department and the IRS also have determined that, 
because a series of related transactions generally is undertaken among 
the relevant parties pursuant to a preconceived plan, the rule in the 
commenter's second alternative approach would have limited application. 
Because the application of this approach would depend upon the 
taxpayer's demonstration that it did not know, and did not have reason 
to know, that a transfer occurred pursuant to a series, this rule also 
may be difficult for both taxpayers and the IRS to administer. 
Furthermore, this approach fails to adequately address situations where 
the parties other than the original transferor and the ultimate 
transferee in a series may be related or may become related pursuant to 
the series. Thus, these final regulations do not adopt the commenter's 
second alternative approach.
    However, the Treasury Department and the IRS agree that the 
Proposed Related Transactions Rule should be simplified. The Treasury 
Department and the IRS also agree that this rule should be modified to 
take into account changes in the relationship between the parties, 
including a party ceasing to exist, over the course of a series of 
related transactions. For example, assume that, pursuant to a series of 
related transactions, A transfers property to B, B transfers property 
to C, and C transfers property to D. Under the Proposed Related 
Transactions Rule, relatedness is tested after each step and between D 
and A. Assume further that, at the beginning of the series, C was 
related to A but, prior to acquiring the property, C ceases to be 
related to A, or A ceases to exist. The Proposed Related Transactions 
Rule does not address how to treat such changes.
    Accordingly, these final regulations provide that each transferee 
in a series of related transactions tests its relationship under 
section 179(d)(2)(A) or (B) with the transferor from which the 
transferee directly acquires the depreciable property (immediate 
transferor) and with the original transferor of the depreciable 
property in the series. The transferee is treated as related to the 
immediate transferor or the original transferor if the relationship 
exists either immediately before the first transfer of the depreciable 
property in the series or when the transferee acquires the property. 
Any transferor in a series of related transactions that ceases to exist 
during the series is deemed to continue to exist for purposes of 
testing relatedness.
    These final regulations also provide a special rule that disregards 
certain transitory relationships created pursuant to a series of 
related transactions. More specifically, if a party acquires 
depreciable property in a series of related transactions in which the 
acquiring party acquires stock, meeting the requirements of section 
1504(a)(2), of a corporation in a fully taxable transaction, followed 
by a liquidation of the acquired corporation under section 331, any 
relationship created as part of such series of transactions is 
disregarded in determining whether any party is related to such 
acquired corporation for purposes of testing relatedness. This rule is 
similar to Sec.  1.197-2(h)(6)(iii) and properly reflects the change in 
ownership of depreciable property in a series of related transactions 
without taking into account certain transitory relationships the 
purpose of which is unrelated to the additional first year depreciation 
deduction.
    Finally, these final regulations provide that, if a transferee in a 
series of related transactions acquires depreciable property from a 
transferor that was not in existence immediately prior to the first 
transfer of the property in the series (new transferor), the transferee 
tests its relationship with the party from which the new transferor 
acquired the depreciable property. Examples illustrating these revised 
rules are provided in these final regulations.
4. Application to Members of a Consolidated Group
a. The 2019 Proposed Regulations
    The 2019 Proposed Regulations provide special rules addressing the 
availability of the additional first year depreciation deduction upon 
the acquisition of depreciable property by a member of a consolidated 
group, as defined in Sec.  1.1502-1(b) and (h), respectively. Under the 
2019 Proposed Regulations, if a member acquires property in which the 
consolidated group had a depreciable interest at any time prior to the 
member's acquisition of such property, then the member is treated as 
previously having a depreciable interest in such property (Group Prior 
Use Rule). This rule was first included in the 2018 Proposed 
Regulations to address situations in which property is disposed of by 
one member of a consolidated group and subsequently is acquired by 
another member of the same consolidated group, because the Treasury 
Department and the IRS had determined that allowing the additional 
first year depreciation deduction in such situations would not clearly 
reflect the income of the consolidated group. See 83 FR 39292, 39295 
(Aug. 8, 2018). For purposes of the Group Prior Use Rule, a 
consolidated group is treated as having a depreciable interest in 
property during the time any current or former member of the group had 
a depreciable interest while a member of the group. See Sec.  1.168(k)-
2(b)(3)(v)(A) of the 2019 Proposed Regulations.
    Further, when members of a consolidated group acquire both 
depreciable property and the stock of a corporation that previously had 
a depreciable interest in such property

[[Page 71739]]

pursuant to the same series of related transactions, the 2019 Proposed 
Regulations treat the member that acquires the property as previously 
having a depreciable interest in such property (Stock and Asset 
Acquisition Rule). See Sec.  1.168(k)-2(b)(3)(v)(B) of the 2019 
Proposed Regulations. Like the Group Prior Use Rule, the Stock and 
Asset Acquisition Rule initially was included in the 2018 Proposed 
Regulations. As stated in the preamble to those regulations, the 
Treasury Department and the IRS have determined that, in substance, 
this series of related transactions is the same as a series of related 
transactions in which a consolidated group acquired the selling 
corporation, which subsequently reacquired the property in which it 
previously had a depreciable interest and then transferred it to 
another member of the consolidated group. In that situation, the 
additional first year depreciation deduction would not be allowed. See 
83 FR 39292, 39295 (Aug. 8, 2018). Both the Group Prior Use Rule and 
the Stock and Asset Acquisition Rule are adopted in these final 
regulations with certain modifications, as discussed further in part 
I.B.4.b(2) of this Summary of Comments and Explanation of Revisions 
section.
    The 2019 Proposed Regulations also include rules addressing 
transfers of depreciable property between members of the same 
consolidated group. One such rule (Proposed Consolidated Asset 
Acquisition Rule) applies if a member (transferee member) acquires 
depreciable property from another member of the same consolidated group 
in a taxable transaction and, as part of the same series of related 
transactions, the transferee member then ceases to be a member of that 
group within 90 calendar days of the date of the property acquisition. 
Under the Proposed Consolidated Asset Acquisition Rule, the transferee 
member is treated as (1) acquiring the property one day after the date 
on which the transferee member ceases to be a member of the 
consolidated group (Deconsolidation Date) for all Federal income tax 
purposes, and (2) placing the property in service no earlier than one 
day after the Deconsolidation Date for purposes of depreciation and the 
investment credit allowed by section 38. See Sec.  1.168(k)-
2(b)(3)(v)(C) of the 2019 Proposed Regulations.
    The Treasury Department and the IRS also determined that, in 
general, deemed acquisitions of property pursuant to a section 338 
election or a section 336(e) election should be subject to the same 
treatment as actual acquisitions of property because such deemed 
acquisitions generally are respected as actually occurring for Federal 
income tax purposes. See Sec. Sec.  1.336-2(e) and 1.338-1(a)(2); see 
also Sec.  1.336-1(a)(1) (generally providing that, except to the 
extent inconsistent with section 336(e), the results of section 336(e) 
should coincide with those of section 338(h)(10)). Accordingly, the 
Treasury Department and the IRS proposed a rule analogous to the 
Proposed Consolidated Asset Acquisition Rule for deemed acquisitions of 
property pursuant to such an election (Proposed Consolidated Deemed 
Acquisition Rule, and together with the Proposed Consolidated Asset 
Acquisition Rule, the Proposed Consolidated Acquisition Rules).
    Section 338 and section 336(e) both provide elections to treat 
certain transfers of a target corporation's stock as transfers of the 
target corporation's assets. If a section 338 election is made for a 
``qualified stock purchase'' (QSP), then the target corporation 
generally is treated as two separate corporations before and after the 
acquisition date for Federal income tax purposes. As a result of the 
election, ``old target'' is deemed to sell its assets to an unrelated 
person at the close of the acquisition date at fair market value, and 
``new target'' is deemed to acquire those assets from an unrelated 
person at the beginning of the following day. See section 338(a). If 
the election is a section 338(h)(10) election, then old target is 
deemed to liquidate following the deemed sale of its assets. See Sec.  
1.338-1(a)(1).
    Generally, a similar sale and liquidation are deemed to occur if a 
section 336(e) election is made for a ``qualified stock disposition'' 
(QSD) of target corporation stock. However, if a section 336(e) 
election is made for a QSD described in section 355(d)(2) or (e)(2), 
then a different transaction is deemed to occur. In that case, old 
target is deemed to sell its assets to an unrelated party and then 
reacquire those assets from an unrelated party, and old target is not 
deemed to liquidate (sale-to-self model). See Sec.  1.336-2(b).
    The Proposed Consolidated Deemed Acquisition Rule changes certain 
aspects of the deemed acquisitions that result from a section 338 
election or a section 336(e) election. This proposed rule applies if a 
member (transferee member) acquires, in a QSP or QSD, stock of another 
member (target) that holds depreciable property and, as part of the 
same series of related transactions, the transferee member and target 
cease to be members of the selling consolidated group within 90 
calendar days of the QSP or QSD. Under this proposed rule, (1) the 
acquisition date or disposition date, as applicable, is treated as the 
day that is one day after the Deconsolidation Date for all Federal 
income tax purposes, and (2) new target is treated as placing the 
property in service no earlier than one day after the Deconsolidation 
Date for purposes of depreciation and the investment credit allowed by 
section 38. The Proposed Consolidated Deemed Acquisition Rule does not 
apply to QSDs described in section 355(d)(2) or (e)(2). See Sec.  
1.168(k)-2(b)(3)(v)(D) of the 2019 Proposed Regulations.
b. Comments on Consolidated Group Rules in the 2019 Proposed 
Regulations
    The Treasury Department and the IRS received comments regarding the 
foregoing consolidated group rules in the 2019 Proposed Regulations.
(1) The Proposed Consolidated Acquisition Rules
(a) Issues Under the Proposed Consolidated Acquisition Rules
    The Proposed Consolidated Acquisition Rules were intended to make 
the additional first year depreciation deduction available to the buyer 
of depreciable property in an intercompany transaction, as defined in 
Sec.  1.1502-13(b)(1)(i), if the buyer member leaves the consolidated 
group within 90 calendar days pursuant to the same series of related 
transactions that includes the property acquisition. As discussed in 
the preamble to the 2019 Proposed Regulations, the Treasury Department 
and the IRS have determined that, in substance, such a transaction 
should be treated the same as if the buyer member first left the 
consolidated group and then purchased the depreciable property (in 
which case the buyer member would be allowed to claim the additional 
first year depreciation deduction). See 84 FR 50152, 50156 (Sep. 24, 
2019). Treating the property acquisition as occurring after the buyer 
member leaves the consolidated group reduces the likelihood that the 
transfer fails to satisfy the ``purchase'' requirements in section 
179(d)(2) and (3), helps ensure that the buyer member is not attributed 
the seller member's prior use of the property, and precludes the 
application of section 168(i)(7).
    Commenters appreciated the Proposed Consolidated Acquisition Rules. 
However, commenters also argued that, because these rules treat certain 
actual or deemed asset acquisitions as occurring on a date that is 
different than the date on which the

[[Page 71740]]

acquisitions occurred up to 90 calendar days after the date of such an 
acquisition for all Federal income tax purposes, these rules create 
some uncertainty and raise certain implementation issues.
    Many of the questions raised by commenters regarding the Proposed 
Consolidated Acquisition Rules concern the period beginning on the date 
of the actual or deemed asset acquisition and ending on the 
Deconsolidation Date (interim period). In particular, commenters noted 
that tax items may arise during the interim period from both the 
depreciable property acquired by the transferee member and the 
consideration received by the transferor member. Commenters asked how 
income, deductions, or other tax items from the transferred depreciable 
property during the interim period should be reported, particularly if 
the asset acquisition occurs in one taxable year and the 
Deconsolidation Date occurs in the subsequent taxable year. 
Additionally, commenters suggested that the consideration used to 
acquire depreciable property from the transferor member may consist of 
stock or debt instruments that produce dividends or interest during the 
interim period. According to commenters, the Proposed Consolidated 
Acquisition Rules do not address how such income should be reported. 
Commenters also asked how changes in the depreciable property (or the 
seller consideration) during the interim period--such as a change in 
value, or a change in use that affects eligibility for the additional 
first year depreciation deduction--should be taken into account, and 
how tax items associated with the property should be reported if the 
transferor member leaves the selling group during the interim period.
    Commenters also raised questions about the interim period relating 
specifically to the Proposed Consolidated Deemed Acquisition Rule. 
Commenters noted that additional transaction steps, such as property 
transfers by the transferee member to target, or the assumption of 
additional liabilities of the transferee member by target, may occur 
between the date of the QSP and the Deconsolidation Date. If these 
transaction steps occur, commenters asked whether the aggregate deemed 
sale price (ADSP) and adjusted grossed-up basis (AGUB) (see Sec. Sec.  
1.338-4 and 1.338-5, respectively) are adjusted and, if so, how.
    Additionally, commenters asked about the interaction of the 
Proposed Consolidated Acquisition Rules with section 355. More 
specifically, if the transferee member is relying on the acquired 
assets to satisfy the ``active trade or business'' requirements of 
section 355(b) in connection with the distribution of the transferee 
member's stock, commenters asked whether the Proposed Consolidated 
Acquisition Rules could prevent the distribution from qualifying under 
section 355 because the asset acquisition would be treated as occurring 
one day after the transferee member has left the selling group. See 
section 355(b)(1)(A) (providing that the distributing corporation and 
the controlled corporation must be ``engaged immediately after the 
distribution in the active conduct of a trade or business'').
    The Treasury Department and the IRS appreciate the comments 
received with regard to the Proposed Consolidated Acquisition Rules. 
The Treasury Department and the IRS agree that these proposed rules 
could create uncertainty and raise implementation issues. As a result, 
these final regulations adopt an alternative approach (Delayed Bonus 
Approach) that would alleviate many of the concerns raised by 
commenters. See the discussion in part I.B.4.b(1)(e) of this Summary of 
Comments and Explanation of Revisions section.
(b) The 90-Day Requirement
    The Proposed Consolidated Acquisition Rules apply only if, as part 
of the same series of related transactions, the transferee member 
leaves (or, in the case of a deemed asset purchase, the transferee 
member and target leave) the transferor member's consolidated group 
within 90 calendar days of the date of the property acquisition (90-day 
requirement). See part I.B.4.a of this Summary of Comments and 
Explanation of Revisions section. The 90-day requirement was based in 
part on the rule for syndication transactions in section 
168(k)(2)(E)(iii) and Sec.  1.168(k)-2(b)(3)(vi) and (b)(4)(iv). By 
capping the period of time that could elapse between the property 
transfer date and the Deconsolidation Date, the 90-day requirement was 
intended to limit the scope of certain issues created by treating the 
asset acquisition as occurring after the actual transfer date under the 
Proposed Consolidated Acquisition Rules. See the discussion in part 
I.B.4.b(1)(a) of this Summary of Comments and Explanation of Revisions 
section.
    The Treasury Department and the IRS received several comments 
recommending the elimination of the 90-day requirement. The commenters 
generally argued that, in many cases, the 90-day requirement will be 
difficult for taxpayers to satisfy. In business transactions, an 
intercompany asset transfer may be a preparatory step undertaken well 
in advance of the Deconsolidation Date, particularly if the transaction 
involves the transfer of legal title to assets. Additionally, delays in 
regulatory approval for the transaction may preclude the transferee 
member from leaving the consolidated group within 90 days. Moreover, 
one commenter argued that the rationale for the 90-day requirement for 
syndication transactions differs from the rationale for such a 
requirement in the Proposed Consolidated Acquisition Rules. The 
commenter noted that the syndication exception in section 
168(k)(2)(E)(iii) specifies a period of time that ownership of an asset 
(rather than the relationship between the transferor and transferee, as 
in the Proposed Consolidated Acquisition Rules) should be disregarded, 
and the commenter suggested that the primary authority for disregarding 
periods of transitory ownership is the step transaction doctrine rather 
than section 168(k). Commenters also suggested that the 90-day 
requirement does not further the policy goals of section 168(k). In 
other words, so long as there is a series of related transactions, 
whether the asset acquisition and the deconsolidation occur within 90 
days should not be determinative. Based on the foregoing, the 
commenters recommended removing the 90-day requirement and simply 
retaining the ``series of related transactions'' requirement.
    The Treasury Department and the IRS agree with commenters that the 
90-day requirement would be difficult for taxpayers to satisfy in many 
ordinary-course business transactions. The Treasury Department and the 
IRS also have determined that the Delayed Bonus Approach would 
eliminate many of the aforementioned issues with the Proposed 
Consolidated Acquisition Rules by respecting the date on which each 
transaction in the series actually occurs. Consequently, the Delayed 
Bonus Approach does not include a 90-day requirement. See the 
discussion in part I.B.4.b(1)(e) of this Summary of Comments and 
Explanation of Revisions section.
(c) Assets to Which the Proposed Consolidated Acquisition Rules Apply
    Under the 2019 Proposed Regulations, the Proposed Consolidated 
Acquisition Rules apply to actual or deemed acquisitions of 
``depreciable property,'' regardless of whether such property is of a 
type that is eligible for the additional first year depreciation 
deduction (eligible property) or of a type that is ineligible for the 
additional first year depreciation deduction (ineligible

[[Page 71741]]

property). For example, under a literal reading of the Proposed 
Consolidated Asset Acquisition Rule, a member's acquisition of several 
parcels of depreciable real estate that is not eligible property from 
another member would be subject to this rule (assuming that all other 
requirements for application of this rule are satisfied), even though 
none of the transferred property is eligible property. Similarly, a 
member's acquisition of the stock of a target corporation whose assets 
largely consist of depreciable real estate that is not eligible 
property would be subject to the Proposed Consolidated Deemed 
Acquisition Rule (again, assuming that all other requirements for 
application of this rule are satisfied), even though most of the target 
corporation's assets are not eligible property.
    One commenter recommended that the final regulations limit the 
application of the Proposed Consolidated Acquisition Rules to actual or 
deemed acquisitions of eligible property. The commenter explained that 
application of the Proposed Consolidated Acquisition Rules to 
ineligible property would not further the purposes of section 168(k) 
and might lack statutory authority. The commenter also asserted that 
such an application might create a trap for unwary taxpayers who do not 
consult the regulations under section 168(k) when planning transfers of 
ineligible property.
    The Treasury Department and the IRS agree that the Proposed 
Consolidated Acquisition Rules should apply only to eligible property. 
Thus, the Delayed Bonus Approach applies solely to depreciable 
property, as defined in Sec.  1.168(b)-1(a)(1), that meets the 
requirements in Sec.  1.168(k)-2(b)(2), determined without regard to 
Sec.  1.168(k)-2(b)(2)(ii)(C) (election not to claim the additional 
first year depreciation for a class of property) except on the day 
after the Deconsolidation Date. See the discussion in part 
I.B.4.b(1)(e) of this Summary of Comments and Explanation of Revisions 
section.
(d) Application of the Proposed Consolidated Deemed Acquisition Rule to 
Qualified Stock Dispositions Described in Section 355(d)(2) or (e)(2)
    The Proposed Consolidated Deemed Acquisition Rule does not apply to 
QSDs described in section 355(d)(2) or (e)(2). As explained in part 
2(D)(iv) of the Explanation of Provisions section in the 2019 Proposed 
Regulations and part II(C)(2)(c) of the Summary of Comments and 
Explanation of Revisions section in the 2019 Final Regulations, the 
Treasury Department and the IRS determined that this limitation would 
be appropriate because the rules applicable to such QSDs do not treat a 
new target corporation as acquiring assets from an unrelated person. 
See Sec.  1.336-2(b)(2).
    One commenter argued that, although the sale-to-self model in Sec.  
1.336-2(b)(2) could be construed as violating the ``no prior use'' 
requirement in section 168(k)(2)(E)(ii)(I) and Sec.  1.168(k)-
2(b)(3)(iii)(A)(1), this model should not control eligibility for the 
additional first year depreciation deduction, for several reasons. 
First, the commenter argued that there is no policy rationale under 
section 168(k) for treating QSDs described in section 355(d)(2) or 
(e)(2) differently than other transactions for which an election under 
section 336(e) is made. Second, the commenter argued that the sale-to-
self model was not intended to be applied, and has not been applied, 
for all Federal income tax purposes. See, for example, Sec.  1.336-
2(b)(2)(ii)(C) (for purposes of section 197(f)(9), section 1091, and 
any other provision designated in the Internal Revenue Bulletin by the 
Internal Revenue Service, old target in its capacity as the deemed 
seller of assets is treated as separate and distinct from, and 
unrelated to, old target in its capacity as the deemed acquirer of 
assets). Third, the commenter suggested that taxpayers will structure 
around the exclusion for these QSDs in order to avail themselves of the 
Proposed Consolidated Deemed Acquisition Rule. Thus, the commenter 
recommended expanding this rule to include all types of QSD for which 
an election under section 336(e) is made.
    The Treasury Department and the IRS do not agree with the 
commenter's recommendation to expand the scope of the Proposed 
Consolidated Deemed Acquisition Rule to include all types of QSD for 
which an election under section 336(e) is made. In general, a section 
336(e) election should not affect the tax consequences to which the 
purchaser or the distributee would have been subject with respect to 
the acquisition of target stock if a section 336(e) election had not 
been made. See Sec.  1.336-2(c). As explained in the preamble to the 
final section 336(e) regulations, the Treasury Department and the IRS 
believe that ``the predominant feature of the section 336(e) election 
with respect to a section 355(d)(2) or (e)(2) transaction is the 
section 355 transaction.'' 78 FR 28347, 28469 (May 15, 2013). Following 
such a transaction, the controlled corporation (that is, old target) 
generally remains in existence, and it retains its earnings and profits 
and other tax attributes. Because old target remains in existence under 
this construct, such attributes would include old target's prior use of 
its depreciable property. Accordingly, the Treasury Department and the 
IRS decline to expand the scope of the Proposed Consolidated Deemed 
Acquisition Rule.
(e) Alternative Approaches
    Commenters recommended several alternative approaches to alleviate 
the uncertainties and implementation issues raised by the Proposed 
Consolidated Acquisition Rules. This part I.B.4.b(1)(e) of this Summary 
of Comments and Explanation of Revisions section discusses each 
alternative approach.
(i) Delayed Bonus Approach
    The first alternative approach recommended by commenters (Delayed 
Bonus Approach) would treat the asset acquisition as occurring on the 
date such acquisition actually occurred for all Federal income tax 
purposes and, thus, as generally being subject to all Federal income 
tax rules that ordinarily would apply (with the exception of the series 
of related transactions rules in Sec.  1.168(k)-2(b)(3)(iii)(C)). For 
example, during the interim period, the transferee member would 
recognize depreciation on all depreciable transferred assets (including 
the eligible property), and the transferor member would recognize gain 
or loss in accordance with section 168(i)(7) and Sec.  1.1502-13(c)(2).
    Absent additional rules, the transferee member would not be able to 
claim the additional first year depreciation deduction (see sections 
179(d)(2)(A) and (B) and the Group Prior Use Rule). To enable the 
transferee member to claim this deduction, the Delayed Bonus Approach 
treats the transferee member as (1) selling the eligible property to an 
unrelated third party one day after the Deconsolidation Date for an 
amount equal to the member's basis in the eligible property at such 
time, and then (2) acquiring identical, but different, eligible 
property from another unrelated third party for the same amount (deemed 
sale and purchase of eligible property). For this purpose, the 
transferee member's basis in the eligible property on the day after the 
Deconsolidation Date is the value of the consideration paid by the 
transferee member for the property less any depreciation deductions 
taken by the member with respect to such property during the interim 
period.
    The Treasury Department and the IRS have determined that the 
Delayed Bonus Approach would achieve the objectives of the Proposed 
Consolidated Acquisition Rules (that is, permitting

[[Page 71742]]

additional first year depreciation to the transferee member after the 
member leaves the selling group pursuant to a series of related 
transactions) while creating fewer collateral consequences. Moreover, 
because the Delayed Bonus Approach would respect the asset acquisition 
as occurring on the actual acquisition date for all Federal income tax 
purposes, this approach would provide taxpayers with greater certainty 
regarding the tax consequences of the acquisition and the treatment of 
tax items arising during the interim period.
    Thus, these final regulations adopt the Delayed Bonus Approach for 
actual and deemed acquisitions of eligible property that satisfy 
certain requirements. As noted in part I.B.4.b(1)(b) of this Summary of 
Comments and Explanation of Revisions section, the Delayed Bonus 
Approach does not include a 90-day requirement because this approach 
would not raise the same issues as the Proposed Consolidated 
Acquisition Rules. Furthermore, as noted in part I.B.4.b(1)(c) of this 
Summary of Comments and Explanation of Revisions section, the 
transferee member's (or target's) deemed sale and purchase of assets 
the day after the Deconsolidation Date under the Delayed Bonus Approach 
applies solely to eligible property (rather than to all depreciable 
assets).
    Under the Delayed Bonus Approach in these final regulations, the 
transferee member (or target) is treated as selling and then purchasing 
eligible property for cash. Accordingly, the deemed sale and purchase 
of eligible property cannot be characterized as an exchange of property 
that is eligible for nonrecognition treatment under section 1031. 
Moreover, in the deemed sale and purchase of eligible property, the 
transferee member (or target) is treated as acquiring used property 
(deemed replacement property). Accordingly, the original use of such 
property does not commence with the transferee member (or target). As a 
result, the deemed sale and purchase of eligible property does not 
allow the deemed replacement property to be eligible for federal income 
tax credits or deductions that require new property. For example, such 
property does not satisfy the original use requirement in section 
48(a)(3)(B)(ii) for the energy credit.
    Because the cost of the deemed replacement property (and, 
consequently, the adjusted basis in such property) is identical to the 
transferee member's (or target's) adjusted basis in the eligible 
property, a question has arisen as to whether section 179(d)(3) and 
Sec.  1.168(k)-2(b)(3)(iii)(A)(3) potentially could apply to prevent 
the transferee member (or target) from claiming the additional first 
year depreciation deduction for such property. To avoid any potential 
uncertainty in this regard, these final regulations expressly provide 
that the acquisition of the deemed replacement property does not result 
in the basis in such property being determined, in whole or in part, by 
reference to the basis of other property held at any time by the 
transferee member or target.
    The Treasury Department and the IRS note that, under the Delayed 
Bonus Approach in these final regulations, the deemed sale and purchase 
of eligible property are treated as occurring for all Federal income 
tax purposes. Treating the deemed sale and purchase of eligible 
property as applicable solely for purposes of sections 168 and 179 (and 
not for all Federal income tax purposes) could lead to complications 
and inconsistencies. Under such an approach, taxpayers would be 
required to treat each piece of eligible property as two separate 
assets: (1) An asset that exists for purposes of sections 168 and 179; 
and (2) an asset that exists for all other Federal income tax purposes. 
Therefore, this approach could present difficulties in determining, for 
instance, (1) how any depreciation claimed with respect to the asset 
that exists for purposes of sections 168 and 179 affects the taxpayer's 
adjusted basis in the asset that exists for all other Federal income 
tax purposes, and (2) how to calculate the gain or loss recognized on a 
future disposition of the eligible property.
    The Delayed Bonus Approach does not apply to property unless such 
property is eligible property as of the time of its acquisition by the 
transferee member, the Deconsolidation Date, and the day after the 
Deconsolidation Date. For this purpose, the status of acquired property 
as ``eligible property'' is generally determined without regard to 
Sec.  1.168(k)-2(b)(2)(ii)(C) (property subject to an election not to 
claim the additional first year depreciation deduction for a class of 
property). As a result, a series of related transactions may be subject 
to the Delayed Bonus Approach even if the common parent of the selling 
consolidated group makes an election under section 168(k)(7) not to 
claim the additional first year depreciation deduction for a class of 
property placed in service by the transferee member for the short 
taxable year ending on the Deconsolidation Date. However, to avoid 
creating a trap for the unwary, the definition of ``eligible property'' 
takes into account any such election made for the taxable year that 
includes the day after the Deconsolidation Date. Accordingly, one 
component in the definition of eligible property effectively provides 
that for such taxable year, the transferee member cannot have made an 
election under section 168(k)(7) not to claim the additional first year 
depreciation deduction for the class of property to which the acquired 
property belongs. By extension, the Delayed Bonus Approach does not 
apply to acquired property belonging to a class of property with 
respect to which the transferee makes an election under section 
168(k)(7), for property placed in service in the taxable year that 
includes the day after the Deconsolidation Date.
    Additionally, these final regulations allow taxpayers to elect out 
of the application of the Delayed Bonus Approach with respect to all 
eligible property that otherwise would be subject to the Delayed Bonus 
Approach. If a taxpayer makes this election for a transaction, the 
taxpayer also is deemed to have made such an election for all other 
transactions in the same series of related transactions that otherwise 
would be subject to the Delayed Bonus Approach and that involve the 
same (or a related) transferee member or target. To provide clarity and 
uniformity with the other elections in Sec.  1.168(k)-2, these final 
regulations provide that the election 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.
    A commenter requested confirmation that the deemed sale and 
purchase of eligible property under the Delayed Bonus Approach would 
not prevent the transferee member's deconsolidation in a stock 
distribution from qualifying under section 355. In other words, if such 
eligible property comprises the transferee member's entire trade or 
business, the deemed sale and purchase might be viewed as precluding 
the distribution from satisfying the ``active trade or business'' 
requirement in section 355(b). See section 355(b)(2)(C) (a corporation 
is treated as engaged in the active conduct of a trade or business only 
if, among other things, such trade or business was not acquired in a 
recognition transaction during the five-year period ending on the date 
of the distribution). The Treasury Department and the IRS are 
considering this issue and request comments for purposes of potential 
future guidance.
(ii) Other Alternative Approaches
    The second alternative approach recommended by commenters (Modified 
Consolidated Acquisition Approach) would be identical to the Proposed 
Consolidated Acquisition Rules, except

[[Page 71743]]

that the asset acquisition would not be treated as occurring on the day 
after the Deconsolidation Date for all Federal income tax purposes. 
Instead, the asset acquisition would be treated as occurring on the day 
after the Deconsolidation Date solely for purposes of determining (1) 
whether the requirements of section 168(k) are satisfied and, if so, 
(2) the amount, location, and timing of the transferee member's (or new 
target's) additional first year depreciation deduction with respect to 
the depreciable property. For all other Federal income tax purposes, 
the asset acquisition would be treated as occurring on the date such 
acquisition actually occurred.
    The third alternative approach recommended by commenters (Frozen 
Depreciation Approach) is the same as the Delayed Bonus Approach, 
except that the transferee member would not be permitted to claim 
depreciation deductions during the interim period for the acquired 
assets (and the transferor member would not be required to take into 
account gain or loss from the asset acquisition under Sec.  1.1502-
13(c)).
    The Treasury Department and the IRS have determined that, although 
the Modified Consolidated Acquisition Approach would address certain 
issues and uncertainties created by the Proposed Consolidated 
Acquisition Rules, this approach would create other issues and 
uncertainties by delaying the asset acquisition date for purposes of 
section 168(k) but not for other Federal income tax purposes. For 
instance, if the Modified Consolidated Acquisition Approach were 
applied to a deemed asset acquisition pursuant to a section 338(h)(10) 
election, the acquisition date would be delayed until one day after the 
Deconsolidation Date for purposes of section 168(k), but old target 
would be deemed to sell its assets and liquidate pursuant to Sec.  
1.338(h)(10)-1(d)(4)(i) on the actual acquisition date for all other 
Federal income tax purposes. This duality could complicate the 
calculation and allocation of the ADSP and AGUB among the target's 
assets by creating two separate acquisition dates, and thus two 
different dates on which such calculation and allocation must be 
determined. Therefore, these final regulations do not adopt the 
Modified Consolidated Acquisition Approach.
    Similarly, with respect to the Frozen Depreciation Approach, the 
Treasury Department and the IRS have determined that holding the 
transferee member's depreciation deductions (and the transferor 
member's gain or loss on the asset acquisition) in abeyance could 
create some of the same issues as those identified by commenters with 
regard to the Proposed Consolidated Acquisition Rules. Such issues 
include the proper manner for reporting transactions that are part of a 
series of related transactions spanning multiple taxable years, and the 
appropriate way to account for changes in the depreciable property 
during the interim period. Accordingly, if the Frozen Depreciation 
Approach were to be adopted, the 90-day requirement might be required 
to limit the scope of such issues. Thus, these final regulations also 
do not adopt this approach.
(2) Application of the Five-Year Safe Harbor
    As discussed in part I.B.1.a of this Summary of Comments and 
Explanation of Revisions section, the Five-Year Safe Harbor in Sec.  
1.168(k)-2(b)(3)(iii)(B)(1) of these final regulations provides that, 
in determining if the taxpayer or a predecessor previously had a 
depreciable interest in property, ``only the five calendar years 
immediately prior to the current calendar year in which the property is 
placed in service by the taxpayer, and the portion of such current 
calendar year before the placed-in-service date of the property without 
taking into account the applicable convention, are taken into 
account.'' Commenters requested confirmation that the Five-Year Safe 
Harbor applies for purposes of the Group Prior Use Rule and the Stock 
and Asset Acquisition Rule.
    The Treasury Department and the IRS did not intend to require a 
different (and longer) ``look back'' period for consolidated group 
members than for other taxpayers. Accordingly, these final regulations 
clarify the Group Prior Use Rule to provide that a member of a 
consolidated group is treated as having a depreciable interest in 
property only if the group had a depreciable interest within the 
``lookback period.'' This period, which is defined in these final 
regulations in accordance with the Five-Year Safe Harbor, includes both 
the five calendar years immediately prior to the current calendar year 
in which the property is placed in service by the member and the 
portion of such current calendar year before the placed-in-service date 
of the property, without taking into account the applicable convention. 
Similarly, these final regulations clarify that the Stock and Asset 
Acquisition Rule applies only if the corporation that joins the 
consolidated group had a depreciable interest in the property within 
the lookback period. These final regulations have modified Examples 26, 
27, and 30 in Sec.  1.168(k)-2(b)(3)(vii) of the 2019 Proposed 
Regulations (Examples 1, 2, and 3 in Sec.  1.1502-68(d) of these final 
regulations) accordingly.
(3) Request for Additional Examples
    One commenter requested several additional examples to clarify the 
application of the aforementioned special rules for consolidated 
groups. One such example would illustrate that the Group Prior Use Rule 
does not apply to situations in which an asset is acquired by a former 
group member (other than the member that directly held the asset) 
following the termination of the group. Another such example would 
address the consequences of an asset acquisition by one member of a 
consolidated group if, in an unrelated transaction, a corporation that 
previously had a depreciable interest in the property becomes a member 
of the same consolidated group.
    The Treasury Department and the IRS agree that such examples would 
be helpful and have included them in these final regulations.
(4) Movement of Consolidated Rules to Regulations Under Section 1502
    The Treasury Department and the IRS have determined that moving the 
section 168(k) rules for consolidated groups to the regulations under 
section 1502 would facilitate the identification and application of 
these rules by practitioners. Thus, these rules have been moved from 
Sec.  1.168(k)-2(b)(3)(v) of the 2019 Proposed Regulations to new Sec.  
1.1502-68.

C. Acquisition of Property

1. Acquisition of a Trade or Business or an Entity
    Section 1.168(k)-2(b)(5)(iii)(G) of the 2019 Proposed Regulations 
provides that a contract to acquire all or substantially all of the 
assets of a trade or business or to acquire an entity is binding if it 
is enforceable under State law against the parties to the contract and 
that certain conditions do not prevent the contract from being a 
binding contract. This proposed rule also provides that it applies to a 
contract for the sale of stock of a corporation that is treated as an 
asset sale as a result of an election under section 338.
    The Treasury Department and the IRS are aware of potential 
questions regarding whether Sec.  1.168(k)-2(b)(5)(iii)(G) of the 2019 
Proposed Regulations also applies to a contract for the sale of stock 
of a corporation that is treated as an asset sale as a result of an 
election under section 336(e). The Federal income tax consequences of a 
section 336(e) election made with respect to a qualified stock 
disposition

[[Page 71744]]

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. Sec.  1.336-1(a)(1) and 1.336-2(b)(1). Accordingly, 
these final regulations clarify that Sec.  1.168(k)-2(b)(5)(iii)(G) 
applies to a contract for the sale of stock of a corporation that is 
treated as an asset sale as a result of an election under section 
336(e) made for a disposition described in Sec.  1.336-2(b)(1).
2. Property Not Acquired Pursuant to a Written Binding Contract
    Section 1.168(k)-2(b)(5)(v) of the 2019 Proposed Regulations 
provides that, in general, the acquisition date of property that the 
taxpayer acquires pursuant to a contract that does not meet the 
definition of a written binding contract in Sec.  1.168(k)-2(b)(5)(iii) 
of the 2019 Final Regulations is the date on which the taxpayer paid or 
incurred more than 10 percent of the total cost of the property, 
excluding the cost of any land and preliminary activities. A commenter 
on the 2019 Proposed Regulations requested the bifurcation of a 
particular type of contract that the taxpayer has determined does not 
meet the definition of a written binding contract in Sec.  1.168(k)-
2(b)(5)(iii) of the 2019 Final Regulations. The contract at issue is 
cancelable at any time by the taxpayer/customer without penalty and 
requires the taxpayer to reimburse the contractor only for the costs 
the contractor has incurred, plus the contractor's profit margin, prior 
to the date the contractor receives a notice of cancellation by the 
taxpayer. For such a contract, the commenter requested that the final 
regulations allow the contract to be bifurcated into a binding contract 
for the period prior to the effective date of section 13201 of the TCJA 
and a separate non-binding contract for the period after the effective 
date of section 13201 of the TCJA. If the final regulations allow such 
a bifurcation, the commenter asserted that, if more than 10 percent of 
the costs of the project are paid or incurred by the taxpayer before 
the effective date of section 13201 of the TCJA, none of such costs are 
eligible for the 100-percent additional first year depreciation 
deduction, but all costs paid or incurred by the taxpayer after the 
effective date of section 13201 of the TCJA would meet the acquisition 
date requirements for the 100-percent additional first year 
depreciation deduction.
    The Treasury Department and the IRS have determined that the change 
made in these final regulations to the component election (see part 
I.C.3 of this Summary of Comments and Explanation of Revisions section) 
generally addresses this comment. Therefore, the Treasury Department 
and the IRS decline to provide a special rule for this particular type 
of contract.
3. Component Election
    Section 1.168(k)-2(c) of the 2019 Proposed Regulations allows a 
taxpayer to elect to treat one or more components acquired or self-
constructed after September 27, 2017, of certain larger self-
constructed property as being eligible for the additional first year 
depreciation deduction (Component Election). The larger self-
constructed property must be qualified property under section 
168(k)(2), as in effect before the enactment of the TCJA, for which the 
manufacture, construction, or production began before September 28, 
2017. However, the election is not available for components of larger 
self-constructed property when such components are not otherwise 
eligible for the additional first year depreciation deduction.
a. Eligible Larger Self-Constructed Property
    Pursuant to Sec.  1.168(k)-2(c)(2)(ii) of the 2019 Proposed 
Regulations, larger self-constructed property that is placed in service 
by the taxpayer after December 31, 2019, or larger self-constructed 
property described in section 168(k)(2)(B) or (C), as in effect on the 
day before enactment of the TCJA, that is placed in service after 
December 31, 2020, is not eligible larger self-constructed property. 
Accordingly, any components of such property that are acquired or self-
constructed after September 27, 2017, do not qualify for the Component 
Election. A commenter on the 2019 Proposed Regulations requested that 
the final regulations remove this cut-off date for when the larger 
self-constructed property must be placed in service because it does not 
reflect the intent of section 13201 of the TCJA of promoting capital 
investment, modernization, and growth. If a taxpayer constructs a 
building, the Treasury Department and the IRS are aware that taxpayers 
have questioned whether the larger self-constructed property is the 
building or the tangible personal property constructed as part of the 
building.
    After considering these comments and the comment for property not 
acquired pursuant to a written binding contract (see part I.C.2 of this 
Summary of Comments and Explanation of Revisions section), the Treasury 
Department and the IRS have determined to expand the larger self-
constructed property that is eligible for the Component Election. These 
final regulations provide that eligible larger self-constructed 
property also includes property that is manufactured, constructed, or 
produced for the taxpayer by another person under a written contract 
that does not meet the definition of a binding contract under Sec.  
1.168(k)-2(b)(5)(iii) of the 2019 Final Regulations (written non-
binding contract) and 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. Further, these 
final regulations remove the requirement that the larger self-
constructed property be qualified property under section 168(k)(2), as 
in effect on the day before the enactment of the TCJA, and instead 
provide that the larger self-constructed property must be (i) MACRS 
property with a recovery period of 20 years or less, computer software, 
water utility property, or qualified improvement property under section 
168(k)(3) as in effect on the day before the enactment date of the 
TCJA, and (ii) qualified property under Sec.  1.168(k)-2(b) of the 2019 
Final Regulations and these final regulations, determined without 
regard to the acquisition date requirement in Sec.  1.168(k)-2(b)(5), 
for which the taxpayer begins the manufacture, construction, or 
production before September 28, 2017. As a result of this change, the 
cut-off dates for when the larger self-constructed property must be 
placed in service by the taxpayer now align with the placed-in-service 
dates under section 168(k)(6) and Sec.  1.168(k)-2(b)(4)(i). Because 
the Component Election is an exception to the acquisition date 
requirements in Sec.  1.168(k)-2(b)(5)(iv) of the 2019 Final 
Regulations and Sec.  1.168(k)-2(b)(5)(v) of these final regulations, 
and such rules do not apply to qualified film, television, and live 
theatrical productions, the Treasury Department and the IRS have 
determined to retain the rule in Sec.  1.168(k)-2(c) of the 2019 
Proposed Regulations to exclude these productions from being eligible 
for the Component Election.
    With regard to the taxpayers' question of whether the larger self-
constructed property is the building constructed by the taxpayer or the 
tangible personal property constructed as part of the building, all 
tangible personal property constructed as part of that building 
generally is MACRS property with a recovery period of 20 years or less. 
As a result, the Treasury Department and the IRS have determined that 
such tangible personal property is the larger self-constructed property 
for purposes

[[Page 71745]]

of the Component Election if the construction of all tangible personal 
property of the building began before September 28, 2017, and any 
eligible component of such tangible personal property is eligible for 
the Component Election. Accordingly, these final regulations clarify 
that all property that is constructed as part of residential rental 
property, nonresidential real property, or an improvement to such 
property, and that is MACRS property with a recovery period of 20 years 
or less, computer software, water utility property, or qualified 
improvement property under section 168(k)(3) as in effect on the day 
before the enactment date of the TCJA, is the larger self-constructed 
property for purposes of the Component Election.
b. Eligible Components
    To be eligible for the Component Election, Sec.  1.168(k)-2(c)(3) 
of the 2019 Proposed Regulations provides that a component of the 
larger self-constructed property must be qualified property under Sec.  
1.168(k)-2(b) of the 2019 Final Regulations and these final regulations 
that is acquired or self-constructed by the taxpayer after September 
27, 2017. These final regulations retain this rule. In addition, these 
final regulations clarify that the acquisition date of a component 
acquired pursuant to a written binding contract is determined under 
Sec.  1.168(k)-2(b)(5)(ii)(B) of the 2019 Final Regulations. If a 
component is acquired or self-constructed pursuant to a written non-
binding contract, these final regulations provide that the rules under 
Sec.  1.168(k)-2(b)(5)(v) of these final regulations determine the 
acquisition date of such component or when manufacture, construction, 
or production of such component begins. These final regulations also 
include a conforming change to Sec.  1.168(k)-2(b)(5)(v) clarifying 
that these rules apply to property that is self-constructed pursuant to 
a written non-binding contract, and amend Sec.  1.168(k)-2(d)(3) to 
provide a rule similar to the rule in Sec.  1.168(k)-2(b)(5)(v) for 
property that is described in section 168(k)(2)(B) or (C) and is not 
acquired pursuant to a written binding contract.

D. Property Described in Section 168(k)(2)(B)

    Section 1.168(k)-2(e)(1)(iii) of the 2019 Proposed Regulations 
provides that rules similar to the rules in section 4.02(1)(b) of 
Notice 2007-36 (2007-17 I.R.B. 1000) apply for determining the amounts 
of unadjusted depreciable basis attributable to the manufacture, 
construction, or production of property described in section 
168(k)(2)(B) before January 1, 2027. These final regulations clarify 
that such rules apply regardless of whether the manufacture, 
construction, or production of such property is pursuant to a written 
binding contract or a written non-binding contract.

II. Definitions

A. Depreciable Property

    Section 1.168(b)-1(a)(1) defines the term ``depreciable property'' 
for purposes of section 168. See also Sec.  1.168(k)-2(b)(1). In 
connection with its comments on the special rules for consolidated 
groups in Sec.  1.168(k)-2(b)(3)(v) of the 2019 Proposed Regulations, a 
commenter requested the final regulations provide either an explicit 
definition of that term or an alternate term that is expressly limited 
to property the nature of which is eligible for the additional first 
year depreciation deduction.
    The definition of ``depreciable property'' in Sec.  1.168(b)-
1(a)(1) is the same definition of that term in Sec.  1.168(k)-
1(a)(2)(i) for purposes of section 168(k) as in effect before the 
enactment of the TCJA. The Treasury Department and the IRS are not 
aware of problems with applying the definition under either Sec.  
1.168(b)-1(a)(1) or Sec.  1.168(k)-1(a)(2)(i). Moreover, the Treasury 
Department and the IRS have determined that such definition clearly 
describes which property is depreciable property. Accordingly, the 
Treasury Department and the IRS decline to adopt this comment. However, 
the rules in Sec.  1.1502-68 for consolidated groups use the term 
``eligible property'' to identify the types of depreciable property 
eligible for the additional first year depreciation deduction.

B. Qualified Improvement Property

    Section 1.168(b)-1(a)(5) of the 2019 Final Regulations defines the 
term ``qualified improvement property'' for purposes of section 168. 
Section 168(e)(6), as amended by section 13204 of the TCJA, and Sec.  
1.168(b)-1(a)(5)(i)(A) and (a)(5)(ii) provide the definition of that 
term for improvements placed in service after December 31, 2017. 
Section 2307 of the CARES Act amended section 168(e)(3)(E), (e)(6), and 
(g)(3)(B). Section 2307(a)(1)(A) of the CARES Act added a new clause 
(vii) to the end of section 168(e)(3)(E) to provide that qualified 
improvement property is classified as 15-year property. Section 
2307(a)(1)(B) of the CARES Act amended the definition of qualified 
improvement property in section 168(e)(6) by providing that the 
improvement must be ``made by the taxpayer.'' In addition, section 
2307(a)(2) of the CARES Act amended the table in section 168(g)(3)(B) 
to provide a recovery period of 20 years for qualified improvement 
property for purposes of the alternative depreciation system under 
section 168(g). These amendments to section 168(e) and (g) are 
effective as if included in section 13204 of the TCJA and, therefore, 
apply to property placed in service after December 31, 2017.
    As a result of these changes by section 2307 of the CARES Act, 
these final regulations amend Sec.  1.168(b)-1(a)(5)(i)(A) to provide 
that the improvement must be made by the taxpayer. The Treasury 
Department and the IRS are aware of questions regarding the meaning of 
``made by the taxpayer'' with respect to third-party construction of 
the improvement and the acquisition of a building in a transaction 
described in section 168(i)(7)(B) (pertaining to treatment of 
transferees in certain nonrecognition transactions) that includes an 
improvement previously made by, and placed in service by, the 
transferor or distributor of the building. In this regard, the Treasury 
Department and the IRS believe that an improvement is made by the 
taxpayer if the taxpayer makes, manufactures, constructs, or produces 
the improvement for itself or if the improvement is made, manufactured, 
constructed, or produced for the taxpayer by another person under a 
written contract. In contrast, if a taxpayer acquires nonresidential 
real property in a taxable transaction and such nonresidential real 
property includes an improvement previously placed in service by the 
seller of such nonresidential real property, the improvement is not 
made by the taxpayer.
    Consistent with section 168(i)(7) (pertaining to treatment of 
transferees in certain nonrecognition transactions), the Treasury 
Department and the IRS also believe that if a transferee taxpayer 
acquires nonresidential real property in a transaction described in 
section 168(i)(7)(B) (for example, section 351 or 721), any improvement 
that was previously made by, and placed in service by, the transferor 
or distributor of such nonresidential real property and that is 
qualified improvement property in the hands of the transferor or 
distributor is treated as being made by the transferee taxpayer, and 
thus is qualified improvement property in the hands of the transferee 
taxpayer, but only for the portion of its basis in such property that 
does not exceed the transferor's or distributor's adjusted depreciable 
basis of this property.

[[Page 71746]]

However, because the basis is determined by reference to the 
transferor's or distributor's adjusted basis in the improvement, the 
transferee taxpayer's acquisition 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 Sec.  1.168(k)-2(b)(3)(iii). 
Accordingly, the qualified improvement property is not eligible for the 
additional first year depreciation deduction in the hands of the 
transferee taxpayer, except as provided in Sec.  1.168(k)-2(g)(1)(iii).
    An example has been added to Sec.  1.168(k)-2(b)(2)(iii) to 
illustrate the eligibility of qualified improvement property for the 
additional first year depreciation deduction.

C. Predecessor and Class of Property

    Section 1.168(k)-2(a)(2)(iv)(B) of the 2019 Final Regulations 
defines a predecessor as including 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. A commenter requested 
clarification of whether this definition was intended to apply only 
with respect to the specific property transferred or more broadly. The 
Treasury Department and the IRS intended the definition of a 
``predecessor'' in Sec.  1.168(k)-2(a)(2)(iv)(B) of the 2019 Final 
Regulations to be property-specific. Similarly, the Treasury Department 
and the IRS intended the definition of a ``class of property'' in Sec.  
1.168(k)-2(f)(1)(ii)(G) of the 2019 Final Regulations (regarding basis 
adjustments in partnership assets under section 743(b)) to be partner-
specific. Accordingly, these final regulations amend Sec.  1.168(k)-
2(a)(2)(iv)(B) of the 2019 Final Regulations to substitute ``the'' for 
``an'', and these final regulations amend Sec.  1.168(k)-2(f)(1)(ii)(G) 
of the 2019 Final Regulations to substitute ``Each'' for ``A''.
    Pursuant to Sec.  1.168(k)-2(a)(2)(iv)(E) of the 2019 Final 
Regulations, a transferor of an asset to a trust is a predecessor with 
respect to the trust. The Treasury Department and the IRS intended that 
this provision apply only to transfers involving carryover basis. 
Because Sec.  1.168(k)-2(a)(2)(iv)(B) of the 2019 Final Regulations 
applies to such transfers, these final regulations remove Sec.  
1.168(k)-2(a)(2)(iv)(E) of the 2019 Final Regulations.

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 https://www.irs.gov.

Applicability Date

    The definition of qualified improvement property in Sec.  1.168(b)-
1(a)(5)(i)(A) of these final regulations applies to depreciable 
property placed in service by the taxpayer after December 31, 2017. 
Sections 1.168(k)-2 and 1.1502-68 of these final regulations apply to 
depreciable property, including certain components, acquired after 
September 27, 2017, and placed in service, or certain plants planted or 
grafted, as applicable, by the taxpayer during or after the taxpayer's 
taxable year that begins on or after January 1, 2021. However, a 
taxpayer may choose to apply Sec. Sec.  1.168(k)-2 and 1.1502-68 of 
these final regulations to depreciable property, including certain 
components, acquired and placed in service after September 27, 2017, or 
certain plants planted or grafted after September 27, 2017, as 
applicable, by the taxpayer during a taxable year ending on or after 
September 28, 2017, provided the taxpayer applies all rules in 
Sec. Sec.  1.168(k)-2 and 1.1502-68 (to the extent relevant) in their 
entirety and in a consistent manner. See section 7805(b)(7).
    In the case of property described in Sec.  1.1502-68(e)(2)(i) of 
these final regulations that is acquired in a transaction that 
satisfies the requirements of Sec.  1.1502-68(c)(1)(ii) or (c)(2)(ii) 
of these final regulations, the taxpayer may apply Sec. Sec.  1.168(k)-
2 and 1.1502-68 of these final regulations for such property only if 
the rules are applied, in their entirety and in a consistent manner, by 
all parties to the transaction, including the transferor member, the 
transferee member, and the target, as applicable, and the consolidated 
groups of which they are members, for the taxable year(s) in which the 
transaction occurs and the taxable year(s) that includes the day after 
the deconsolidation date, as defined in Sec.  1.1502-68(a)(2)(iii) of 
these final regulations.
    Additionally, once a taxpayer applies Sec. Sec.  1.168(k)-2 and 
1.1502-68 of these final regulations, in their entirety, for a taxable 
year, the taxpayer must continue to apply Sec. Sec.  1.168(k)-2 and 
1.1502-68 of these final regulations, in their entirety, for the 
taxpayer's subsequent taxable years.
    Alternatively, a taxpayer may rely on the proposed regulations 
under section 168(k) in regulation project REG-106808-19 (84 FR 50152; 
2019-41 I.R.B. 912), with respect to depreciable property, including 
certain components, acquired and placed in service after September 27, 
2017, or certain plants planted or grafted after September 27, 2017, as 
applicable, by the taxpayer during a taxable year ending on or after 
September 28, 2017, and before the taxpayer's first taxable year that 
begins on or after January 1, 2021, if (1) the taxpayer follows the 
proposed regulations in their entirety, except for the Partnership 
Lookthrough Rule in proposed Sec.  1.168(k)-2(b)(3)(iii)(B)(5), and in 
a consistent manner, and (2) all members of a consolidated group 
consistently rely on the same set of rules. Further, if such property 
is acquired in a transaction described in proposed Sec.  1.168(k)-
2(b)(3)(v)(C) or (D), the taxpayer may rely on the proposed regulations 
under section 168(k) for such property only if the rules are followed, 
in their entirety and in a consistent manner, by all parties to the 
transaction, including the transferor member, the transferee member, 
and the target, as applicable, and the consolidated groups of which 
they are members, for the taxable year(s) in which the transaction 
occurs and the taxable year(s) that includes the day after the 
Deconsolidation Date. For this purpose, the terms transferor member, 
transferee member, and target have the meaning provided in proposed 
Sec.  1.168(k)-2(b)(3)(v)(C) and (D), and the term Deconsolidation Date 
has the meaning provided in proposed Sec.  1.168(k)-2(b)(3)(v)(C)(1).

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Executive Orders 12866, 13563, and 13771 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 final regulations have been designated as subject to review 
under Executive Order 12866 pursuant to the Memorandum of Agreement 
(April 11,

[[Page 71747]]

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

i. Bonus Depreciation
    In general, section 168(k) allows taxpayers to immediately deduct 
some portion of investment in certain types of capital assets referred 
to as the ``bonus percentage.'' This provision is colloquially referred 
to as ``bonus depreciation.'' Public Law 115-97, commonly referred to 
as the Tax Cuts and Jobs Act (TCJA), increased the bonus percentage 
from 50 percent to 100 percent for qualified property acquired after 
September 27, 2017, which accelerates depreciation deductions relative 
to previous law. The TCJA also removed the ``original use'' 
requirement, meaning that taxpayers could claim bonus depreciation on 
certain ``used'' property. The TCJA 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 certain firms (primarily automobile dealerships) with 
``floor plan financing indebtedness'' as defined under section 163(j). 
Furthermore, section 168(k)(2)(a)(ii)(IV) and (V) allowed qualified 
film, television, and live theatrical productions (as defined under 
Section 181) to qualify for bonus depreciation.
    The Treasury Department and the IRS promulgated regulations under 
Sec.  1.168(k)-2 to generally provide structure and clarity for the 
implementation of section 168(k). Such regulations were proposed as 
REG-104397-18 (2018 Proposed Regulations) and finalized as TD 9874 
(2019 Final Regulations). However, the Treasury Department and the IRS 
determined that there remained several outstanding issues requiring 
clarification that should be subject to notice and comment. In 
response, the Treasury Department and the IRS issued an additional 
notice of proposed rulemaking as REG 106808-19 (2019 Proposed 
Regulations). These final regulations finalize the 2019 Proposed 
Regulations with only minor changes.
    These final regulations (these regulations) address ambiguities 
related to the operation of section 168(k)(9), which describes property 
that is ineligible for bonus depreciation. Second, these regulations 
create a de minimis rule which provides that a taxpayer will be deemed 
not to have had a prior depreciable interest in a property--and thus 
that property will be eligible for bonus depreciation in that 
taxpayer's hands (assuming it otherwise qualifies)--if the taxpayer 
previously disposed of that property within 90 days of the date on 
which that property was originally placed in service. Third, these 
regulations provide for the treatment of an asset acquisition as part 
of a sale of a member of a consolidated group from one group to 
another. Fourth, these regulations clarify the treatment of a series of 
related transactions. Finally, these regulations provide an election to 
treat certain components of larger self-constructed property as 
eligible for the increased bonus percentage even if the construction of 
such larger self-constructed property began before September 28, 2017.

B. Economic Analysis

1. No-Action Baseline
    In this analysis, the Treasury Department and the IRS assess the 
benefits and costs of these regulations relative to a no-action 
baseline reflecting anticipated Federal income tax-related behavior in 
the absence of these regulations.
2. Summary of Economic Effects
    These regulations provide certainty and consistency in the 
application of section 168(k) by providing definitions and 
clarifications regarding the statute's terms and rules. In the absence 
of the guidance provided in these regulations, the chance that 
different taxpayers might interpret the statute differently is 
exacerbated. For example, two similarly situated taxpayers might 
interpret the statutory provisions pertaining to the definition of 
property eligible for bonus depreciation differently, with one taxpayer 
pursuing a project that another comparable taxpayer might decline 
because of a different interpretation of whether property is eligible 
for bonus depreciation under 168(k). If this second taxpayer's activity 
is more profitable, an economic loss arises. Similar situations may 
arise under each of the provisions addressed by these regulations. 
Certainty and clarity over tax treatment generally also reduce 
compliance costs for taxpayers and increase overall economic 
performance.
    An economic loss might also arise if all taxpayers have similar 
interpretations under the baseline of the tax treatment of particular 
deductible items but those interpretations differ slightly from the 
interpretation Congress intended for deductions of these items. For 
example, these regulations may specify a tax treatment that few or no 
taxpayers would adopt in the absence of specific guidance but that 
nonetheless advances Congressional intent. In these cases, guidance 
provides value by bringing economic decisions closer in line with the 
intent and purpose of the statute.
    While no guidance can curtail all differential or inaccurate 
interpretations of the statute, these regulations significantly 
mitigate the chance for differential or inaccurate interpretations and 
thereby increase economic efficiency.
    Because these regulations clarify the tax treatment of bonus 
depreciation for certain taxpayers, there is the possibility that 
business decisions may change as a result of these regulations relative 
to the no-action baseline. Averaged across taxpayers in the economy, 
these regulations will tend to expand the pool of property that is 
eligible for bonus depreciation, thus reducing effective tax rates for 
affected taxpayers, relative to the no-action baseline. This reduction 
in effective tax rates, viewed in isolation, is generally projected to 
increase economic activity by these taxpayers relative to the no-action 
baseline.
3. Economic Analysis of Specific Provisions
i. Property Excluded From Bonus by Section 168(k)(9)
    Section 168(k)(9) provides that property used by certain businesses 
is not eligible for bonus depreciation. These businesses include 
certain rate-regulated utilities and certain firms (primarily motor 
vehicle dealerships) with floor plan financing indebtedness and total 
interest expense that exceeds certain thresholds.
    These regulations clarify that those taxpayers that lease property 
to such businesses described by section 168(k)(9) may claim bonus 
depreciation, so long as other requirements of section 168(k) are met. 
This approach broadly follows existing normalization rules (which pre-
date TCJA and which provide generally for the reconciliation of tax 
income and book income for regulatory purposes for utilities), which 
provide that lessors to public utilities are not bound by such rules so 
long as they themselves are not a public utility. The Treasury 
Department and the IRS expect that this guidance will be easy for 
taxpayers to interpret and comply with. To the extent that lessors can 
claim bonus depreciation, it is plausible that the market-clearing 
lease price for

[[Page 71748]]

such assets will fall, potentially enabling some expansions of output 
and contributing to economic growth.
    These regulations next clarify which businesses fall under the 
umbrella of section 168(k)(9)(A) (utilities) and section 168(k)(9)(B) 
(firms with floor plan financing indebtedness). In regards to section 
168(k)(9)(A), which applies to property that is ``primarily used'' in 
certain utilities businesses, these regulations provide that the 
``primary use'' of property is consistent with how primary use is 
determined in existing regulations under section 167. This application 
should be familiar to taxpayers, and thus relatively easy to comply 
with.
    The statutory language of section 168(k)(9)(B) is somewhat 
ambiguous, requiring more substantive clarifications. First, section 
168(k)(9)(B) provides that firms with floor plan financing indebtedness 
are ineligible for bonus depreciation ``if the floor plan financing 
interest [from such indebtedness] was taken into account under [section 
163(j)(1)(C)].'' These regulations clarify that such interest is in 
fact ``taken into account'' only if the firm in fact received a benefit 
from section 163(j)(1)(C)--i.e., if total business interest expense 
(including floor plan financing interest) exceeds business interest 
income plus 30 percent (50 percent for taxable years beginning during 
2019 and 2020) of adjusted taxable income. This decision allows more 
firms to claim bonus depreciation than if the Treasury Department and 
the IRS had made the opposite interpretation (deeming all firms with 
floor plan financing interest to be ineligible for bonus depreciation, 
regardless of whether the firm received a benefit from section 
163(j)(1)(C)). However, the Treasury Department and the IRS expect that 
most taxpayers would have interpreted the phrase ``taken into account'' 
in the same manner as these regulations in the absence of these 
regulations, implying that the economic effects of this provision are 
modest.
    An additional ambiguity in section 168(k)(9)(B) pertains to the 
length of time that the section applies to a given firm. The section 
refers to a ``trade or business that has had floor plan financing 
indebtedness . . . if the floor plan financing interest related to such 
indebtedness was taken into account under [section 163(j)(1)(C)]'' 
(emphasis added). Consider a firm (Example A) that received a benefit 
from section 163(j)(C)(1) in the 2021 tax year (meaning that its 
interest deduction would have been smaller if not for section 
163(j)(C)(1)) but not in the 2022 tax year or any other later year. The 
Treasury Department and the IRS considered two options to address the 
length of time to which this designation would apply: (i) In 
perpetuity, such that such businesses would be forever ineligible for 
bonus depreciation; or (ii) annually; that is, section 168(k)(9)(B) is 
determined on an annual basis. Under this option, the firm in Example A 
would not be eligible for bonus depreciation in 2021, but so long as 
the other requirements were met, it would be eligible for bonus 
depreciation in 2022.
    These regulations adopt the second option. This interpretation 
enables more firms to be eligible for bonus depreciation in more years, 
relative to the alternative regulatory approach, and would thus 
potentially increase investment by such firms. The Treasury Department 
and the IRS expect that a substantial proportion of taxpayers would 
have come to a different conclusion regarding the interpretation of 
this timing in the absence of these regulations. Therefore, this 
provision could be expected to affect economic activity by these 
taxpayers relative to the no-action baseline.
    The Treasury Department and the IRS engaged in an analysis of these 
effects based on historical tax data, parameter values from the 
economic literature for the effect of bonus depreciation on investment, 
and assumptions regarding taxpayer interpretations in the absence of 
these regulations. This analysis projects that this provision will 
cause investment to increase in this industry by no greater than $55 
million in any year, and approximately $25 million per year on average 
over the period from 2019-2028, relative to the no-action baseline. 
Additionally, this analysis projects that some share of this increased 
investment will reduce investment in other industries through crowd-out 
effects.
ii. Prior Depreciable Interest
    In general, to be statutorily eligible for bonus depreciation, a 
given property may not have been owned and depreciated by the same firm 
in the past. This requirement has the effect of penalizing any tax-
driven ``churning'' of assets, whereby a firm could sell and soon 
thereafter repurchase the same asset in order to claim the 100 percent 
deduction. The 2019 Final Regulations defined ``ownership'' for this 
purpose as having a prior depreciable interest. These regulations 
create an exception that provides that a taxpayer does not have a prior 
depreciable interest in a given property if the taxpayer disposed of 
the property within 90 days of the initial date when the property was 
placed in service (additional requirements apply to the extent the 
original acquisition occurred prior to September 28, 2017). The 
Treasury Department and the IRS instituted this rule to address 
situations where temporary ownership of property is necessary to 
facilitate certain lease arrangements so that the property subsequently 
purchased off-lease is not ineligible for bonus depreciation and to 
coordinate with the syndication transaction rules of section 
168(k)(2)(E)(iii).
    The Treasury Department and the IRS do not anticipate substantial 
economic effects of this provision. Nevertheless, it will generally 
have the effect of causing more property to be eligible for bonus 
depreciation (increasing incentives to invest) relative to the no-
action baseline. This provision is not expected to meaningfully 
increase tax-driven or economically wasteful churning of assets 
relative to the no-action baseline.
iii. Group Prior Use Rule
    These regulations clarify several aspects of the ``Group Prior Use 
Rule'' as introduced in the 2018 Proposed Regulations. Under that rule, 
all members of a consolidated group are treated as having had a 
depreciable interest in a property if any member of the consolidated 
group had such a depreciable interest. First, these final regulations 
clarify that the rule ceases to be in effect once the consolidated 
group terminates as a result of joining another consolidated group. 
Second, these regulations clarify that the Group Prior Use Rule does 
not apply to a corporation after it deconsolidates from the 
consolidated group, so long as that corporation did not in fact 
previously own that property. As is the case with the prior use rules 
generally, the Treasury Department and the IRS do not anticipate large 
economic effects as a result of this section of these regulations 
relative to the no-action baseline.
iv. Purchases of Assets as Part of Acquisition of Entire Business
    These regulations clarify the procedure for certain purchases of 
assets by a given corporation from a related party that are a part of 
an integrated plan involving the selling of that corporation from one 
group to another. Specifically, these regulations provide that the 
deduction for bonus depreciation is allowed in such circumstances and 
should be claimed by the acquiring group. These regulations provide for 
a similar treatment in the case of deemed acquisitions in the case of 
an election under section 338(h)(10)

[[Page 71749]]

or section 336(e). These rules cause the tax treatment to reflect the 
economic reality, in which the acquiring group is bearing the economic 
outlay of the asset purchase, and that acquiring group had no economic 
prior depreciable interest. By aligning the tax consequences with the 
economic allocations, this treatment minimizes potential distortions 
caused by the anti-churning rules relative to the no-action baseline.
v. Component Rule Election
    In 2010, Congress increased the bonus percentage from 50 percent to 
100 percent for property placed in service between September 9, 2010 
and December 31, 2011. In 2011, the IRS issued Revenue Procedure 2011-
26 to allow taxpayers to elect to have the 100 percent bonus rate apply 
to components of larger self-constructed property whose construction 
began before September 9, 2010, so long as (1) the components were 
acquired (or self-constructed) after that date and (2) the larger self-
constructed property itself otherwise qualifies for bonus depreciation 
generally. These regulations provide an analogous rule, replacing 
September 9, 2010 with September 28, 2017. This provision will allow 
more property to qualify for 100 percent bonus depreciation relative to 
the no-action baseline. Furthermore, this provision provides neutrality 
between taxpayers who acquire distinct, smaller pieces of depreciable 
property and those taxpayers that invest a similar amount in fewer, 
larger pieces of depreciable property whose construction takes place 
over a longer period of time. By treating similar taxpayers (and 
similar choices) similarly, this rule enhances economic efficiency by 
minimizing tax-related distortions. However, the Treasury Department 
and the IRS project these rules to have only a modest effect on future 
economic decisions relative to the no-action baseline. These rules 
affect only taxpayers (1) that acquire (or self-construct) components 
after September 27, 2017 and (2) that began construction of the larger 
self-constructed property prior to September 28, 2017 (approximately 32 
months ago). The Treasury Department and the IRS expect relatively few 
taxpayers to be affected by this provision going forward.
vi. Series of Related Transactions
    The 2018 Proposed Regulations provided that, in a series of related 
transactions, the relationship between the transferor and transferee of 
an asset was determined only after the final transaction in the series 
(Series of Related Transactions Rule). Commenters had expressed 
confusion regarding whether this rule applies to testing whether 
parties are related under section 179(d)(2), or whether it applies more 
broadly (e.g., in determining whether the taxpayer had a prior 
depreciable interest). These regulations clarify that this Series of 
Related Transactions Rule is intended only to test the relatedness of 
the parties involved in the series of related transactions.
    These regulations further revise the Series of Related Transactions 
Rule to address its application in various situations. Under these 
regulations, relatedness is tested after each step of the series of 
related transactions and between the original transferor in the series 
and the direct transferor, with a substantial exception that any 
intermediary (i.e., a taxpayer other than the original transferor or 
ultimate transferee) is disregarded so long as that intermediary (1) 
never places the property in service or (2) disposes of the property in 
the same taxable year in which it was placed in service. Testing 
relatedness after each step in the transaction allows certain 
intermediaries in the series to claim bonus depreciation if they 
maintained use of the property for a non-trivial length of time. The 
Treasury Department and the IRS do not predict substantial economic 
effects of this provision relative to the no-action baseline.
vii. Miscellaneous
    These regulations put forward rules to the extent existing 
regulations apply in slightly new contexts. In particular, these 
regulations clarify when a binding contract is in force to acquire all 
or substantially all the assets of a trade or business. Additionally, 
consistent with the rules of Sec.  1.168(d)-1(b)(4), these regulations 
provide that, for the purpose of determining whether the mid-quarter 
convention applies, depreciable basis is not reduced by the amount of 
bonus depreciation.
    The Treasury Department and the IRS do not anticipate large 
economic effects of these clarifications relative to the no-action 
baseline, though the additional clarity provided by these regulations 
will likely reduce compliance burdens.
4. Number of Affected Taxpayers
    The most substantial components of these regulations affect the 
ability of dealers of motor vehicles to claim bonus depreciation. Based 
on data from tax year 2017, the Treasury Department and the IRS 
estimate that there are approximately 94,000 taxpayers in that industry 
who may be affected by these regulations based on the taxpayer's 
voluntarily reported NAICS code. Of this 94,000, 14,000 are filers of 
Form 1120, 42,000 are filers of Form 1120S, 12,000 are filers of Form 
1065, and 26,000 are filers of Form 1040. Additionally, other 
components of these regulations may have a very slight effect on all 
taxpayers that claim bonus depreciation. Including such taxpayers, 
these regulations may affect approximately 2.85 million taxpayers, 
including 160,000 filers of Form 1120, 560,000 filers of Form 1120S, 
400,000 filers of Form 1065, and 1.75 million filers of Form 1040.

II. Paperwork Reduction Act

    The collections of information in these final regulations are in 
Sec. Sec.  1.168(k)-2(c) and 1.1502-68(c)(4). The collection of 
information in Sec.  1.168(k)-2(c) is an election that a taxpayer may 
make to treat one or more components acquired or self-constructed after 
September 27, 2017, of certain larger self-constructed property as 
being eligible for the 100-percent additional first year depreciation 
deduction under section 168(k). The larger self-constructed property 
must be MACRS property with a recovery period of 20 years or less, 
computer software, water utility property, or qualified improvement 
property placed in service by the taxpayer after September 27, 2017, 
and before January 1, 2018, that is qualified property under section 
168(k)(2) for which the manufacture, construction, or production began 
before September 28, 2017. The election is made by attaching a 
statement to a Federal income tax return indicating that the taxpayer 
is making the election under Sec.  1.168(k)-2(c) and whether the 
taxpayer is making the election for all or some of the components 
described in Sec.  1.168(k)-2(c).
    The collection of information in Sec.  1.1502-68(c)(4) is an 
election that a taxpayer may make to not claim the additional first 
year depreciation deduction for qualified property, and which Sec.  
1.1502-68(c)(1) or (2) would otherwise require the taxpayer to claim 
such deduction when a member of a consolidated group acquires from 
another member property eligible for the additional first year 
depreciation deduction (or stock of a third member holding such 
property), and the acquirer member (and acquired member, if applicable) 
then leaves the consolidated group. To make the election, the 
corporation must attach a statement to its timely filed federal income 
tax return (including extensions) for the taxable year that begins 
after the date on which it leaves the consolidated group. The

[[Page 71750]]

statement must describe the transaction(s) to which Sec.  1.1502-
68(c)(1) or (2) would apply and state that the corporation elects not 
to claim the additional first year depreciation deduction for any 
property transferred in such transaction(s).
    For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) (PRA), the reporting burden associated with Sec.  1.168(k)-
2(c) will be reflected in the PRA submission associated with income tax 
returns in the Form 1120 series, Form 1040 series, Form 1041 series, 
and Form 1065 series (for OMB control numbers, see chart at the end of 
this part II of this Special Analysis section). The estimate for the 
number of impacted filers with respect to the collection of information 
described in this part is 0 to 41,775 respondents. Partial data was 
available to directly estimate the upper bound for the number of 
impacted filers. The upper bound estimate is based on the change in 
volume of federal income tax return filers that amended a 2017 or 2018 
filing a nonzero entry on Form 4562 Line 14 (additional first year 
depreciation deduction).
    For purposes of the PRA, the reporting burden associated with Sec.  
1.1502-68(c)(4) will be reflected in the PRA submission associated with 
income tax returns in the Form 1120 series (for OMB control number, see 
chart at the end of this part II of this Special Analysis section). The 
estimate for the number of impacted filers with respect to the 
collection of information described in this part is 0 to 500 
respondents. Partial data was available to estimate the upper bound for 
the number of impacted filers. The upper bound estimate is based on the 
observed volume of federal income tax return filers that are a 
subsidiary corporation of a parent, have a history of reporting 
depreciation on a Form 4562, and based on the parent's consolidated 
federal tax return filing in 2017 and 2018, the subsidiary 
deconsolidated from the consolidated group.
    The IRS estimates the number of affected filers to be the 
following:

                           Tax Forms Impacted
------------------------------------------------------------------------
                                       Number of     Forms to which the
     Collection of information        respondents    information may be
                                      (estimated)         attached
------------------------------------------------------------------------
Section 1.168(k)-2(c) Election for        0-41,775  Form 1120 series,
 components of larger self-                          Form 1040 series,
 constructed property for which                      Form 1041 series,
 the manufacture, construction, or                   and Form 1065
 production begins before                            series.
 September 28, 2017.
Section 1.1502-68(c)(4) Election             0-500  Form 1120 series.
 to not claim the additional first
 year depreciation deduction under
 Sec.   1.1502-68(c)(1) or (2) for
 property owned by a subsidiary
 corporation of a consolidated
 group that is qualified property
 after the subsidiary corporation
 leaves the consolidated group.
------------------------------------------------------------------------
Source: IRS:RAAS:KDA (CDW 5-16-20 for Sec.   1.168(k)-2(c) election and
  CDW 5-15-20 for Sec.   1.1502-68(c)(4)(i) election).

    The current status of the PRA submissions related to the tax forms 
that will be revised as a result of the information collections in the 
section 168(k) regulations and the section 1502 regulations is provided 
in the accompanying table. As described earlier, 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 3.344 billion hours and total 
estimated monetized costs of $61.558 billion ($2019)), 1545-0074 (which 
represents a total estimated burden time, including all other related 
forms and schedules for individuals, of 1.721 billion hours and total 
estimated monetized costs of $33.267 billion ($2019)), 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 IRS is currently in the process of revising the methodology it uses 
to estimate burden and costs for OMB control number 1545-0092. It is 
expected that future estimates under this OMB control number will 
include dollar estimates of annual burden costs to taxpayers calculated 
using this revised methodology. The overall burden estimates provided 
for the OMB control numbers below are aggregate amounts that relate to 
the entire package of forms associated with the applicable OMB control 
number and will in the future include, but not isolate, the estimated 
burden of the tax forms that will be created or revised as a result of 
the information collections in the regulations. These numbers are 
therefore unrelated to the future calculations needed to assess the 
burden imposed by the regulations. These burdens have been reported for 
other regulations that rely on the same OMB control numbers to conduct 
information collections under the PRA, and the Treasury Department and 
the IRS urge readers to recognize that these numbers are duplicates and 
to guard against over counting the burden that the regulations that 
cite these OMB control numbers imposed prior to the TCJA. 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 earlier, the Treasury Department and the 
IRS estimate PRA burdens on a taxpayer-type basis rather than a 
provision-specific basis. Those estimates would capture changes made by 
the TCJA 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 these final regulations, 
including estimates for how much time it would take to comply with the 
paperwork burdens described earlier for each relevant form and ways for 
the IRS to minimize the paperwork burden. In addition, when available, 
drafts of IRS forms are posted for comment at https://apps.irs.gov/app/picklist/list/draftTaxForms.htm. IRS forms are available at https://www.irs.gov/forms-instructions. Forms will not be finalized until after 
they have been approved by OMB under the PRA.

[[Page 71751]]



----------------------------------------------------------------------------------------------------------------
                  Form                           Type of filer          OMB No(s).              Status
----------------------------------------------------------------------------------------------------------------
Form 1040...............................  Individual (NEW Model)....       1545-0074  Approved by OIRA through 1/
                                                                                       31/2021.
                                         -----------------------------------------------------------------------
                                          Link: https://www.federalregister.gov/documents/2019/09/30/2019-21066/proposed-collection-comment-request-for-form-1040-form-1040nr-form-1040nr-ez-form-1040x-1040-sr-and
----------------------------------------------------------------------------------------------------------------
Form 1041...............................  Trusts and estates........       1545-0092  Approved by OIRA through 5/
                                                                                       3/2022.
                                         -----------------------------------------------------------------------
                                          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  Approved by OIRA through 1/
                                                                                       31/2021.
                                         -----------------------------------------------------------------------
                                          Link: https://www.federalregister.gov/documents/2019/09/30/2019-21068/proposed-collection-comment-request-for-forms-1065-1066-1120-1120-c-1120-f-1120-h-1120-nd-1120-s
----------------------------------------------------------------------------------------------------------------

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 burden in Sec.  1.168(k)-2(c) 
generally affects taxpayers that elect to have the 100-percent 
additional first year depreciation deduction apply to components that 
are acquired or self-constructed after September 27, 2017, of 
depreciable property for which the manufacture, construction, or 
production began before September 28, 2017. The election is made by 
attaching a statement to a Federal income tax return indicating that 
the taxpayer is making the election under Sec.  1.168(k)-2(c) and 
whether the taxpayer is making this election for all or some of the 
components described in Sec.  1.168(k)-2(c).
    The reporting burden in Sec.  1.1502-68(c)(4) generally affects 
taxpayers that elect to not claim the additional first year 
depreciation deduction for qualified property, and which Sec.  1.1502-
68(c)(1) or (2) would otherwise require the taxpayer to claim such 
deduction when a member of a consolidated group acquires from another 
member property eligible for the additional first year depreciation 
deduction (or stock of a third member holding such property), and the 
acquirer member (and acquired member, if applicable) then leaves the 
consolidated group. To make the election, the corporation must attach a 
statement to its timely filed federal income tax return (including 
extensions) for the taxable year that begins after the date on which it 
leaves the consolidated group. The statement must describe the 
transaction(s) to which Sec.  1.1502-68(c)(1) or (2) would apply and 
state that the corporation elects not to claim the additional first 
year depreciation deduction for any property transferred in such 
transaction(s).
    For purposes of the PRA, the Treasury Department and the IRS 
estimate that there are 0 to 41,775 respondents of all sizes that are 
likely to be impacted by the collection of information in Sec.  
1.168(k)-2(c). 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(c) to be the following:

------------------------------------------------------------------------
                                   Gross receipts of
              Form                  $25 million or      Gross receipts
                                         less          over $25 million
------------------------------------------------------------------------
Form 1040.......................  0-7,000             0-25 Respondents
                                   Respondents         (estimated).
                                   (estimated).
Form 1065.......................  0-12,000            0-500 Respondents
                                   Respondents         (estimated).
                                   (estimated).
Form 1120.......................  0-1,500             0-750 Respondents
                                   Respondents         (estimated).
                                   (estimated).
Form 1120S......................  0-19,000            0-1,000
                                   Respondents         Respondents
                                   (estimated).        (estimated).
                                 ---------------------------------------
    Total.......................  0-39,500            0-2,275
                                   Respondents         Respondents
                                   (estimated).        (estimated).
------------------------------------------------------------------------
Source: IRS:RAAS:KDA (CDW 5-6-20).

    For purposes of the PRA, the Treasury Department and the IRS 
estimate that there are 0 to 500 respondents of all sizes that are 
likely to be impacted by the collection of information in Sec.  1.1502-
68(c)(4). Only a small number 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.  1.1502-68(c)(4)(i) to 
be the following:

------------------------------------------------------------------------
                                   Gross receipts of
              Form                  $25 million or      Gross receipts
                                         less          over $25 million
------------------------------------------------------------------------
Form 1120.......................  0-67 Respondents    0-433 Respondents
                                   (estimated).        (estimated).
------------------------------------------------------------------------
Source: IRS:RAAS:KDA (CDW 5-15-2020).

    Regardless of the number of small entities potentially affected by 
these final regulations, the Treasury Department and the IRS have 
concluded that Sec. Sec.  1.168(k)-2(c) and 1.1502-68(c)(4) will not 
have a significant economic impact on a substantial number of small 
entities. As a result of all changes in these final regulations, the 
Treasury Department and the IRS estimate that individual taxpayers who 
have gross receipts of $25 million or less

[[Page 71752]]

and experience an increase in burden will incur an average increase of 
0 to 3 hours, and business taxpayers that have gross receipts of $25 
million or less and experience an increase in burden will incur an 
average increase of 0 to 2 hours (Source: IRS:RAAS (8-28-2019)). 
Because the elections in Sec. Sec.  1.168(k)-2(c) and 1.1502-68(c)(4) 
are one of several changes in these final regulations, the Treasury 
Department and the IRS expect the average increase in burden to be less 
for the collections of information in Sec. Sec.  1.168(k)-2(c) and 
1.1502-68(c)(4) than the average increase in burden in the preceding 
sentence. The Treasury Department and the IRS also note that many 
taxpayers with gross receipts of $25 million or less may experience a 
reduction in burden as a result of all changes in these final 
regulations.
    Additionally: (1) Many small businesses are not required to 
capitalize under section 263(a) the amount paid or incurred for the 
acquisition of depreciable tangible property that costs $5,000 or less 
if the business has an applicable financial statement or costs $500 or 
less if the business does not have an applicable financial statement, 
pursuant to Sec.  1.263(a)-1(f)(1); (2) many small businesses are no 
longer required to capitalize under section 263A the costs to 
construct, build, manufacture, install, improve, raise, or grow 
depreciable property if their average annual gross receipts are 
$26,000,000 or less (2020 inflation adjusted amount); and (3) a small 
business that capitalizes costs of depreciable tangible property may 
deduct under section 179 up to $1,040,000 (2020 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 $2,590,000 (2020 
inflation adjusted amount). Therefore, the Treasury Department and the 
IRS have determined that a substantial number of small entities will 
not be subject to these final regulations. Further, Sec. Sec.  
1.168(k)-2(c) and 1.1502-68(c)(4) apply only if the taxpayer chooses to 
make an election. Finally, no comments regarding the economic impact of 
these regulations on small entities were received. Accordingly, the 
Secretary of the Treasury's delegate certifies 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 the 
Office of Advocacy of the Small Business Administration for comment on 
its impact on small business, and no comments were received from the 
Chief Counsel for the Office of Advocacy of the Small Business 
Administration.

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. 
Accordingly, the Treasury Department and IRS are adopting these final 
regulations with the delayed effective date generally prescribed under 
the Congressional Review Act.

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 is amended by adding 
an entry for Sec.  1.1502-68 in numerical order to read in part as 
follows:

    Authority:  26 U.S.C. 7805 * * *
* * * * *
    Section 1.1502-68 also issued under 26 U.S.C. 1502.
* * * * *

0
Par. 2. Section 1.168(b)-1 is amended by:
0
1. Revising paragraph (a)(5)(i)(A);
0
2. In paragraph (b)(2)(i), removing ``paragraphs (b)(2)(ii) and (iii)'' 
and adding ``paragraphs (b)(2)(ii) through (iv)'' in its place; and
0
3. Adding paragraph (b)(2)(iv).
    The addition and revision read as follows:


Sec.  1.168(b)-1  Definitions.

    (a) * * *
    (5) * * *
    (i) * * *
    (A) For purposes of section 168(e)(6), the improvement is made by 
the taxpayer and is placed in service by the taxpayer after December 
31, 2017;
* * * * *
    (b) * * *
    (2) * * *
    (iv) Addition of language in paragraph (a)(5)(i)(A) of this 
section. The language ``is made by the taxpayer and'' in paragraph 
(a)(5)(i)(A) of this section applies to property placed in service by 
the taxpayer after December 31, 2017.

0
Par. 3. Section 1.168(k)-0 is amended under Sec.  1.168(k)-2 by:
0
1. Adding entries for (b)(3)(iii)(C), (b)(3)(v), (b)(5)(iii)(G), 
(b)(5)(v), (c), (c)(1) and (2), (c)(2)(i) through (iv), (c)(3), 
(c)(3)(i) through (iii), (c)(4), (c)(4)(i) and (ii), (c)(5), (c)(5)(i) 
and (ii), (c)(6), (c)(6)(i) and (ii), (c)(7), (c)(7)(i) and (ii), and 
(c)(8) and (c)(9);
0
2. Revising the entry for (d)(3)(iv);
0
3. Adding entries for (d)(4), (f)(7), and (g)(11);
0
4. Revising the entries for (h)(2) and (3); and
0
5. Adding entries for (h)(3)(i) through (iii).
    The additions and revisions read as follows:


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

* * * * *

[[Page 71753]]

Sec.  1.168(k)-2 Additional first year depreciation deduction for 
property acquired and placed in service after September 27, 2017.
* * * * *
    (b) * * *
    (3) * * *
    (iii) * * *
    (C) Special rules for a series of related transactions.
* * * * *
    (v) Application to members of a consolidated group.
* * * * *
    (5) * * *
    (iii) * * *
    (G) Acquisition of a trade or business or an entity.
* * * * *
    (v) Determination of acquisition date for property not acquired 
pursuant to a written binding contract.
* * * * *
    (c) Election for components of larger self-constructed property 
for which the manufacture, construction, or production begins before 
September 28, 2017.
    (1) In general.
    (2) Eligible larger self-constructed property.
    (i) In general.
    (ii) Residential rental property or nonresidential real 
property.
    (iii) Beginning of manufacture, construction, or production.
    (iv) Exception.
    (3) Eligible components.
    (i) In general.
    (ii) Acquired components.
    (iii) Self-constructed components.
    (4) Special rules.
    (i) Installation costs.
    (ii) Property described in section 168(k)(2)(B).
    (5) Computation of additional first year depreciation deduction.
    (i) Election is made.
    (ii) Election is not made.
    (6) Time and manner for making election.
    (i) Time for making election.
    (ii) Manner of making election.
    (7) Revocation of election.
    (i) In general.
    (ii) Automatic 6-month extension.
    (8) Additional procedural guidance.
    (9) Examples.
    (d) * * *
    (3) * * *
    (iv) Determination of acquisition date for property not acquired 
pursuant to a written binding contract.
    (4) Examples.
* * * * *
    (f) * * *
    (7) Additional procedural guidance.
    (g) * * *
    (11) Mid-quarter convention.
    (h) * * *
    (2) Applicability of this section for prior taxable years.
    (3) Early application of this section and Sec.  1.1502-68.
    (i) In general.
    (ii) Early application to certain transactions.
    (iii) Bound by early application.

0
Par. 4. Section 1.168(k)-2 is amended by:
0
1. At the end of paragraph (a)(1), removing the period and adding ``, 
except as provided in paragraph (c) of this section.'' in its place;
0
2. In paragraph (a)(2)(iv)(B), removing ``an asset'' and adding ``the 
asset'' in its place;
0
3. After the semicolon at the end of paragraph (a)(2)(iv)(C), adding 
the word ``or'';
0
4. In paragraph (a)(2)(iv)(D), removing ``; or'' and adding a period in 
its place;
0
5. Removing paragraph (a)(2)(iv)(E);
0
6. Revising paragraphs (b)(2)(ii)(F) and (G);
0
7. Adding paragraphs (b)(2)(iii)(F) through (I);
0
8. Revising the second and third sentences in paragraph 
(b)(3)(iii)(B)(1);
0
9. Adding paragraphs (b)(3)(iii)(B)(4), (b)(3)(iii)(C), (b)(3)(v), and 
(b)(3)(vii)(Y) through (OO);
0
10. Revising the last sentence in paragraph (b)(5)(ii)(A);
0
11. In the first sentence in paragraph (b)(5)(iii)(A), removing the 
word ``A'' at the beginning of the sentence and adding ``Except as 
provided in paragraph (b)(5)(iii)(G) of this section, a'' in its place;
0
12. In the first sentence in paragraph (b)(5)(iii)(B), removing the 
word ``A'' at the beginning of the sentence and adding ``Except as 
provided in paragraph (b)(5)(iii)(G) of this section, a'' in its place;
0
13. Adding paragraph (b)(5)(iii)(G);
0
14. In the fourth sentence in paragraph (b)(5)(iv)(C)(1), removing the 
period at the end of the sentence and adding ``, except as provided in 
paragraph (c) of this section.'' in its place;
0
15. In the fourth sentence in paragraph (b)(5)(iv)(C)(2), removing the 
period at the end of the sentence and adding ``, except as provided in 
paragraph (c) of this section.'' in its place;
0
16. Adding paragraph (b)(5)(v);
0
17. Revising the second sentence in paragraph (b)(5)(viii) introductory 
text;
0
18. Adding paragraph (c);
0
19. Redesignating paragraph (d)(3)(iv) as paragraph (d)(4) and adding 
new paragraph (d)(3)(iv);
0
20. Adding three sentences at the end of paragraph (e)(1)(iii);
0
21. In paragraph (f)(1)(ii)(D), removing ``(a)(5)(ii),'' and adding 
``(a)(5)(ii) (acquired by the taxpayer after September 27, 2017, and 
placed in service by the taxpayer after September 27, 2017, and before 
January 1, 2018),'' in its place;
0
22. In paragraph (f)(1)(ii)(G), removing the word ``A'' at the 
beginning of the sentence and adding the word ``Each'' in its place;
0
23. Adding paragraph (f)(7);
0
24. In paragraph (g)(1)(i):
0
i. In the first sentence, after ``paragraphs (g)(1)(ii) and (iii) of 
this section'' adding ``and by the application of paragraph 
(b)(3)(iii)(B)(4) of this section''; and
0
ii. In the last sentence, removing the period at the end of the 
sentence and adding ``, except as otherwise provided by the application 
of paragraph (b)(3)(iii)(B) of this section.'' in its place;
0
25. Adding paragraph (g)(11); and
0
26. Revising paragraphs (h)(1), (2), and (3).
    The additions and revisions read as follows:


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

* * * * *
    (b) * * *
    (2) * * *
    (ii) * * *
    (F) Primarily used in a trade or business described in section 
163(j)(7)(A)(iv) and Sec. Sec.  1.163(j)-1(b)(15)(i) and 1.163(j)-
10(c)(3)(iii)(C)(3), and placed in service by the taxpayer in any 
taxable year beginning after December 31, 2017. For purposes of section 
168(k)(9)(A) and this paragraph (b)(2)(ii)(F), the term primarily used 
has the same meaning as that term is used in Sec.  1.167(a)-
11(b)(4)(iii)(b) and (e)(3)(iii) for classifying property. This 
paragraph (b)(2)(ii)(F) does not apply to property that is leased to a 
lessee's trade or business described in section 163(j)(7)(A)(iv) and 
Sec. Sec.  1.163(j)-1(b)(15)(i) and 1.163(j)-10(c)(3)(iii)(C)(3), by a 
lessor's trade or business that is not described in section 
163(j)(7)(A)(iv) and Sec. Sec.  1.163(j)-1(b)(15)(i) and 1.163(j)-
10(c)(3)(iii)(C)(3) for the taxable year; or
    (G) Used in a trade or business that has had floor plan financing 
indebtedness, as defined in section 163(j)(9)(B) and Sec.  1.163(j)-
1(b)(18), if the floor plan financing interest expense, as defined in 
section 163(j)(9)(A) and Sec.  1.163(j)-1(b)(19), 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. Solely 
for purposes of section 168(k)(9)(B) and this paragraph (b)(2)(ii)(G), 
floor plan financing interest expense is taken into account for the 
taxable year by a trade or business that has had floor plan financing

[[Page 71754]]

indebtedness only if the business interest expense, as defined in 
section 163(j)(5) and Sec.  1.163(j)-1(b)(3), of the trade or business 
for the taxable year (which includes floor plan financing interest 
expense) exceeds the sum of the amounts calculated under section 
163(j)(1)(A) and (B) for the trade or business for the taxable year. If 
the trade or business has taken floor plan financing interest expense 
into account pursuant to this paragraph (b)(2)(ii)(G) for a taxable 
year, this paragraph (b)(2)(ii)(G) applies to any property placed in 
service by that trade or business in that taxable year. This paragraph 
(b)(2)(ii)(G) does not apply to property that is leased to a lessee's 
trade or business that has had floor plan financing indebtedness, by a 
lessor's trade or business that has not had floor plan financing 
indebtedness during the taxable year or that has had floor plan 
financing indebtedness but did not take into account floor plan 
financing interest expense for the taxable year pursuant to this 
paragraph (b)(2)(ii)(G).
    (iii) * * *
    (F) Example 6. In 2019, a financial institution buys new equipment 
for $1 million and then leases this equipment to a lessee that 
primarily uses the equipment in a trade or business described in 
section 163(j)(7)(A)(iv) and Sec. Sec.  1.163(j)-1(b)(15)(i) and 
1.163(j)-10(c)(3)(iii)(C)(3). The financial institution is not 
described in section 163(j)(7)(A)(iv) and Sec. Sec.  1.163(j)-
1(b)(15)(i) and Sec.  1.163(j)-10(c)(3)(iii)(C)(3). As a result, 
paragraph (b)(2)(ii)(F) of this section does not apply to this new 
equipment. Assuming all other requirements are met, the financial 
institution's purchase price of $1 million for the new equipment 
qualifies for the additional first year depreciation deduction under 
this section.
    (G) Example 7. During its taxable year beginning in 2020, F, a 
corporation that is an automobile dealer, buys new computers for 
$50,000 for use in its trade or business of selling automobiles. For 
purposes of section 163(j), F has the following for 2020: $700 of 
adjusted taxable income, $40 of business interest income, $400 of 
business interest expense (which includes $100 of floor plan financing 
interest expense). The sum of the amounts calculated under section 
163(j)(1)(A) and (B) for F for 2020 is $390 ($40 + ($700 x 50 
percent)). F's business interest expense, which includes floor plan 
financing interest expense, for 2020 is $400. As a result, F's floor 
plan financing interest expense is taken into account by F for 2020 
pursuant to paragraph (b)(2)(ii)(G) of this section. Accordingly, F's 
purchase price of $50,000 for the computers does not qualify for the 
additional first year depreciation deduction under this section.
    (H) Example 8. The facts are the same as in Example 7 in paragraph 
(b)(2)(iii)(G) of this section, except F buys new computers for $30,000 
for use in its trade or business of selling automobiles and, for 
purposes of section 163(j), F has $1,300 of adjusted taxable income. 
The sum of the amounts calculated under section 163(j)(1)(A) and (B) 
for F for 2020 is $690 ($40 + ($1,300 x 50 percent)). F's business 
interest expense, which includes floor plan financing interest expense, 
for 2020 is $400. As a result, F's floor plan financing interest 
expense is not taken into account by F for 2020 pursuant to paragraph 
(b)(2)(ii)(G) of this section. Assuming all other requirements are met, 
F's purchase price of $30,000 for the computers qualifies for the 
additional first year depreciation deduction under this section.
    (I) Example 9. (1) G, a calendar-year taxpayer, owns an office 
building for use in its trade or business and G placed in service such 
building in 2000. In November 2018, G made and placed in service an 
improvement to the inside of such building at a cost of $100,000. In 
January 2019, G entered into a written contract with H for H to 
construct an improvement to the inside of the building. In March 2019, 
H completed construction of the improvement at a cost of $750,000 and G 
placed in service such improvement. Both improvements to the building 
are section 1250 property and are not described in Sec.  1.168(b)-
1(a)(5)(ii).
    (2) Both the improvement to the office building made by G in 
November 2018 and the improvement to the office building that was 
constructed by H for G in 2019 are improvements made by G under Sec.  
1.168(b)-1(a)(5)(i)(A). Further, each improvement is made to the inside 
of the office building, is section 1250 property, and is not described 
in Sec.  1.168(b)-1(a)(5)(ii). As a result, each improvement meets the 
definition of qualified improvement property in section 168(e)(6) and 
Sec.  1.168(b)-1(a)(5)(i)(A) and (a)(5)(ii). Accordingly, each 
improvement is 15-year property under section 168(e)(3) and is 
described in Sec.  1.168(k)-2(b)(2)(i)(A). Assuming all other 
requirements of this section are met, each improvement made by G 
qualifies for the additional first year depreciation deduction for G 
under this section.
    (3) * * *
    (iii) * * *
    (B) * * *
    (1) * * * To determine if the taxpayer or a predecessor had a 
depreciable interest in the property at any time prior to the 
acquisition, only the five calendar years immediately prior to the 
current calendar year in which the property is placed in service by the 
taxpayer, and the portion of such current calendar year before the 
placed-in-service date of the property without taking into account the 
applicable convention, are taken into account (lookback period). If 
either the taxpayer or a predecessor, or both, have not been in 
existence for the entire lookback period, only the portion of the 
lookback period during which the taxpayer or a predecessor, or both, as 
applicable, have been in existence is taken into account to determine 
if the taxpayer or a predecessor had a depreciable interest in the 
property at any time prior to the acquisition. * * *
    (4) De minimis use of property. If a taxpayer acquires and places 
in service property, the taxpayer or a predecessor did not previously 
have a depreciable interest in the property, the taxpayer disposes of 
the property to an unrelated party within 90 calendar days after the 
date the property was originally placed in service by the taxpayer, 
without taking into account the applicable convention, and the taxpayer 
reacquires and again places in service the property, then the 
taxpayer's depreciable interest in the property during that 90-day 
period is not taken into account for determining whether the property 
was used by the taxpayer or a predecessor at any time prior to its 
reacquisition by the taxpayer under paragraphs (b)(3)(iii)(A)(1) and 
(b)(3)(iii)(B)(1) of this section. If the taxpayer originally acquired 
the property before September 28, 2017, as determined under Sec.  
1.168(k)-1(b)(4), and the taxpayer reacquires and again places in 
service the property during the same taxable year the taxpayer disposed 
of the property to the unrelated party, then this paragraph 
(b)(3)(iii)(B)(4) does not apply. For purposes of this paragraph 
(b)(3)(iii)(B)(4), an unrelated party is a person not described in 
section 179(d)(2)(A) or (B), and Sec.  1.179-4(c)(1)(ii) or (iii) or 
(c)(2).
    (C) Special rules for a series of related transactions--(1) In 
general. Solely for purposes of paragraph (b)(3)(iii) of this section, 
each transferee in a series of related transactions tests its 
relationship under section 179(d)(2)(A) or (B) with the transferor from 
which the transferee directly acquires the depreciable property 
(immediate transferor) and with the original transferor of the 
depreciable property in the series. The transferee is treated as 
related to the immediate transferor or the original

[[Page 71755]]

transferor if the relationship exists either when the transferee 
acquires, or immediately before the first transfer of, the depreciable 
property in the series. A series of related transactions may include, 
for example, a transfer of partnership assets followed by a transfer of 
an interest in the partnership that owned the assets; or a disposition 
of property and a disposition, directly or indirectly, of the 
transferor or transferee of the property. For special rules that may 
apply when the transferor and transferee of the property are members of 
a consolidated group, as defined in Sec.  1.1502-1(h), see Sec.  
1.1502-68.
    (2) Special rules--(i) Property placed in service and disposed of 
in same taxable year or property not placed in service. Any party in a 
series of related transactions that is neither the original transferor 
nor the ultimate transferee is disregarded (disregarded party) for 
purposes of testing the relationships under paragraph (b)(3)(iii)(C)(1) 
of this section if the party places in service and disposes of the 
depreciable property subject to the series, other than in a transaction 
described in paragraph (g)(1)(iii) of this section, during the party's 
same taxable year, or if the party does not place in service the 
depreciable property subject to the series for use in the party's trade 
or business or production of income. In either case, the party to which 
the disregarded party disposed of the depreciable property tests its 
relationship with the party from which the disregarded party acquired 
the depreciable property and with the original transferor of the 
depreciable property in the series. If the series has consecutive 
disregarded parties, the party to which the last disregarded party 
disposed of the depreciable property tests its relationship with the 
party from which the first disregarded party acquired the depreciable 
property and with the original transferor of the depreciable property 
in the series. The rules for testing the relationships in paragraph 
(b)(3)(iii)(C)(1) of this section continue to apply for the other 
transactions in the series.
    (ii) All section 168(i)(7) transactions. This paragraph 
(b)(3)(iii)(C) does not apply if all transactions in a series of 
related transactions are described in paragraph (g)(1)(iii) of this 
section (section 168(i)(7) transactions in which property is 
transferred in the same taxable year that the property is placed in 
service by the transferor).
    (iii) One or more section 168(i)(7) transactions. Any step in a 
series of related transactions that is neither the original step nor 
the ultimate step is disregarded (disregarded step) for purposes of 
testing the relationships under paragraph (b)(3)(iii)(C)(1) of this 
section if the step is a transaction described in paragraph (g)(1)(iii) 
of this section. In this case, the relationship is not tested between 
the transferor and transferee of that transaction. Instead, the 
relationship is tested between the transferor in the disregarded step 
and the party to which the transferee in the disregarded step disposed 
of the depreciable property, the transferee in the disregarded step and 
the party to which the transferee in the disregarded step disposed of 
the depreciable property, and the original transferor of the 
depreciable property in the series and the party to which the 
transferee in the disregarded step disposed of the depreciable 
property. If the series has consecutive disregarded steps, the 
relationship is tested between the transferor in the first disregarded 
step and the party to which the transferee in the last disregarded step 
disposed of the depreciable property, the transferee in the last 
disregarded step and the party to which the transferee in the last 
disregarded step disposed of the depreciable property, and the original 
transferor of the depreciable property in the series and the party to 
which the transferee in the last disregarded step disposed of the 
depreciable property. The rules for testing the relationships in 
paragraph (b)(3)(iii)(C)(1) of this section continue to apply for the 
other transactions in the series.
    (iv) Syndication transaction. This paragraph (b)(3)(iii)(C) does 
not apply to a syndication transaction described in paragraph 
(b)(3)(vi) of this section.
    (v) Certain relationships disregarded. If a party acquires 
depreciable property in a series of related transactions in which the 
party acquires stock, meeting the requirements of section 1504(a)(2), 
of a corporation in a fully taxable transaction followed by a 
liquidation of the acquired corporation under section 331, any 
relationship created as part of such series of related transactions is 
disregarded in determining whether any party is related to such 
acquired corporation for purposes of testing the relationships under 
paragraph (b)(3)(iii)(C)(1) of this section.
    (vi) Transferors that cease to exist for Federal tax purposes. Any 
transferor in a series of related transactions that ceases to exist for 
Federal tax purposes during the series is deemed, for purposes of 
testing the relationships under paragraph (b)(3)(iii)(C)(1) of this 
section, to be in existence at the time of any transfer in the series.
    (vii) Newly created party. If a transferee in a series of related 
transactions acquires depreciable property from a transferor that was 
not in existence immediately prior to the first transfer of such 
property in such series (new transferor), the transferee tests its 
relationship with the party from which the new transferor acquired such 
property and with the original transferor of the depreciable property 
in the series for purposes of paragraph (b)(3)(iii)(C)(1) of this 
section. If the series has consecutive new transferors, the party to 
which the last new transferor disposed of the depreciable property 
tests its relationship with the party from which the first new 
transferor acquired the depreciable property and with the original 
transferor of the depreciable property in the series. The rules for 
testing the relationships in paragraph (b)(3)(iii)(C)(1) of this 
section continue to apply for the other transactions in the series.
    (viii) Application of paragraph (g)(1) of this section. Paragraph 
(g)(1) of this section applies to each step in a series of related 
transactions.
* * * * *
    (v) Application to members of a consolidated group. For rules 
applicable to the acquisition of depreciable property by a member of a 
consolidated group, see Sec.  1.1502-68.
* * * * *
    (vii) * * *
    (Y) Example 25. (1) JL is a fiscal year taxpayer with a taxable 
year ending June 30. On April 22, 2020, JL acquires and places in 
service a new machine for use in its trade or business. On May 1, 2022, 
JL sells this machine to JM, an unrelated party, for use in JM's trade 
or business. JM is a fiscal year taxpayer with a taxable year ending 
March 31. On February 1, 2023, JL buys the machine from JM and places 
the machine in service. JL uses the machine in its trade or business 
for the remainder of its taxable year ending June 30, 2023.
    (2) JL's acquisition of the machine on April 22, 2020, satisfies 
the original use requirement in paragraph (b)(3)(ii) of this section. 
Assuming all other requirements are met, JL's purchase price of the 
machine qualifies for the additional first year depreciation deduction 
for JL for the taxable year ending June 30, 2020, under this section.
    (3) JM placed in service the machine on May 1, 2022, and disposed 
of it on February 1, 2023. As a result, JM placed in service and 
disposed of the machine during the same taxable year (JM's taxable year 
beginning April 1, 2022, and ending March 31, 2023). Accordingly, JM's 
acquisition of the machine on May 1, 2022, does not qualify for the 
additional first year

[[Page 71756]]

depreciation deduction pursuant to paragraph (g)(1)(i) of this section.
    (4) Pursuant to paragraph (b)(3)(iii)(B)(1) of this section, the 
lookback period is calendar years 2018 through 2022 and January 1, 
2023, through January 31, 2023, to determine if JL had a depreciable 
interest in the machine when JL reacquired it on February 1, 2023. As a 
result, JL's depreciable interest in the machine during the period 
April 22, 2020, to April 30, 2022, is taken into account for 
determining whether the machine was used by JL or a predecessor at any 
time prior to its reacquisition by JL on February 1, 2023. Accordingly, 
the reacquisition of the machine by JL on February 1, 2023, does not 
qualify for the additional first year depreciation deduction.
    (Z) Example 26. (1) EF has owned and had a depreciable interest in 
Property since 2012. On January 1, 2016, EF contributes assets (not 
including Property) to existing Partnership T in a transaction 
described in section 721, in exchange for a partnership interest in 
Partnership T, and Partnership T placed in service these assets for use 
in its trade or business. On July 1, 2016, EF sells Property to EG, a 
party unrelated to either EF or Partnership T. On April 1, 2018, 
Partnership T buys Property from EG and places it in service for use in 
its trade or business.
    (2) EF is not Partnership T's predecessor with respect to Property 
within the meaning of paragraph (a)(2)(iv)(B) of this section. Pursuant 
to paragraph (b)(3)(iii)(B)(1) of this section, the lookback period is 
2013-2017, plus January through March 2018, to determine if Partnership 
T had a depreciable interest in Property that Partnership T acquired on 
April 1, 2018. EF need not be examined in the lookback period to see if 
EF had a depreciable interest in Property, because EF is not 
Partnership T's predecessor. Because Partnership T did not have a 
depreciable interest in Property in the lookback period prior to its 
acquisition of Property on April 1, 2018, Partnership T's acquisition 
of Property on April 1, 2018, satisfies the used property acquisition 
requirement of paragraph (b)(3)(iii)(B)(1) of this section. Assuming 
all other requirements of this section are satisfied, Partnership T's 
purchase price of Property qualifies for the additional first year 
depreciation deduction under this section.
    (AA) Example 27. (1) The facts are the same as in Example 26 of 
paragraph (b)(3)(vii)(Z)(1) of this section, except that on January 1, 
2016, EF's contribution of assets to Partnership T includes Property. 
On July 1, 2016, Partnership T sells Property to EG.
    (2) Partnership T's acquisition of Property on January 1, 2016, 
does not satisfy the original use requirement of Sec.  1.168(k)-1(b)(3) 
and is not eligible for the additional first year depreciation 
deduction under section 168(k) as in effect prior to the enactment of 
the Act.
    (3) With respect to Partnership T's acquisition of Property on 
April 1, 2018, EF is Partnership T's predecessor with respect to 
Property within the meaning of paragraph (a)(2)(iv)(B) of this section. 
Pursuant to paragraph (b)(3)(iii)(B)(1) of this section, the lookback 
period is 2013-2017, plus January through March 2018, to determine if 
EF or Partnership T had a depreciable interest in Property that 
Partnership T acquired on April 1, 2018. Because EF had a depreciable 
interest in Property from 2013 to 2015 and Partnership T had a 
depreciable interest in Property from January through June 2016, 
Partnership T's acquisition of Property on April 1, 2018, does not 
satisfy the used property acquisition requirement of paragraph 
(b)(3)(iii)(B)(1) of this section and is not eligible for the 
additional first year depreciation deduction.
    (BB) Example 28. (1) X Corporation has owned and had a depreciable 
interest in Property since 2012. On January 1, 2015, X Corporation sold 
Property to Q, an unrelated party. Y Corporation is formed July 1, 
2015. On January 1, 2016, Y Corporation merges into X Corporation in a 
transaction described in section 368(a)(1)(A). On April 1, 2018, X 
Corporation buys Property from Q and places it in service for use in 
its trade or business.
    (2) Pursuant to paragraph (a)(2)(iv)(A) of this section, Y 
Corporation is X Corporation's predecessor. Pursuant to paragraph 
(b)(3)(iii)(B)(1) of this section, the lookback period is 2013-2017, 
plus January through March 2018, to determine if Y Corporation or X 
Corporation had a depreciable interest in Property that X Corporation 
acquired on April 1, 2018. Y Corporation did not have a depreciable 
interest in Property at any time during the lookback period. Because X 
Corporation had a depreciable interest in Property from 2013 through 
2014, X Corporation's acquisition of Property on April 1, 2018, does 
not satisfy the used property acquisition requirement of paragraph 
(b)(3)(iii)(B)(1) of this section and is not eligible for the 
additional first year depreciation deduction.
    (CC) Example 29. (1) Y Corporation has owned and had a depreciable 
interest in Property since 2012. On January 1, 2015, Y Corporation 
sells Property to Q, an unrelated party. X Corporation is formed on 
July 1, 2015. On January 1, 2016, Y Corporation merges into X 
Corporation in a transaction described in section 368(a)(1)(A). On 
April 1, 2018, X Corporation buys Property from Q and places it in 
service for use in its trade or business.
    (2) Pursuant to paragraph (a)(2)(iv)(A) of this section, Y 
Corporation is X Corporation's predecessor. Pursuant to paragraph 
(b)(3)(iii)(B)(1) of this section, the lookback period is 2013-2017, 
plus January through March 2018, to determine if X Corporation or Y 
Corporation had a depreciable interest in Property that X Corporation 
acquired on April 1, 2018. Because Y Corporation had a depreciable 
interest in Property from 2013 through 2014, X Corporation's 
acquisition of Property on April 1, 2018, does not satisfy the used 
property acquisition requirement of paragraph (b)(3)(iii)(B)(1) of this 
section and is not eligible for the additional first year depreciation 
deduction.
    (DD) Example 30. (1) On September 5, 2017, Y, a calendar-year 
taxpayer, acquires and places in service a new machine (Machine #1), 
and begins using Machine #1 in its manufacturing trade or business. On 
November 1, 2017, Y sells Machine #1 to Z, then Z leases Machine #1 
back to Y for 4 years, and Y continues to use Machine #1 in its 
manufacturing trade or business. The lease agreement contains a 
purchase option provision allowing Y to buy Machine #1 at the end of 
the lease term. On November 1, 2021, Y exercises the purchase option in 
the lease agreement and buys Machine #1 from Z. The lease between Y and 
Z for Machine #1 is a true lease for Federal tax purposes.
    (2) Because Y, a calendar-year taxpayer, placed in service and 
disposed of Machine #1 during 2017, Machine #1 is not eligible for the 
additional first year depreciation deduction for Y pursuant to Sec.  
1.168(k)-1(f)(1)(i).
    (3) The use of Machine #1 by Y prevents Z from satisfying the 
original use requirement of paragraph (b)(3)(ii) of this section. 
However, Z's acquisition of Machine #1 satisfies the used property 
acquisition requirements of paragraph (b)(3)(iii) of this section. 
Assuming all other requirements are met, Z's purchase price of Machine 
#1 qualifies for the additional first year depreciation deduction for Z 
under this section.
    (4) During 2017, Y sold Machine #1 within 90 calendar days of 
placing Machine #1 in service originally on September 5, 2017. Pursuant 
to paragraph (b)(3)(iii)(B)(4) of this section, Y's depreciable 
interest in Machine #1 during that 90-day period is not taken

[[Page 71757]]

into account for determining whether Machine #1 was used by Y or a 
predecessor at any time prior to its reacquisition by Y on November 1, 
2021. Accordingly, assuming all other requirements are met, Y's 
purchase price of Machine #1 on November 1, 2021, qualifies for the 
additional first year depreciation deduction for Y under this section.
    (EE) Example 31. (1) On October 15, 2019, FA, a calendar-year 
taxpayer, buys and places in service a new machine for use in its trade 
or business. On January 10, 2020, FA sells this machine to FB for use 
in FB's trade or business. FB is a calendar-year taxpayer and is not 
related to FA. On March 30, 2020, FA buys the machine from FB and 
places the machine in service. FA uses the machine in its trade or 
business for the remainder of 2020.
    (2) FA's acquisition of the machine on October 15, 2019, satisfies 
the original use requirement in paragraph (b)(3)(ii) of this section. 
Assuming all other requirements are met, FA's purchase price of the 
machine qualifies for the additional first year depreciation deduction 
for FA for the 2019 taxable year under this section.
    (3) Because FB placed in service the machine on January 10, 2020, 
and disposed of it on March 30, 2020, FB's acquisition of the machine 
on January 10, 2020, does not qualify for the additional first year 
depreciation deduction pursuant to Sec.  1.168(k)-2(g)(1)(i).
    (4) FA sold the machine to FB in 2020 and within 90 calendar days 
of placing the machine in service originally on October 15, 2019. 
Pursuant to paragraph (b)(3)(iii)(B)(4) of this section, FA's 
depreciable interest in the machine during that 90-day period is not 
taken into account for determining whether the machine was used by FA 
or a predecessor at any time prior to its reacquisition by FA on March 
30, 2020. Accordingly, assuming all other requirements are met, FA's 
purchase price of the machine on March 30, 2020, qualifies for the 
additional first year depreciation deduction for FA for the 2020 
taxable year under this section.
    (FF) Example 32. (1) The facts are the same as in Example 31 of 
paragraph (b)(3)(vii)(EE)(1) of this section, except that on November 
1, 2020, FB buys the machine from FA and places the machine in service. 
FB uses the machine in its trade or business for the remainder of 2020.
    (2) Because FA placed in service the machine on March 30, 2020, and 
disposed of it on November 1, 2020, FA's reacquisition of the machine 
on March 30, 2020, does not qualify for the additional first year 
depreciation deduction pursuant to paragraph (g)(1)(i) of this section.
    (3) During 2020, FB sold the machine to FA within 90 calendar days 
of placing the machine in service originally on January 10, 2020. After 
FB reacquired the machine on November 1, 2020, FB did not dispose of 
the property during the remainder of 2020. Pursuant to paragraph 
(b)(3)(iii)(B)(4) of this section, FB's depreciable interest in the 
machine during that 90-day period is not taken into account for 
determining whether the machine was used by FB or a predecessor at any 
time prior to its reacquisition by FB on November 1, 2020. Accordingly, 
assuming all other requirements are met, FB's purchase price of the 
machine on November 1, 2020, qualifies for the additional first year 
depreciation deduction for FB under this section.
    (GG) Example 33. (1) The facts are the same as in Example 32 of 
paragraph (b)(3)(vii)(FF)(1) of this section, except FB sells the 
machine to FC, an unrelated party, on December 31, 2020.
    (2) Because FB placed in service the machine on November 1, 2020, 
and disposed of it on December 31, 2020, FB's reacquisition of the 
machine on November 1, 2020, does not qualify for the additional first 
year depreciation deduction pursuant to paragraph (g)(1)(i) of this 
section.
    (3) FC's acquisition of the machine on December 31, 2020, satisfies 
the used property acquisition requirement of paragraph 
(b)(3)(iii)(A)(2) of this section. Accordingly, assuming all other 
requirements of this section are satisfied, FC's purchase price of the 
machine qualifies for the additional first year depreciation deduction 
under this section.
    (HH) Example 34. (1) In August 2017, FD, a calendar-year taxpayer, 
entered into a written binding contract with X for X to manufacture a 
machine for FD for use in its trade or business. Before September 28, 
2017, FD incurred more than 10 percent of the total cost of the 
machine. On February 8, 2020, X delivered the machine to FD and FD 
placed in service the machine. The machine is property described in 
section 168(k)(2)(B) as in effect on the day before the date of the 
enactment of the Act. FD's entire unadjusted depreciable basis of the 
machine is attributable to the machine's manufacture before January 1, 
2020. FD uses the safe harbor test in Sec.  1.168(k)-1(b)(4)(iii)(B)(2) 
to determine when manufacturing of the machine began. On March 26, 
2020, FD sells the machine to FE for use in FE's trade or business. FE 
is a calendar-year taxpayer and is not related to FD. On November 7, 
2020, FD buys the machine from FE and places in service the machine. FD 
uses the machine in its trade or business for the remainder of 2020.
    (2) Because FD incurred more than 10 percent of the cost of the 
machine before September 28, 2017, and FD uses the safe harbor test in 
Sec.  1.168(k)-1(b)(4)(iii)(B)(2) to determine when the manufacturing 
of the machine began, FD acquired the machine before September 28, 
2017. If FD had not disposed of the machine on March 26, 2020, the cost 
of the machine would have qualified for the 30-percent additional first 
year depreciation deduction pursuant to section 168(k)(8), assuming all 
requirements are met under section 168(k)(2) as in effect on the day 
before the date of the enactment of the Act. However, because FD placed 
in service the machine on February 8, 2020, and disposed of it on March 
26, 2020, FD's acquisition of the machine on February 8, 2020, does not 
qualify for the additional first year depreciation deduction pursuant 
to Sec.  1.168(k)-1(f)(1)(i).
    (3) Because FE placed in service the machine on March 26, 2020, and 
disposed of it on November 7, 2020, FE's acquisition of the machine on 
March 26, 2020, does not qualify for the additional first year 
depreciation deduction pursuant to paragraph (g)(1)(i) of this section.
    (4) During 2020, FD sold the machine to FE within 90 calendar days 
of placing the machine in service originally on February 8, 2020. After 
FD reacquired the machine on November 7, 2020, FD did not dispose of 
the machine during the remainder of 2020. FD originally acquired this 
machine before September 28, 2017. As a result, paragraph 
(b)(3)(iii)(B)(4) of this section does not apply. Pursuant to paragraph 
(b)(3)(iii)(B)(1) of this section, the lookback period is 2015 through 
2019 and January 1, 2020, through November 6, 2020, to determine if FD 
had a depreciable interest in the machine when FD reacquired it on 
November 7, 2020. As a result, FD's depreciable interest in the machine 
during the period February 8, 2020, to March 26, 2020, is taken into 
account for determining whether the machine was used by FD or a 
predecessor at any time prior to its reacquisition by FD on November 7, 
2020. Accordingly, the reacquisition of the machine by FD on November 
7, 2020, does not qualify for the additional first year depreciation 
deduction.
    (II) Example 35. (1) In a series of related transactions, a father 
sells a machine to an unrelated individual on

[[Page 71758]]

December 15, 2019, who sells the machine to the father's daughter on 
January 2, 2020, for use in the daughter's trade or business. Pursuant 
to paragraph (b)(3)(iii)(C)(1) of this section, a transferee tests its 
relationship with the transferor from which the transferee directly 
acquires the depreciable property, and with the original transferor of 
the depreciable property in the series. The relationship is tested when 
the transferee acquires, and immediately before the first transfer of, 
the depreciable property in the series. As a result, the following 
relationships are tested under section 179(d)(2)(A): The unrelated 
individual tests its relationship to the father as of December 15, 
2019; and the daughter tests her relationship to the unrelated 
individual as of January 2, 2020, and December 15, 2019, and to the 
father as of January 2, 2020, and December 15, 2019.
    (2) Because the individual is not related to the father within the 
meaning of section 179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii) as of 
December 15, 2019, the individual's acquisition of the machine 
satisfies the used property acquisition requirement of paragraph 
(b)(3)(iii)(A)(2) of this section. Accordingly, assuming the unrelated 
individual placed the machine in service for use in its trade or 
business in 2019 and all other requirements of this section are 
satisfied, the unrelated individual's purchase price of the machine 
qualifies for the additional first year depreciation deduction under 
this section.
    (3) The individual and the daughter are not related parties within 
the meaning of section 179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii) as of 
January 2, 2020, or December 15, 2019. However, the father and his 
daughter are related parties within the meaning of section 179(d)(2)(A) 
and Sec.  1.179-4(c)(1)(ii) as of January 2, 2020, or December 15, 
2019. Accordingly, the daughter's acquisition of the machine does not 
satisfy the used property acquisition requirements of paragraph 
(b)(3)(iii) of this section and is not eligible for the additional 
first year depreciation deduction.
    (JJ) Example 36. (1) The facts are the same as in Example 35 of 
paragraph (b)(3)(vii)(II)(1) of this section, except that instead of 
selling to an unrelated individual, the father sells the machine to his 
son on December 15, 2019, who sells the machine to his sister (the 
father's daughter) on January 2, 2020. Pursuant to paragraph 
(b)(3)(iii)(C)(1) of this section, a transferee tests its relationship 
with the transferor from which the transferee directly acquires the 
depreciable property, and with the original transferor of the 
depreciable property in the series. The relationship is tested when the 
transferee acquires, and immediately before the first transfer of, the 
depreciable property in the series. As a result, the following 
relationships are tested under section 179(d)(2)(A): The son tests his 
relationship to the father as of December 15, 2019; and the daughter 
tests her relationship to her brother as of January 2, 2020, and 
December 15, 2019, and to the father as of January 2, 2020, and 
December 15, 2019.
    (2) Because the father and his son are related parties within the 
meaning of section 179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii) as of 
December 15, 2019, the son's acquisition of the machine does not 
satisfy the used property acquisition requirements of paragraph 
(b)(3)(iii) of this section. Accordingly, the son's acquisition of the 
machine is not eligible for the additional first year depreciation 
deduction.
    (3) The son and his sister are not related parties within the 
meaning of section 179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii) as of 
January 2, 2020, or December 15, 2019. However, the father and his 
daughter are related parties within the meaning of section 179(d)(2)(A) 
and Sec.  1.179-4(c)(1)(ii) as of January 2, 2020, or December 15, 
2019. Accordingly, the daughter's acquisition of the machine does not 
satisfy the used property acquisition requirements of paragraph 
(b)(3)(iii) of this section and is not eligible for the additional 
first year depreciation deduction.
    (KK) Example 37. (1) In June 2018, BA, an individual, bought and 
placed in service a new machine from an unrelated party for use in its 
trade or business. In a series of related transactions, BA sells the 
machine to BB and BB places it in service on October 1, 2019, BB sells 
the machine to BC and BC places it in service on December 1, 2019, and 
BC sells the machine to BD and BD places it in service on January 2, 
2020. BA and BB are related parties within the meaning of section 
179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii). BB and BC are related parties 
within the meaning of section 179(d)(2)(B) and Sec.  1.179-
4(c)(1)(iii). BC and BD are not related parties within the meaning of 
section 179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii), or section 
179(d)(2)(B) and Sec.  1.179-4(c)(1)(iii). BA is not related to BC or 
to BD within the meaning of section 179(d)(2)(A) and Sec.  1.179-
4(c)(1)(ii). All parties are calendar-year taxpayers.
    (2) BA's purchase of the machine in June 2018 satisfies the 
original use requirement of paragraph (b)(3)(ii) of this section and, 
assuming all other requirements of this section are met, BA's purchase 
price of the machine qualifies for the additional first year 
depreciation deduction under this section.
    (3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a 
transferee tests its relationship with the transferor from which the 
transferee directly acquires the depreciable property, and with the 
original transferor of the depreciable property in the series. The 
relationship is tested when the transferee acquires, and immediately 
before the first transfer of, the depreciable property in the series. 
However, because BB placed in service and disposed of the machine in 
the same taxable year, BB is disregarded pursuant to paragraph 
(b)(3)(iii)(C)(2)(i) of this section. As a result, the following 
relationships are tested under section 179(d)(2)(A) and (B): BC tests 
its relationship to BA as of December 1, 2019, and October 1, 2019; and 
BD tests its relationship to BC as of January 2, 2020, and October 1, 
2019, and to BA as of January 2, 2020, and October 1, 2020.
    (4) Because BA is not related to BC within the meaning of section 
179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii) as of December 1, 2019, or 
October 1, 2019, BC's acquisition of the machine satisfies the used 
property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this 
section. Accordingly, assuming all other requirements of this section 
are satisfied, BC's purchase price of the machine qualifies for the 
additional first year depreciation deduction under this section.
    (5) Because BC is not related to BD and BA is not related to BD 
within the meaning of section 179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii), 
or section 179(d)(2)(B) and Sec.  1.179-4(c)(1)(iii) as of January 2, 
2020, or October 1, 2019, BD's acquisition of the machine satisfies the 
used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of 
this section. Accordingly, assuming all other requirements of this 
section are satisfied, BD's purchase price of the machine qualifies for 
the additional first year depreciation deduction under this section.
    (LL) Example 38. (1) In June 2018, CA, an individual, bought and 
placed in service a new machine from an unrelated party for use in his 
trade or business. In a series of related transactions, CA sells the 
machine to CB and CB places it in service on September 1, 2019, CB 
transfers the machine to CC in a transaction described in paragraph 
(g)(1)(iii) of this section and CC places it in service on November 1, 
2019, and CC sells the

[[Page 71759]]

machine to CD and CD places it in service on January 2, 2020. CA and CB 
are not related parties within the meaning of section 179(d)(2)(A) and 
Sec.  1.179-4(c)(1)(ii). CB and CC are related parties within the 
meaning of section 179(d)(2)(B) and Sec.  1.179-4(c)(1)(iii). CB and CD 
are related parties within the meaning of section 179(d)(2)(A) and 
Sec.  1.179-4(c)(1)(ii), or section 179(d)(2)(B) and Sec.  1.179-
4(c)(1)(iii). CC and CD are not related parties within the meaning of 
section 179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii), or section 
179(d)(2)(B) and Sec.  1.179-4(c)(1)(iii). CA is not related to CC or 
to CD within the meaning of section 179(d)(2)(A) and Sec.  1.179-
4(c)(1)(ii). All parties are calendar-year taxpayers.
    (2) CA's purchase of the machine in June 2018 satisfies the 
original use requirement of paragraph (b)(3)(ii) of this section and, 
assuming all other requirements of this section are met, CA's purchase 
price of the machine qualifies for the additional first year 
depreciation deduction under this section.
    (3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a 
transferee tests its relationship with the transferor from which the 
transferee directly acquires the depreciable property, and with the 
original transferor of the depreciable property in the series. The 
relationship is tested when the transferee acquires, and immediately 
before the first transfer of, the depreciable property in the series. 
However, because CB placed in service and transferred the machine in 
the same taxable year in a transaction described in paragraph 
(g)(1)(iii) of this section, the section 168(i)(7) transaction between 
CB and CC is disregarded pursuant to paragraph (b)(3)(iii)(C)(2)(iii) 
of this section. As a result, the following relationships are tested 
under section 179(d)(2)(A) and (B): CB tests its relationship to CA as 
of September 1, 2019; and CD tests its relationship to CB, CC, and CA 
as of January 2, 2020, and September 1, 2019.
    (4) Because CA is not related to CB within the meaning of section 
179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii) as of September 1, 2019, CB's 
acquisition of the machine satisfies the used property acquisition 
requirement of paragraph (b)(3)(iii)(A)(2) of this section. 
Accordingly, assuming all other requirements of this section are 
satisfied, CB's purchase price of the machine qualifies for the 
additional first year depreciation deduction under this section. 
Pursuant to paragraph (g)(1)(iii) of this section, CB is allocated 2/12 
of its 100-percent additional first year depreciation deduction for the 
machine, and CC is allocated the remaining portion of CB's 100-percent 
additional first year depreciation deduction for the machine.
    (5) CC is not related to CD and CA is not related to CD within the 
meaning of section 179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii), or section 
179(d)(2)(B) and Sec.  1.179-4(c)(1)(iii) as of January 2, 2020, or 
September 1, 2019. However, CB and CD are related parties within the 
meaning of section 179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii), or section 
179(d)(2)(B) and Sec.  1.179-4(c)(1)(iii) as of January 2, 2020, or 
September 1, 2019. Accordingly, CD's acquisition of the machine does 
not satisfy the used property acquisition requirements of paragraph 
(b)(3)(iii) of this section and is not eligible for the additional 
first year depreciation deduction.
    (MM) Example 39. (1) In a series of related transactions, on 
January 2, 2018, DA, a corporation, bought and placed in service a new 
machine from an unrelated party for use in its trade or business. As 
part of the same series, DB purchases 100 percent of the stock of DA on 
January 2, 2019, and such stock acquisition meets the requirements of 
section 1504(a)(2). DB and DA were not related prior to the acquisition 
within the meaning of section 179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii) 
or section 179(d)(2)(B) and Sec.  1.179-4(c)(1)(iii). Immediately after 
acquiring the DA stock, and DB liquidates DA under section 331. In the 
liquidating distribution, DB receives the machine that was acquired by 
DA on January 2, 2018. As part of the same series, on March 1, 2020, DB 
sells the machine to DC and DC places it in service. Throughout the 
series, DC is not related to DB or DA within the meaning of section 
179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii) or section 179(d)(2)(B) and 
Sec.  1.179-4(c)(1)(iii).
    (2) DA's purchase of the machine on January 2, 2018, satisfies the 
original use requirement of paragraph (b)(3)(ii) of this section and, 
assuming all other requirements of this section are met, DA's purchase 
price of the machine qualifies for the additional first year 
depreciation deduction under this section.
    (3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a 
transferee tests its relationship with the transferor from which the 
transferee directly acquires the depreciable property, and with the 
original transferor of the depreciable property in the series. The 
relationship is tested when the transferee acquires, and immediately 
before the first transfer of, the depreciable property in the series. 
Although DA is no longer in existence as of the date DC acquires the 
machine, pursuant to paragraph (b)(3)(iii)(C)(2)(vi) of this section, 
DA is deemed to be in existence at the time of each transfer for 
purposes of testing relationships under paragraph (b)(3)(iii)(C)(1). As 
a result, the following relationships are tested under section 
179(d)(2)(A) and (B): DB tests its relationship to DA as of January 2, 
2019, and January 2, 2018; and DC tests its relationship to DB and DA 
as of March 1, 2020, and January 2, 2018.
    (4) Because DB acquired the machine in a series of related 
transactions in which DB acquired stock, meeting the requirements of 
section 1504(a)(2), of DA followed by a liquidation of DA under section 
331, the relationship of DB and DA created thereof is disregarded for 
purposes of testing the relationship pursuant to paragraph 
(b)(3)(iii)(C)(2)(v) of this section. Therefore, DA is not related to 
DB within the meaning of section 179(d)(2)(A) and Sec.  1.179-
4(c)(1)(ii) or section 179(d)(2)(B) and Sec.  1.179-4(c)(1)(iii) as of 
January 2, 2019, or January 2, 2018, and DB's acquisition of the 
machine satisfies the used property acquisition requirement of 
paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming all 
other requirements of this section are satisfied, DB's depreciable 
basis of the machine as a result of the liquidation of DA qualifies for 
the additional first year depreciation deduction under this section.
    (5) Because DC is not related to DB or DA within the meaning of 
section 179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii) or section 
179(d)(2)(B) and Sec.  1.179-4(c)(1)(iii) as of March 1, 2020, or 
January 2, 2018, DC 's acquisition of the machine satisfies the used 
property acquisition requirements of paragraph (b)(3)(iii)(A)(2) of 
this section. Accordingly, assuming all other requirements of this 
section are satisfied, DC 's purchase price of the machine qualifies 
for the additional first year depreciation deduction.
    (NN) Example 40. (1) Pursuant to a series of related transactions, 
on January 2, 2018, EA bought and placed in service a new machine from 
an unrelated party for use in its trade or business. As part of the 
same series, EA sells the machine to EB and EB places it in service on 
January 2, 2019. As part of the same series, EB sells the machine to EC 
and EC places it in service on January 2, 2020. Throughout the series, 
EA is not related to EB or EC within the meaning of section 
179(d)(2)(B) and Sec.  1.179-4(c)(1)(iii). EB and EC were related 
parties within the meaning of section 179(d)(2)(B) and Sec.  1.179-
4(c)(1)(iii) until July 1, 2019, at which time, they ceased to be 
related.

[[Page 71760]]

    (2) EA's purchase of the machine on January 2, 2018, satisfies the 
original use requirement of paragraph (b)(3)(ii) of this section and, 
assuming all other requirements of this section are met, EA's purchase 
price of the machines qualifies for the additional first year 
depreciation deduction under this section.
    (3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a 
transferee tests its relationship with the transferor from which the 
transferee directly acquires the depreciable property, and with the 
original transferor of the depreciable property in the series. The 
relationship is tested when the transferee acquires, and immediately 
before the first transfer of, the depreciable property in the series. 
As a result, the following relationships are tested under section 
179(d)(2)(A) and (B): EB tests its relationship to EA as of January 2, 
2019, and January 2, 2018; and EC tests its relationship to EA and EB 
as of January 2, 2020, and January 2, 2018.
    (4) Because EA is not related to EB within the meaning of section 
179(d)(2)(B) and Sec.  1.179-4(c)(1)(iii) as of January 2, 2019, or 
January 2, 2018, EB's acquisition of the machine satisfies the used 
property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this 
section. Accordingly, assuming all other requirements of this section 
are satisfied, EB's purchase price of the machine qualifies for the 
additional first year depreciation deduction under this section.
    (5) EC and EA are not related parties within the meaning of section 
179(d)(2)(B) and Sec.  1.179-4(c)(1)(iii) as of January 2, 2020, or 
January 2, 2018. Within the meaning of section 179(d)(2)(B) and Sec.  
1.179-4(c)(1)(iii), EC is not related to EB as of January 2, 2020; 
however, EC is related to EB as of January 2, 2018. Accordingly, EC 's 
acquisition of the machine does not satisfy the used property 
acquisition requirement of paragraph (b)(3)(iii) of this section and is 
not eligible for the additional first year depreciation deduction.
    (OO) Example 41. (1) The facts are the same as in Example 40 of 
paragraph (b)(3)(vii)(NN)(1) of this section, except that instead of 
selling to EC, EB sells the machine to EE, and EE places in service on 
January 2, 2020, and EE sells the machine to EC and EC places in 
service on January 2, 2021. EE was not in existence until July 2019 and 
is not related to EA or EB.
    (2) EA's purchase of the machine on January 2, 2018, satisfies the 
original use requirement of paragraph (b)(3)(ii) of this section and, 
assuming all other requirements of this section are met, EA's purchase 
price of the machine qualifies for the additional first year 
depreciation deduction under this section.
    (3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a 
transferee tests its relationship with the transferor from which the 
transferee directly acquires the depreciable property, and with the 
original transferor of the depreciable property in the series. The 
relationship is tested when the transferee acquires, and immediately 
before the first transfer of, the depreciable property in the series. 
However, because EE was not in existence immediately prior to the first 
transfer of the depreciable property in the series, EC tests its 
relationship with EB and EA pursuant to paragraph 
(b)(3)(iii)(C)(2)(vii) of this section. As a result, the following 
relationships are tested under section 179(d)(2)(A) and (B): EB tests 
its relationship to EA as of January 2, 2019, and January 2, 2018; EE 
tests its relationship to EA and EB as of January 2, 2020, and January 
2, 2018; and EC tests its relationship to EA and EB as of January 2, 
2021, and January 2, 2018.
    (4) Because EA is not related to EB within the meaning of section 
179(d)(2)(B) and Sec.  1.179-4(c)(1)(iii) as of January 2, 2019, or 
January 2, 2018, EB's acquisition of the machine satisfies the used 
property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this 
section. Accordingly, assuming all other requirements of this section 
are satisfied, EB's purchase price of the machine qualifies for the 
additional first year depreciation deduction under this section.
    (5) Because EE is not related to EA or EB within the meaning of 
section 179(d)(2)(B) and Sec.  1.179-4(c)(1)(iii) as of January 2, 
2020, or January 2, 2018, EE's acquisition of the machine satisfies the 
used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of 
this section. Accordingly, assuming all other requirements of this 
section are satisfied, EE 's purchase price of the machine qualifies 
for the additional first year depreciation deduction under this 
section.
    (6) Within the meaning of section 179(d)(2)(B) and Sec.  1.179-
4(c)(1)(iii), EC is not related to EA as of January 2, 2021, or January 
2, 2018; however, EC is related to EB as of January 2, 2018. 
Accordingly, EC 's acquisition of the machine does not satisfy the used 
property acquisition requirement of paragraph (b)(3)(iii) of this 
section and is not eligible for the additional first year depreciation 
deduction.
* * * * *
    (5) * * *
    (ii) * * *
    (A) * * * For determination of acquisition date, see paragraph 
(b)(5)(ii)(B) of this section for property acquired pursuant to a 
written binding contract, paragraph (b)(5)(iv) of this section for 
self-constructed property, and paragraph (b)(5)(v) of this section for 
property not acquired pursuant to a written binding contract.
* * * * *
    (iii) * * *
    (G) Acquisition of a trade or business or an entity. A contract to 
acquire all or substantially all of the assets of a trade or business 
or to acquire an entity (for example, a corporation, a partnership, or 
a limited liability company) is binding if it is enforceable under 
State law against the parties to the contract. The presence of a 
condition outside the control of the parties, including, for example, 
regulatory agency approval, will not prevent the contract from being a 
binding contract. Further, the fact that insubstantial terms remain to 
be negotiated by the parties to the contract, or that customary 
conditions remain to be satisfied, does not prevent the contract from 
being a binding contract. This paragraph (b)(5)(iii)(G) also applies to 
a contract for the sale of the stock of a corporation that is treated 
as an asset sale as a result of an election under section 338 or under 
section 336(e) made for a disposition described in Sec.  1.336-2(b)(1).
* * * * *
    (v) Determination of acquisition date for property not acquired 
pursuant to a written binding contract. Except as provided in 
paragraphs (b)(5)(iv), (vi), and (vii) of this section, the acquisition 
date of property that the taxpayer acquires pursuant to a contract that 
does not meet the definition of a written binding contract in paragraph 
(b)(5)(iii) of this section, is the date on which the taxpayer paid, in 
the case of a cash basis taxpayer, or incurred, in the case of an 
accrual basis taxpayer, more than 10 percent of the total cost of the 
property, excluding the cost of any land and preliminary activities 
such as planning and designing, securing financing, exploring, or 
researching. The preceding sentence also applies to property that is 
manufactured, constructed, or produced for the taxpayer by another 
person under a written contract that does not meet the definition of a 
binding contract in paragraph (b)(5)(iii) of this section, and that is 
entered into prior to the manufacture, construction, or

[[Page 71761]]

production of the property for use by the taxpayer in its trade or 
business or for its production of income. This paragraph (b)(5)(v) does 
not apply to an acquisition described in paragraph (b)(5)(iii)(G) of 
this section.
* * * * *
    (viii) * * * Unless the facts specifically indicate otherwise, 
assume that the parties are not related within the meaning of section 
179(d)(2)(A) or (B) and Sec.  1.179-4(c), paragraph (c) of this section 
does not apply, and the parties do not have predecessors:
* * * * *
    (c) Election for components of larger self-constructed property for 
which the manufacture, construction, or production begins before 
September 28, 2017--(1) In general. A taxpayer may elect to treat any 
acquired or self-constructed component, as described in paragraph 
(c)(3) of this section, of the larger self-constructed property, as 
described in paragraph (c)(2) of this section, as being eligible for 
the additional first year depreciation deduction under this section, 
assuming all requirements of section 168(k) and this section are met. 
The taxpayer may make this election for one or more such components.
    (2) Eligible larger self-constructed property--(i) In general. 
Solely for purposes of this paragraph (c), a larger self-constructed 
property is property that is manufactured, constructed, or produced by 
the taxpayer for its own use in its trade or business or production of 
income. Solely for purposes of this paragraph (c), 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, or under a written contract that does not 
meet the definition of a binding contract 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 production of income is considered to be 
manufactured, constructed, or produced by the taxpayer. Except as 
provided in paragraph (c)(2)(iv) of this section, such larger self-
constructed property must be property--
    (A) That is described in paragraph (b)(2)(i)(A), (B), (C), or (D) 
of this section. Solely for purposes of the preceding sentence, the 
requirement that property has to be acquired after September 27, 2017, 
is disregarded;
    (B) That meets the requirements under paragraph (b) of this 
section, determined without regard to the acquisition date requirement 
in paragraph (b)(5) of this section; and
    (C) For which the taxpayer begins the manufacture, construction, or 
production before September 28, 2017.
    (ii) Residential rental property or nonresidential real property. 
If the taxpayer constructs, manufactures, or produces residential 
rental property or nonresidential real property, as defined in section 
168(e)(2), or an improvement to such property, for use in its trade or 
business or production of income, all property that is constructed, 
manufactured, or produced as part of such residential rental property, 
nonresidential real property, or improvement, as applicable, and that 
is described in paragraph (c)(2)(i)(A) of this section is the larger 
self-constructed property for purposes of applying the rules in this 
paragraph (c).
    (iii) Beginning of manufacturing, construction, or production. 
Solely for purposes of paragraph (c)(2)(i)(C) of this section, the 
determination of when manufacture, construction, or production of the 
larger self-constructed property begins is made in accordance with the 
rules in paragraph (b)(5)(iv)(B) of this section if the larger self-
constructed property is manufactured, constructed, or produced by the 
taxpayer for its own use in its trade or business or production of 
income, or 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 production of income. If the 
larger self-constructed property is manufactured, constructed, or 
produced for the taxpayer by another person under a written contract 
that does not meet the definition of a binding contract 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 production of income, the 
determination of when manufacture, construction, or production of the 
larger self-constructed property begins is made in accordance with the 
rules in paragraph (b)(5)(v) of this section. If the taxpayer enters 
into a written binding contract, as defined in paragraph (b)(5)(iii) of 
this section, before September 28, 2017, with another person to 
manufacture, construct, or produce the larger self-constructed property 
and the manufacture, construction, or production of this property 
begins after September 27, 2017, as determined under paragraph 
(b)(5)(iv)(B) of this section, this paragraph (c) does not apply. If 
the taxpayer enters into a written contract that does not meet the 
definition of a binding contract in paragraph (b)(5)(iii) of this 
section before September 28, 2017, with another person to manufacture, 
construct, or produce the larger self-constructed property and the 
manufacture, construction, or production of this property begins after 
September 27, 2017, as determined under paragraph (b)(5)(v) of this 
section, this paragraph (c) does not apply.
    (iv) Exception. This paragraph (c) does not apply to any larger 
self-constructed property that is included in a class of property for 
which the taxpayer made an election under section 168(k)(7) (formerly 
section 168(k)(2)(D)(iii)) not to deduct the additional first year 
depreciation deduction.
    (3) Eligible components--(i) In general. Solely for purposes of 
this paragraph (c), a component of the larger self-constructed 
property, as described in paragraph (c)(2) of this section, must be 
qualified property under section 168(k)(2) and paragraph (b) of this 
section. Solely for purposes of the preceding sentence, a component 
will satisfy the acquisition date requirement in paragraph (b)(5) of 
this section if it satisfies the requirements in paragraph (c)(3)(ii) 
or (iii) of this section, as applicable.
    (ii) Acquired components. If a component of the larger self-
constructed property is acquired pursuant to a written binding 
contract, as defined in paragraph (b)(5)(iii) of this section, the 
component must be acquired by the taxpayer after September 27, 2017, as 
determined under the rules in paragraph (b)(5)(ii)(B) of this section. 
If a component of the larger self-constructed property is acquired 
pursuant to a written contract that does not meet the definition of a 
binding contract in paragraph (b)(5)(iii) of this section, the 
component must be acquired by the taxpayer after September 27, 2017, as 
determined under the rules in paragraph (b)(5)(v) of this section.
    (iii) Self-constructed components. The manufacture, construction, 
or production of a component of a larger self-constructed property must 
begin after September 27, 2017. The determination of when manufacture, 
construction, or production of the component begins is made in 
accordance with the rules in--
    (A) Paragraph (b)(5)(iv)(B) of this section if the component is 
manufactured, constructed, or produced by the taxpayer for its own use 
in its trade or business or for its production of

[[Page 71762]]

income, or 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 component for use 
by the taxpayer in its trade or business or for its production of 
income; or
    (B) Paragraph (b)(5)(v) of this section if the component is 
manufactured, constructed, or produced for the taxpayer by another 
person under a written contract that does not meet the definition of a 
binding contract in paragraph (b)(5)(iii) of this section, that is 
entered into prior to the manufacture, construction, or production of 
the component for use by the taxpayer in its trade or business or for 
its production of income.
    (4) Special rules--(i) Installation costs. If the taxpayer pays, in 
the case of a cash basis taxpayer, or incurs, in the case of an accrual 
basis taxpayer, costs, including labor costs, to install a component of 
the larger self-constructed property, as described in paragraph (c)(2) 
of this section, such costs are eligible for the additional first year 
depreciation under this section, assuming all requirements are met, 
only if the component being installed meets the requirements in 
paragraph (c)(3) of this section.
    (ii) Property described in section 168(k)(2)(B). The rules in 
paragraph (e)(1)(iii) of this section apply for determining the 
unadjusted depreciable basis, as defined in Sec.  1.168(b)-1(a)(3), of 
larger self-constructed property described in paragraph (c)(2) of this 
section and in section 168(k)(2)(B).
    (5) Computation of additional first year depreciation deduction--
(i) Election is made. Before determining the allowable additional first 
year depreciation deduction for the larger self-constructed property, 
as described in paragraph (c)(2) of this section, for which the 
taxpayer makes the election specified in this paragraph (c) for one or 
more components of such property, the taxpayer must determine the 
portion of the unadjusted depreciable basis, as defined in Sec.  
1.168(b)-1(a)(3), of the larger self-constructed property, including 
all components, attributable to the component that meets the 
requirements of paragraphs (c)(3) and (c)(4)(i) of this section 
(component basis). The additional first year depreciation deduction for 
the component basis is determined by multiplying such component basis 
by the applicable percentage for the placed-in-service year of the 
larger self-constructed property. The additional first year 
depreciation deduction, if any, for the remaining unadjusted 
depreciable basis of the larger self-constructed property, as described 
in paragraph (c)(2) of this section, is determined under section 
168(k), as in effect on the day before the date of the enactment of the 
Act, and section 168(k)(8). For purposes of this paragraph (c), the 
remaining unadjusted depreciable basis of the larger self-constructed 
property is equal to the unadjusted depreciable basis, as defined in 
Sec.  1.168(b)-1(a)(3), of the larger self-constructed property, 
including all components, reduced by the sum of the component basis of 
the components for which the taxpayer makes the election specified in 
this paragraph (c).
    (ii) Election is not made. If the taxpayer does not make the 
election specified in this paragraph (c), the additional first year 
depreciation deduction, if any, for the larger self-constructed 
property, including all components, is determined under section 168(k), 
as in effect on the day before the date of the enactment of the Act, 
and section 168(k)(8).
    (6) Time and manner for making election--(i) Time for making 
election. The election specified in this paragraph (c) must be made by 
the due date, including extensions, of the Federal tax return for the 
taxable year in which the taxpayer placed in service the larger self-
constructed property.
    (ii) Manner of making election. The election specified in this 
paragraph (c) must be made by attaching a statement to such return 
indicating that the taxpayer is making the election provided in this 
paragraph (c) and whether the taxpayer is making the election for all 
or some of the components described in paragraph (c)(3) of this 
section. The election is made separately by each person owning 
qualified property (for example, for each member of a consolidated 
group by the agent for the group (within the meaning of Sec.  1.1502-
77(a) and (c)), by the partnership (including a lower-tier 
partnership), or by the S corporation).
    (7) Revocation of election--(i) In general. Except as provided in 
paragraph (c)(7)(ii) of this section, the election specified in this 
paragraph (c), 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. The 
election specified in this paragraph (c) 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 the election 
specified in this paragraph (c), 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 of the larger self-
constructed property is granted to revoke that election, provided the 
taxpayer timely filed the taxpayer's Federal tax return for that 
placed-in-service year 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 in a manner that is consistent with the revocation of the 
election.
    (8) Additional procedural guidance. The IRS may publish procedural 
guidance in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) that provides alternative 
procedures for complying with paragraph (c)(6) or (c)(7)(i) of this 
section.
    (9) Examples. The application of this paragraph (c) is illustrated 
by the following examples. Unless the facts specifically indicate 
otherwise, assume that the larger self-constructed property is 
described in paragraph (c)(2) of this section, the components that are 
acquired or self-constructed after September 27, 2017, are described in 
paragraph (c)(3) of this section, the taxpayer is an accrual basis 
taxpayer, and none of the costs paid or incurred after September 27, 
2017, are for the installation of components that do not meet the 
requirements of paragraph (c)(3) of this section.
    (i) Example 1. (A) BC, a calendar year taxpayer, is engaged in a 
trade or business described in section 163(j)(7)(A)(iv) and Sec. Sec.  
1.163(j)-1(b)(15)(i) and 1.163(j)-10(c)(3)(iii)(C)(3). In December 
2015, BC decided to construct an electric generation power plant for 
its own use. This plant is property described in section 168(k)(2)(B) 
as in effect on the day before the date of the enactment of the Act. 
However, the turbine for the plant had to be manufactured by another 
person for BC. In January 2016, BC entered into a written binding 
contract with CD to acquire the turbine. BC received the completed 
turbine in August 2017 at which time BC incurred the cost of the 
turbine. The cost of the turbine is 11 percent of the total cost of the 
electric generation power plant to be constructed by BC. BC began

[[Page 71763]]

constructing the electric generation power plant in October 2017 and 
placed in service this new power plant, including all component parts, 
in 2020.
    (B) The larger self-constructed property is the electric generation 
power plant to be constructed by BC. For determining if the 
construction of this power plant begins before September 28, 2017, 
paragraph (b)(5)(iv)(B) of this section provides that manufacture, 
construction, or production of property begins when physical work of a 
significant nature begins. BC uses the safe harbor test in paragraph 
(b)(5)(iv)(B)(2) of this section to determine when physical work of a 
significant nature begins for the electric generation power plant. 
Because the turbine that was manufactured by CD for BC is more than 10 
percent of the total cost of the electric generation power plant, 
physical work of a significant nature for this plant began before 
September 28, 2017.
    (C) The power plant is described in section 168(k)(9)(A) and 
paragraph (b)(2)(ii)(F) of this section and, therefore, is not larger 
self-constructed property eligible for the election pursuant to 
paragraph (c)(2)(i)(B) of this section. Accordingly, none of BC's 
expenditures for components of the power plant that are acquired or 
self-constructed after September 27, 2017, are eligible for the 
election specified in this paragraph (c). Assuming all requirements are 
met under section 168(k)(2) as in effect on the day before the date of 
the enactment of the Act, the unadjusted depreciable basis of the power 
plant, including all components, attributable to its construction 
before January 1, 2020, is eligible for the 30-percent additional first 
year depreciation deduction pursuant to section 168(k)(8).
    (ii) Example 2. (A) In August 2017, BD, a calendar-year taxpayer, 
entered into a written binding contract with CE for CE to manufacture a 
locomotive for BD for use in its trade or business. Before September 
28, 2017, BD acquired or self-constructed components of the locomotive. 
These components cost $500,000, which is more than 10 percent of the 
total cost of the locomotive, and BD incurred such costs before 
September 28, 2017. After September 27, 2017, BD acquired or self-
constructed components of the locomotive and these components cost 
$4,000,000. In February 2019, CE delivered the locomotive to BD and BD 
placed in service the locomotive. The total cost of the locomotive is 
$4,500,000. The locomotive is property described in section 
168(k)(2)(B) as in effect on the day before the date of the enactment 
of the Act. On its timely filed Federal income tax return for 2019, BD 
made the election specified in this paragraph (c).
    (B) The larger self-constructed property is the locomotive being 
manufactured by CE for BD. For determining if the manufacturing of this 
locomotive begins before September 28, 2017, paragraph (b)(5)(iv)(B) of 
this section provides that manufacture, construction, or production of 
property begins when physical work of a significant nature begins. BD 
uses the safe harbor test in paragraph (b)(5)(iv)(B)(2) of this section 
to determine when physical work of a significant nature begins for the 
locomotive. Because BD had incurred more than 10 percent of the total 
cost of the locomotive before September 28, 2017, physical work of a 
significant nature for this locomotive began before September 28, 2017.
    (C) Because BD made the election specified in this paragraph (c), 
the cost of $4,000,000 for the locomotive's components acquired or 
self-constructed after September 27, 2017, qualifies for the 100-
percent additional first year depreciation deduction under this 
section, assuming all other requirements are met. The remaining cost of 
the locomotive is $500,000 and such amount qualifies for the 40-percent 
additional first year depreciation deduction pursuant to section 
168(k)(8), assuming all other requirements in section 168(k) as in 
effect on the day before the date of the enactment of the Act are met.
    (iii) Example 3. (A) In February 2016, BF, a calendar-year 
taxpayer, entered into a written binding contract with CG for CG to 
manufacture a vessel for BF for use in its trade or business. Before 
September 28, 2017, BF acquired or self-constructed components for the 
vessel. These components cost $30,000,000, which is more than 10 
percent of the total cost of the vessel, and BF incurred such costs 
before September 28, 2017. After September 27, 2017, BF acquired or 
self-constructed components for the vessel and these components cost 
$15,000,000. In February 2021, CG delivered the vessel to BF and BF 
placed in service the vessel. The vessel is property described in 
section 168(k)(2)(B) as in effect on the day before the date of the 
enactment of the Act. The total cost of the vessel is $45,000,000. On 
its timely filed Federal income tax return for 2021, BF made the 
election specified in this paragraph (c).
    (B) The larger self-constructed property is the vessel being 
manufactured by CG for BF. For determining if the manufacturing of this 
vessel begins before September 28, 2017, paragraph (b)(5)(iv)(B) of 
this section provides that manufacture, construction, or production of 
property begins when physical work of a significant nature begins. BF 
uses the safe harbor test in paragraph (b)(5)(iv)(B)(2) of this section 
to determine when physical work of a significant nature begins for the 
vessel. Because BF had incurred more than 10 percent of the total cost 
of the vessel before September 28, 2017, physical work of a significant 
nature for this vessel began before September 28, 2017.
    (C) Because BF made the election specified in this paragraph (c), 
the cost of $15,000,000 for the vessel's components acquired or self-
constructed after September 27, 2017, qualifies for the 100-percent 
additional first year depreciation deduction under this section, 
assuming all other requirements are met. Pursuant to section 168(k)(8) 
and because BF placed in service the vessel after 2020, none of the 
remaining cost of the vessel is eligible for any additional first year 
depreciation deduction under section 168(k) and this section nor under 
section 168(k) as in effect on the day before the date of the enactment 
of the Act.
    (iv) Example 4. (A) In March 2017, BG, a calendar year taxpayer, 
entered into a written contract with CH for CH to construct a building 
for BG to use in its retail business. This written contract does not 
meet the definition of a binding contract in paragraph (b)(5)(iii) of 
this section. In September 2019, the construction of the building was 
completed and placed in service by BG. The total cost is $10,000,000. 
Of this amount, $3,000,000 is the total cost for all section 1245 
properties constructed as part of the building, and $7,000,000 is for 
the building. Under section 168(e), section 1245 properties in the 
total amount of $2,400,000 are 5-year property and in the total amount 
of $600,000 are 7-year property. The building is nonresidential real 
property under section 168(e). Before September 28, 2017, BG acquired 
or self-constructed certain components and the total cost of these 
components is $500,000 for the section 1245 properties and $3,000,000 
for the building. BG incurred these costs before September 28, 2017. 
After September 27, 2017, BG acquired or self-constructed the remaining 
components of the section 1245 properties and these components cost 
$2,500,000. BG incurred these costs of $2,500,000 after September 27, 
2017. On its timely filed Federal income tax return for 2019, BG made 
the election specified in this paragraph (c).

[[Page 71764]]

    (B) All section 1245 properties are constructed as part of the 
construction of the building and are described in paragraph 
(b)(2)(i)(A) of this section. The building is not described in 
paragraph (b)(2)(i)(A), (B), (C), or (D) of this section. As a result, 
under paragraph (c)(2)(ii) of this section, the larger self-constructed 
property is all section 1245 properties with a total cost of 
$3,000,000. For determining if the construction of these section 1245 
properties begins before September 28, 2017, paragraph (b)(5)(v) of 
this section provides that manufacture, construction, or production of 
property begins when the taxpayer incurs more than 10 percent of the 
total cost of the property. Because BG incurred more than 10 percent of 
the total cost of the section 1245 properties before September 28, 
2017, construction of the section 1245 properties began before 
September 28, 2017.
    (C) Because BG made the election specified in this paragraph (c), 
the cost of $2,500,000 for the section 1245 components acquired or 
self-constructed by BG after September 27, 2017, qualifies for the 100-
percent additional first year depreciation deduction under this 
section, assuming all other requirements are met. The remaining cost of 
the section 1245 components is $500,000 and such amount qualifies for 
the 30-percent additional first year depreciation deduction pursuant to 
section 168(k)(8), assuming all other requirements in section 168(k), 
as in effect on the day before the date of the enactment of the Act, 
are met. Because the building is not qualified property under section 
168(k), as in effect on the day before the date of the enactment of the 
Act, none of the cost of $7,000,000 for the building is eligible for 
any additional first year depreciation deduction under section 168(k) 
and this section or under section 168(k), as in effect on the day 
before the date of the enactment of the Act.
    (d) * * *
    (3) * * *
    (iv) Determination of acquisition date for property not acquired 
pursuant to a written binding contract. For purposes of the acquisition 
rules in paragraph (d)(1) of this section, the following property is 
acquired by the taxpayer before January 1, 2027, if the taxpayer paid, 
in the case of a cash basis taxpayer, or incurred, in the case of an 
accrual basis taxpayer, more than 10 percent of the total cost of the 
property before January 1, 2027, excluding the cost of any land and 
preliminary activities such as planning and designing, securing 
financing, exploring, or researching:
    (A) Property that the taxpayer acquires pursuant to a contract that 
does not meet the definition of a written binding contract in paragraph 
(b)(5)(iii) of this section; or
    (B) Property that is manufactured, constructed, or produced for the 
taxpayer by another person under a written contract that does not meet 
the definition of a binding contract in paragraph (b)(5)(iii) of this 
section, and 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 production of income.
* * * * *
    (e) * * *
    (1) * * *
    (iii) * * * The amounts of unadjusted depreciable basis 
attributable to the property's manufacture, construction, or production 
before January 1, 2027, are referred to as ``progress expenditures.'' 
Rules similar to the rules in section 4.02(1)(b) of Notice 2007-36 
(2007-17 I.R.B. 1000) (see Sec.  601.601(d)(2)(ii)(b) of this chapter) 
apply for determining progress expenditures, regardless of whether the 
property 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, or under a written contract that 
does not meet the definition of a binding contract in paragraph 
(b)(5)(iii) of this section. The IRS may publish procedural guidance in 
the Internal Revenue Bulletin (see Sec.  601.601(d)(2)(ii)(b) of this 
chapter) that provides alternative procedures for complying with this 
paragraph (e)(1)(iii).
* * * * *
    (f) * * *
    (7) Additional procedural guidance. The IRS may publish procedural 
guidance in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) that provides alternative 
procedures for complying with paragraph (f)(1)(iii), (f)(1)(iv), 
(f)(2)(ii), (f)(2)(iii), (f)(3)(ii), (f)(3)(iii), or (f)(5)(i) of this 
section.
    (g) * * *
    (11) Mid-quarter convention. In determining whether the mid-quarter 
convention applies for a taxable year under section 168(d)(3) and Sec.  
1.168(d)-1, the depreciable basis, as defined in Sec.  1.168(d)-
1(b)(4), for the taxable year the qualified property is placed in 
service by the taxpayer is not reduced by the allowed or allowable 
additional first year depreciation deduction for that taxable year. See 
Sec.  1.168(d)-1(b)(4).
    (h) * * *
    (1) In general. Except as provided in paragraphs (h)(2) and (3) of 
this section, this section applies to--
    (i) Depreciable property acquired after September 27, 2017, by the 
taxpayer and placed in service by the taxpayer during or after the 
taxpayer's taxable year that begins on or after January 1, 2021;
    (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 begins on or after January 1, 2021; 
and
    (iii) Components acquired or self-constructed after September 27, 
2017, of larger self-constructed property described in paragraph (c)(2) 
of this section and placed in service by the taxpayer during or after 
the taxpayer's taxable year that begins on or after January 1, 2021.
    (2) Applicability of this section for prior taxable years. For 
taxable years beginning before January 1, 2021, see Sec.  1.168(k)-2 as 
contained in 26 CFR part 1, revised as of April 1, 2020.
    (3) Early application of this section and Sec.  1.1502-68--(i) In 
general. Subject to paragraphs (h)(3)(ii) and (iii) of this section, 
and provided that all members of a consolidated group consistently 
apply the same set of rules, a taxpayer may choose to apply both the 
rules of this section and the rules of Sec.  1.1502-68 (to the extent 
relevant), in their entirety and in a consistent manner, to--
    (A) Depreciable property acquired after September 27, 2017, by the 
taxpayer and placed in service by the taxpayer during a taxable year 
ending on or after September 28, 2017;
    (B) A specified plant for which the taxpayer properly made an 
election to apply section 168(k)(5) and that is planted, or grafted to 
a plant that was previously planted, after September 27, 2017, by the 
taxpayer during a taxable year ending on or after September 28, 2017; 
and
    (C) Components acquired or self-constructed after September 27, 
2017, of larger self-constructed property described in paragraph (c)(2) 
of this section and placed in service by the taxpayer during a taxable 
year ending on or after September 28, 2017.
    (ii) Early application to certain transactions. In the case of 
property described in Sec.  1.1502-68(e)(2)(i) that is acquired in a 
transaction that satisfies the requirements of Sec.  1.1502-
68(c)(1)(ii) or (c)(2)(ii), the taxpayer may apply the rules of this 
section and the rules of Sec.  1.1502-68 (to the extent relevant), in 
their entirety and in a consistent manner, to such property only if 
those

[[Page 71765]]

rules are applied, in their entirety and in a consistent manner, by all 
parties to the transaction, including the transferor member, the 
transferee member, and the target, as applicable, and the consolidated 
groups of which they are members, for the taxable year(s) in which the 
transaction occurs and the taxable year(s) that includes the day after 
the deconsolidation date, as defined in Sec.  1.1502-68(a)(2)(iii).
    (iii) Bound by early application. Once a taxpayer applies the rules 
of this section and the rules of Sec.  1.1502-68 (to the extent 
relevant), in their entirety, for a taxable year, the taxpayer must 
continue to apply the rules of this section and the rules of Sec.  
1.1502-68 (to the extent relevant), in their entirety, for the 
taxpayer's subsequent taxable years.

0
Par. 5. Section 1.1502-68 is added immediately following Sec.  1.1502-
59A to read as follows:


Sec.  1.1502-68  Additional first year depreciation deduction for 
property acquired and placed in service after September 27, 2017.

    (a) In general--(1) Overview. This section provides rules governing 
the availability of the additional first year depreciation deduction 
allowable under section 168(k) for qualified property that is acquired 
and placed in service after September 27, 2017, by a member of a 
consolidated group. Except as otherwise provided in paragraph (c) of 
this section, the rules in Sec.  1.168(k)-2 apply to members of a 
consolidated group in addition to the rules in this section. Paragraph 
(a)(2) of this section provides definitions of terms used in this 
section. Paragraph (b) of this section provides rules addressing the 
application of Sec.  1.168(k)-2(b)(3)(iii)(A)(1) (requiring that a 
taxpayer claiming the additional first year depreciation deduction for 
used property not previously have used the property) to members of a 
consolidated group. Paragraph (c) of this section provides rules 
addressing certain transfers of eligible property (as defined in 
paragraph (a)(2)(vii) of this section) between members of a 
consolidated group if the transferee member (as defined in paragraph 
(a)(2)(xii) of this section) leaves the group pursuant to the same 
series of related transactions. Paragraph (d) of this section provides 
examples illustrating the application of the rules of this section. 
Paragraph (e) of this section provides the applicability dates.
    (2) Definitions. The following definitions apply for purposes of 
this section.
    (i) Consolidated Asset Acquisition Rule. The term Consolidated 
Asset Acquisition Rule refers to the rule set forth in paragraph 
(c)(1)(i) of this section addressing certain intercompany transfers of 
eligible property.
    (ii) Consolidated Deemed Acquisition Rule. The term Consolidated 
Deemed Acquisition Rule refers to the rule set forth in paragraph 
(c)(2)(i) of this section addressing certain intercompany transfers of 
the stock of target (as defined in paragraph (a)(2)(xi) of this 
section).
    (iii) Deconsolidation date. The term deconsolidation date means the 
date on which a transferee member ceases to be a member of a 
consolidated group.
    (iv) Designated transaction. The term designated transaction has 
the meaning provided in paragraph (c)(4)(i) of this section.
    (v) Deemed replacement property. The term deemed replacement 
property means used property that is identical to (but is separate and 
distinct from) the eligible property that the transferee member or 
target is deemed to sell to an unrelated party under the Consolidated 
Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule. For 
all Federal income tax purposes, the deemed purchase of deemed 
replacement property by the transferee member or target under paragraph 
(c)(1)(i)(B) or (c)(2)(i)(B) of this section, respectively, does not 
result in the basis in such property being determined, in whole or in 
part, by reference to the basis of other property held at any time by 
the transferee member or target. See section 179(d)(3) and Sec.  
1.168(k)-2(b)(3)(iii)(A)(3).
    (vi) Deemed sale amount. The term deemed sale amount means an 
amount equal to the transferee member's or the target's adjusted basis 
in the eligible property immediately before the transferee member or 
target is deemed to sell the property to an unrelated party under the 
Consolidated Asset Acquisition Rule or the Consolidated Deemed 
Acquisition Rule.
    (vii) Eligible property. The term eligible property means 
depreciable property (as defined in Sec.  1.168(b)-1(a)(1)) that meets 
the requirements in Sec.  1.168(k)-2(b)(2), determined without regard 
to Sec.  1.168(k)-2(b)(2)(ii)(C) (property subject to an election not 
to claim the additional first year depreciation for a class of 
property) except on the day after the deconsolidation date.
    (viii) Group Prior Use Rule. The term Group Prior Use Rule refers 
to the rule set forth in paragraph (b)(1) of this section addressing 
when a member of a consolidated group is attributed another member's 
depreciable interest in property.
    (ix) Lookback Period. The term lookback period means, with respect 
to a member of a consolidated group, the period that includes the five 
calendar years immediately prior to the current calendar year in which 
the property is placed in service by such member, as well as the 
portion of such current calendar year before the date on which the 
member placed the property in service (without taking into account the 
applicable convention).
    (x) Stock and Asset Acquisition Rule. The term Stock and Asset 
Acquisition Rule refers to the rule set forth in paragraph (b)(2) of 
this section addressing when a member of a consolidated group is 
attributed a new member's depreciable interest in property.
    (xi) Target. The term target means the member whose stock is 
transferred in a transaction that is subject to the Consolidated Deemed 
Acquisition Rule.
    (xii) Transferee member. The term transferee member means the 
member that acquires eligible property or target stock, respectively, 
in a transaction that is subject to the Consolidated Asset Acquisition 
Rule or the Consolidated Deemed Acquisition Rule.
    (xiii) Transferor member. The term transferor member means the 
member that transfers eligible property or target stock, respectively, 
in a transaction that is subject to the Consolidated Asset Acquisition 
Rule or the Consolidated Deemed Acquisition Rule.
    (b) Acquisitions of depreciable property by a member of a 
consolidated group--(1) General rule (Group Prior Use Rule). Solely for 
purposes of applying Sec.  1.168(k)-2(b)(3)(iii)(A)(1), if a member of 
a consolidated group acquires depreciable property in which the group 
had a depreciable interest at any time within the lookback period, the 
member is treated as having a depreciable interest in the property 
prior to the acquisition. For purposes of this paragraph (b)(1), a 
consolidated group is treated as having a depreciable interest in 
property during the time any current or previous member of the group 
had a depreciable interest in the property while a member of the group. 
For special rules that apply when a member of a consolidated group 
acquires depreciable property in an intercompany transaction (as 
defined in Sec.  1.1502-13(b)(1)(i)) and then leaves the group pursuant 
to the same series of related transactions, see paragraph (c) of this 
section.
    (2) Certain acquisitions pursuant to a series of related 
transactions (Stock and Asset Acquisition Rule). Solely for purposes of 
applying Sec.  1.168(k)-2(b)(3)(iii)(A)(1), if a series of related

[[Page 71766]]

transactions includes one or more transactions in which property is 
acquired by a member of a consolidated group, and one or more 
transactions in which a corporation that had a depreciable interest in 
the property (determined without regard to the application of the Group 
Prior Use Rule) within the lookback period becomes a member of the 
group, then the member that acquires the property is treated as having 
a depreciable interest in the property prior to the acquisition.
    (c) Certain intercompany transfers of eligible property followed by 
deconsolidation--(1) Acquisition of eligible property by a member that 
leaves the group--(i) General rule (Consolidated Asset Acquisition 
Rule). This paragraph (c)(1) applies to certain transactions pursuant 
to which one member of a consolidated group (transferee member) 
acquires from another member of the same consolidated group (transferor 
member) eligible property. Except as otherwise provided in paragraph 
(c)(3) or (4) of this section, if a transaction satisfies the 
requirements of paragraph (c)(1)(ii) of this section, then Sec.  
1.168(k)-2(b)(3)(iii)(C) (providing special rules when depreciable 
property is acquired as part of a series of related transactions) does 
not apply to the transaction, and for all Federal income tax purposes--
    (A) The transferee member is treated as selling the eligible 
property to an unrelated person on the day after the deconsolidation 
date in exchange for an amount of cash equal to the deemed sale amount; 
and
    (B) Immediately after the deemed sale in paragraph (c)(1)(i)(A) of 
this section, the transferee member is treated as purchasing deemed 
replacement property from an unrelated person for an amount of cash 
equal to the deemed sale amount.
    (ii) Requirements. A transaction satisfies the requirements of this 
paragraph (c)(1)(ii) if--
    (A) The transferee member's acquisition of the eligible property 
meets the requirements of Sec.  1.168(k)-2(b)(3)(iii)(A) without regard 
to section 179(d)(2)(A) or (B) and Sec.  1.179-4(c)(1)(ii) or (iii) or 
the Group Prior Use Rule;
    (B) As part of the same series of related transactions that 
includes the acquisition, the transferee member ceases to be a member 
of the consolidated group and ceases to be related, within the meaning 
of section 179(d)(2)(A) or (B) and Sec.  1.179-4(c)(1)(ii) or (iii), to 
the transferor member; and
    (C) The acquired eligible property continues to be eligible 
property on the deconsolidation date and the day after the 
deconsolidation date.
    (2) Deemed acquisition of eligible property pursuant to an election 
under section 338 or 336(e) by a member that leaves the group--(i) 
General rule (Consolidated Deemed Acquisition Rule). This paragraph 
(c)(2) applies to certain transactions pursuant to which a transferee 
member acquires from a transferor member the stock of another member of 
the same consolidated group that holds eligible property (target) in 
either a qualified stock purchase for which a section 338 election is 
made or a qualified stock disposition described in Sec.  1.336-2(b)(1) 
for which a section 336(e) election is made. Except as otherwise 
provided in paragraph (c)(3) or (4) of this section, if a transaction 
satisfies the requirements of paragraph (c)(2)(ii) of this section, 
then Sec.  1.168(k)-2(b)(3)(iii)(C) does not apply to the transaction, 
and for all Federal income tax purposes--
    (A) The target is treated as selling the eligible property to an 
unrelated person on the day after the deconsolidation date in exchange 
for an amount of cash equal to the deemed sale amount; and
    (B) Immediately after the deemed sale in paragraph (c)(2)(i)(A) of 
this section, the target is treated as purchasing deemed replacement 
property from an unrelated person for an amount of cash equal to the 
deemed sale amount.
    (ii) Requirements. A transaction satisfies the requirements of this 
paragraph (c)(2)(ii) if:
    (A) The target's acquisition of the eligible property meets the 
requirements of Sec.  1.168(k)-2(b)(3)(iii)(A) without regard to the 
Group Prior Use Rule;
    (B) As part of the same series of related transactions that 
includes the qualified stock purchase or qualified stock disposition, 
the transferee member and the target cease to be members of the 
transferor member's consolidated group and cease to be related, within 
the meaning of section 179(d)(2)(A) or (B) and Sec.  1.179-4(c)(1)(ii) 
or (iii), to the transferor member; and
    (C) The target's eligible property on the acquisition date (within 
the meaning of Sec.  1.338-2(c)(1)) or the disposition date (within the 
meaning of Sec.  1.336-1(b)(8)) continues to be eligible property on 
the deconsolidation date and the day after the deconsolidation date.
    (3) Disposition of depreciable property pursuant to the same series 
of related transactions. Paragraph (c)(1) of this section does not 
apply if, following the acquisition of eligible property, the 
transferee member disposes of such property pursuant to the same series 
of related transactions that includes the property acquisition. 
Paragraph (c)(2) of this section does not apply if, following the 
deemed acquisition of eligible property, the target disposes of such 
property pursuant to the same series of related transactions that 
includes the qualified stock purchase or qualified stock disposition. 
See Sec.  1.168(k)-2(b)(3)(iii)(C) for rules regarding the transfer of 
property in a series of related transactions. See also Sec.  1.168(k)-
2(g)(1) for rules regarding property placed in service and disposed of 
in the same taxable year. For purposes of this paragraph (c)(3), the 
deemed sale of eligible property by the transferee member or the target 
pursuant to paragraph (c)(1)(i)(A) or (c)(2)(i)(A) of this section is 
not treated as a ``disposition'' of such property.
    (4) Election to not apply paragraph (c)(1)(i) or (c)(2)(i) of this 
section--(i) In general. If a transaction satisfies the requirements of 
the Consolidated Asset Acquisition Rule or the Consolidated Deemed 
Acquisition Rule in paragraph (c)(1)(ii) or (c)(2)(ii) of this section, 
respectively, the transferee member or the target nonetheless may elect 
not to apply the Consolidated Asset Acquisition Rule or the 
Consolidated Deemed Acquisition Rule, respectively, to all eligible 
property that is acquired or deemed acquired in such transaction. If a 
transferee member or target makes an election under this paragraph 
(c)(4) with respect to any transaction (designated transaction), then--
    (A) The transferee member or target is deemed to have made such an 
election for all other transactions--
    (1) That satisfy the requirements of the Consolidated Asset 
Acquisition Rule or the Consolidated Deemed Acquisition Rule;
    (2) That are part of the same series of related transactions as the 
designated transaction; and
    (3) In which the transferee member or target either is the same 
transferee member or target as in the designated transaction or is 
related, within the meaning of section 179(d)(2)(A) or (B) and Sec.  
1.179-4(c)(1)(ii) or (iii), to the transferee member or target in the 
designated transaction immediately after the end of the series of 
related transactions; and
    (B) Any eligible property acquired or deemed acquired in the 
designated transaction and in any transactions described in paragraph 
(c)(4)(i)(A) of this section does not satisfy either the original use 
requirement or the used property acquisition requirements in Sec.  
1.168(k)-2(b)(3) and, thus, is not ``qualified property'' within the 
meaning of Sec.  1.168(k)-2(b)(1).
    (ii) Time and manner for making election--(A) Time to make 
election. An

[[Page 71767]]

election under this paragraph (c)(4) must be made by the due date, 
including extensions, for the Federal tax return for the taxable year 
of the transferee member or target that begins on the day after the 
deconsolidation date.
    (B) Manner of making election. A transferee member or target, as 
applicable, makes the election under this paragraph (c)(4) by attaching 
a statement to its return for the taxable year that begins on the day 
after the deconsolidation date. The statement must describe the 
transaction(s) to which the Consolidated Asset Acquisition Rule or 
Consolidated Deemed Acquisition Rule otherwise would apply and state 
that the transferee member or the target, as applicable, is not 
claiming the additional first year depreciation deduction for any 
eligible property transferred in such transaction(s). If, at the time 
the election is made, the transferee member or the target is a member 
of a consolidated group, the statement is made by the agent for the 
group (within the meaning of Sec.  1.1502-77(a) and (c)) on behalf of 
the transferee member or the target and is attached to the consolidated 
return of the group for the taxable year of the group that includes the 
taxable year of the transferee member or target that begins on the day 
after the deconsolidation date.
    (C) Additional procedural guidance. The IRS may publish procedural 
guidance in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) that provides alternative 
procedures for complying with paragraph (c)(4)(ii)(A) or (B) of this 
section.
    (iii) Revocation of election. An election specified in this 
paragraph (c)(4), 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 (c)(4) may not be revoked through 
a request under section 446(e) to change the taxpayer's method of 
accounting.
    (d) Examples. For purposes of the examples in this section, unless 
otherwise stated: Parent, S, B, Controlled, and T are members of a 
consolidated group of which Parent is the common parent (Parent group); 
Parent owns all of the only class of stock of each of S, B, Controlled, 
and T; X is the common parent of the X consolidated group (X group); no 
member of the X group is related, within the meaning of section 
179(d)(2)(A) or (B) and Sec.  1.179-4(c)(1)(ii) or (iii) (Related), to 
any member of the Parent group; G and U are corporations that are not 
Related to each other or to any member of the Parent group or the X 
group; the Equipment in each example is eligible property; no member of 
the Parent group or the X group has had a depreciable interest in the 
Equipment within the lookback period; Sec.  1.168(k)-2(b)(3)(iii)(A)(1) 
is referred to as the No Prior Use Requirement; and Sec.  1.168(k)-
2(b)(3)(iii)(A)(2) is referred to as the Unrelated Party Requirement. 
The rules of this section are illustrated by the following examples.
    (1) Example 1: Intercompany sale of eligible property--(i) Facts. S 
has a depreciable interest in Equipment #1. In 2018, S sells Equipment 
#1 to B, and B places Equipment #1 in service in the same year.
    (ii) Analysis. B's acquisition of Equipment #1 does not satisfy 
either the No Prior Use Requirement or the Unrelated Party Requirement. 
Under the Group Prior Use Rule, B is treated as previously having a 
depreciable interest in Equipment #1 because B (a member of the Parent 
group) acquired Equipment #1 and S, while a member of the Parent group, 
had a depreciable interest in Equipment #1 within the lookback period. 
In addition, B acquires Equipment #1 from S, and B and S are Related at 
the time of the acquisition. Accordingly, B is not eligible to claim 
the additional first year depreciation deduction for Equipment #1 in 
2018.
    (2) Example 2: Sale outside of the consolidated group followed by a 
reacquisition within the lookback period--(i) Facts. S has a 
depreciable interest in Equipment #2. In 2018, S sells Equipment #2 to 
G. In 2019, in an unrelated transaction, B acquires Equipment #2 from G 
and places it in service in the same year.
    (ii) Analysis. B's acquisition of Equipment #2 does not satisfy the 
No Prior Use Requirement as a result of the Group Prior Use Rule. 
Pursuant to the Group Prior Use Rule, B is treated as previously having 
a depreciable interest in Equipment #2 because B is a member of the 
Parent group and S, while a member of the Parent group, had a 
depreciable interest in Equipment #2 within the lookback period. Thus, 
B is not eligible to claim the additional first year depreciation 
deduction for Equipment #2 in 2019. The result would be the same if, 
after selling Equipment #2 to G, S had ceased to be a member of the 
Parent group prior to B's acquisition of Equipment #2.
    (iii) Sale outside of the consolidated group followed by a 
reacquisition beyond the lookback period. The facts are the same as in 
paragraph (d)(2)(i) of this section, except that B acquires Equipment 
#2 and places it in service in 2024 instead of 2019. B's acquisition of 
Equipment #2 satisfies the No Prior Use Requirement. B would not be 
treated as previously having a depreciable interest in Equipment #2 
under the Group Prior Use Rule because the Parent group did not have a 
depreciable interest in Equipment #2 within the lookback period. 
Further, B itself did not have a prior depreciable interest in 
Equipment #2 within the lookback period. Assuming all other 
requirements in Sec.  1.168(k)-2 are satisfied, B is eligible to claim 
the additional first year depreciation deduction for Equipment #2 in 
2024. The result would be the same if S, rather than B, acquired and 
placed in service Equipment #2 in 2024.
    (3) Example 3: Acquisition of eligible property by the consolidated 
group followed by a corporation with a prior depreciable interest 
joining the group as part of the same series of related transactions--
(i) Facts. G has a depreciable interest in Equipment #3. During 2018, G 
sells Equipment #3 to U. In a series of related transactions that does 
not include the 2018 sale, Parent acquires all of the stock of G in 
2019. Later in 2019, B purchases Equipment #3 from U and places it in 
service immediately thereafter.
    (ii) Analysis. B's acquisition of Equipment #3 does not satisfy the 
No Prior Use Requirement as a result of the Stock and Asset Acquisition 
Rule. In a series of related transactions, G became a member of the 
Parent group and B acquired Equipment #3. Because G had a depreciable 
interest in Equipment #3 within the lookback period, B is treated as 
having a depreciable interest in Equipment #3 under the Stock and Asset 
Acquisition Rule. Thus, B is not eligible to claim the additional first 
year depreciation deduction for Equipment #3 in 2019.
    (iii) B purchases Equipment #3 in 2024. The facts are the same as 
in paragraph (d)(3)(i) of this section, except that B acquires and 
places in service Equipment #3 in 2024 instead of 2019. B is not 
treated under the Stock and Asset Acquisition Rule as having a prior 
depreciable interest in Equipment #3 because G (which sold Equipment #3 
to U in 2018) did not have a depreciable interest in Equipment #3 
within the lookback period. In addition, B is not treated under the 
Group Prior Use Rule as having a prior depreciable interest in

[[Page 71768]]

Equipment #3 at the time of the purchase because neither G nor any 
other member of the Parent group had a depreciable interest in 
Equipment #3 while a member of the Parent group within the lookback 
period. Further, B itself did not have a depreciable interest in 
Equipment #3 within the lookback period. Accordingly, B's acquisition 
of Equipment #3 satisfies the No Prior Use Requirement. Assuming all 
other requirements in Sec.  1.168(k)-2 are satisfied, B is eligible to 
claim the additional first year depreciation deduction for Equipment #3 
in 2024.
    (iv) No series of related transactions. The facts are the same as 
in paragraph (d)(3)(i) of this section, except that Parent's 
acquisition of the G stock and B's purchase of Equipment #3 are not 
part of the same series of related transactions. Because B's purchase 
of Equipment #3 and Parent's acquisition of the G stock did not occur 
pursuant to the same series of related transactions, the Stock and 
Asset Acquisition Rule does not apply. In addition, B is not treated 
under the Group Prior Use Rule as having a prior depreciable interest 
in Equipment #3 at the time of the purchase because neither G nor any 
other member of the Parent group had a depreciable interest in 
Equipment #3 while a member of the Parent group within the lookback 
period. Further, B itself did not have a depreciable interest in 
Equipment #3 within the lookback period. Accordingly, B's acquisition 
of Equipment #3 satisfies the No Prior Use Requirement. Assuming all 
other requirements in Sec.  1.168(k)-2 are satisfied, B is eligible to 
claim the additional first year depreciation deduction for Equipment #3 
in 2019.
    (4) Example 4: Termination of the consolidated group--(i) Facts. S 
owns Equipment #4. In 2018, S sells Equipment #4 to U. In 2019, X 
acquires all of the stock of Parent in a transaction that causes the 
Parent group to terminate and Parent, B, and S to become members of the 
X group. In 2020, in a transaction that is not part of a series of 
related transactions, B purchases Equipment #4 from U and places it in 
service in the same year.
    (ii) Analysis. B's acquisition of Equipment #4 satisfies the No 
Prior Use Requirement. The Group Prior Use Rule does not apply to treat 
B as having a prior depreciable interest in Equipment #4 because B is a 
member of the X group and no member of the X group had a depreciable 
interest in Equipment #4 while a member of the X group within the 
lookback period. Further, B itself did not have a prior depreciable 
interest in Equipment #4 within the lookback period. Assuming all other 
requirements in Sec.  1.168(k)-2 are satisfied, B is eligible to claim 
the additional first year depreciation deduction for Equipment #4 in 
2020.
    (iii) S purchases Equipment #4 in 2020. The facts are the same as 
in paragraph (d)(4)(i) of this section, except that S rather than B 
purchases and places in service Equipment #4 in 2020. S's purchase of 
Equipment #4 does not satisfy the No Prior Use Requirement because S 
had a depreciable interest in Equipment #4 within the lookback period. 
Thus, S is not eligible to claim the additional first year depreciation 
deduction for Equipment #4 in 2020.
    (iv) Acquisitions are part of the same series of related 
transactions. The facts are the same as in paragraph (d)(4)(i) of this 
section, except that X's acquisition of the Parent stock and B's 
purchase of Equipment #4 are part of the same series of related 
transactions. Thus, pursuant to the same series of related 
transactions, S became a member of the X group and B (another member of 
the X group) acquired Equipment #4. Because S had a depreciable 
interest in Equipment #4 within the lookback period, B is treated as 
having a depreciable interest in Equipment #4 under the Stock and Asset 
Acquisition Rule. As a result, B's acquisition of Equipment #4 does not 
satisfy the No Prior Use Requirement, and B is not eligible to claim 
the additional first year depreciation deduction for Equipment #4 in 
2020.
    (5) Example 5: Intercompany sale of eligible property followed by 
sale of B stock as part of the same series of related transactions--(i) 
Facts. S has a depreciable interest in Equipment #5. On January 1, 
2019, B purchases Equipment #5 from S and places it in service. On June 
1, 2019, as part of the same series of related transactions that 
includes B's purchase of Equipment #5, Parent sells all of the stock of 
B to X. Thus, B leaves the Parent group at the end of the day on June 
1, 2019, and B is a member of the X group starting June 2, 2019. See 
Sec.  1.1502-76(b). As of June 1, 2019, Equipment #5 remains eligible 
property.
    (ii) Analysis--(A) Application of the Consolidated Asset 
Acquisition Rule. B was a member of the Parent group when it acquired 
Equipment #5. Because S, another member of the Parent group, had a 
depreciable interest in Equipment #5 while a member of the group within 
the lookback period, B would be treated as having a prior depreciable 
interest in Equipment #5 under the Group Prior Use Rule and B's 
acquisition of Equipment #5 would not satisfy the No Prior Use 
Requirement. However, B's acquisition of Equipment #5 satisfies the 
requirements of the Consolidated Asset Acquisition Rule in paragraph 
(c)(1)(ii) of this section. First, B's acquisition of Equipment #5 
meets the requirements of Sec.  1.168(k)-2(b)(3)(iii)(A) without regard 
to the related-party tests under section 179(d)(2)(A) or (B) and Sec.  
1.179-4(c)(1)(ii) or (iii) or the Group Prior Use Rule. Second, as part 
of the same series of related transactions that includes B's 
acquisition of Equipment #5, B ceases to be a member of the Parent 
group and ceases to be Related to S. Third, Equipment #5 continues to 
be eligible property on the deconsolidation date (June 1, 2019).
    (B) Consequences of the Consolidated Asset Acquisition Rule. Under 
the Consolidated Asset Acquisition Rule, B is treated for all Federal 
income tax purposes as transferring Equipment #5 to an unrelated person 
on June 2, 2019, in exchange for an amount of cash equal to the deemed 
sale amount and, immediately thereafter, acquiring deemed replacement 
property (New Equipment #5) from an unrelated person for an amount of 
cash equal to the deemed sale amount. Accordingly, assuming all other 
requirements in Sec.  1.168(k)-2 are satisfied, B is eligible to claim 
the additional first year depreciation for an amount equal to the 
deemed sale amount for the taxable year in which it places New 
Equipment #5 in service.
    (iii) Distribution of B. The facts are the same as in paragraph 
(d)(5)(i) of this section, except that, on June 1, 2019, Parent 
distributes the stock of B to its shareholders (which are not Related 
to S) in a distribution that qualifies for nonrecognition under section 
355(a). Accordingly, the Consolidated Asset Acquisition Rule applies. 
As in paragraph (d)(5)(ii)(B) of this section, assuming all other 
requirements in Sec.  1.168(k)-2 are satisfied, B is eligible to claim 
the additional first year depreciation deduction for an amount equal to 
the deemed sale amount for the taxable year in which it places New 
Equipment #5 in service.
    (iv) Equipment #5 ceases to be eligible property. The facts are the 
same as in paragraph (d)(5)(i) of this section, except that, on June 1, 
2019, Equipment #5 is no longer eligible property. The Consolidated 
Asset Acquisition Rule does not apply because B's acquisition of 
Equipment #5 fails to satisfy the requirement in paragraph 
(c)(1)(ii)(C) of this section that the acquired eligible property 
continue to be eligible property on the deconsolidation date. 
Therefore, B's acquisition of Equipment #5 on January 1, 2019, fails to 
satisfy the No Prior Use Requirement. Under the Group Prior Use Rule, B 
is treated as

[[Page 71769]]

having a prior depreciable interest in Equipment #5 because B is a 
member of the Parent group and S, while a member of the Parent group, 
had a depreciable interest in Equipment #5 within the lookback period. 
Accordingly, B is not eligible to claim the additional first year 
depreciation deduction with respect to Equipment #5 in 2019.
    (6) Example 6: Intercompany sale of member stock for which a 
section 338(h)(10) election is made followed by sale of B stock as part 
of a series of related transactions--(i) Facts. S owns all of the stock 
of T, which has a depreciable interest in Equipment #6. On January 1, 
2019, B purchases all of the T stock from S in a qualified stock 
purchase for which a section 338(h)(10) election is made. On June 1, 
2019, as part of the same series of related transactions that includes 
B's purchase of the T stock, Parent sells all of the stock of B to X. 
Thus, B and T leave the Parent group at the end of the day on June 1, 
2019, and B and T are members of the X group starting June 2, 2019. See 
Sec.  1.1502-76(b). As of June 1, 2019, Equipment #6 remains eligible 
property.
    (ii) Analysis--(A) Section 338(h)(10) election. Pursuant to the 
section 338(h)(10) election, Old T is treated as transferring all of 
its assets, including Equipment #6, to an unrelated person in a single 
transaction in exchange for consideration at the close of the 
acquisition date (January 1, 2019), and New T is treated as acquiring 
all of its assets, including Equipment #6, from an unrelated person in 
exchange for consideration. Old T is deemed to liquidate following the 
deemed asset sale. See Sec.  1.338-1(a)(1).
    (B) Application of the Consolidated Deemed Acquisition Rule. New T 
was a member of the Parent group when New T acquired Equipment #6 from 
an unrelated person. Because Old T, another member of the Parent group, 
had a depreciable interest in Equipment #6 while a member of the group 
within the lookback period, New T would be treated as having a prior 
depreciable interest in Equipment #6 under the Group Prior Use Rule and 
New T's acquisition of Equipment #6 would not satisfy the No Prior Use 
Requirement. However, New T's acquisition of Equipment #6 satisfies the 
requirements of the Consolidated Deemed Acquisition Rule in paragraph 
(c)(2)(ii) of this section. First, New T's acquisition of Equipment #6 
meets the requirements of Sec.  1.168(k)-2(b)(3)(iii)(A) without regard 
to the Group Prior Use Rule. Second, as part of the same series of 
related transactions that includes B's qualified stock purchase of the 
T stock, B and New T cease to be members of the Parent group and cease 
to be Related to S. Third, Equipment #6 continues to be eligible 
property on the deconsolidation date (June 1, 2019).
    (C) Consequences of the Consolidated Deemed Acquisition Rule. Under 
the Consolidated Deemed Acquisition Rule, New T is treated for all 
Federal income tax purposes as transferring Equipment #6 to an 
unrelated person on June 2, 2019, in exchange for an amount of cash 
equal to the deemed sale amount and, immediately thereafter, acquiring 
deemed replacement property (New Equipment #6) from an unrelated person 
for an amount of cash equal to the deemed sale amount. Accordingly, 
assuming all other requirements in Sec.  1.168(k)-2 are satisfied, New 
T is eligible to claim the additional first year depreciation deduction 
for an amount equal to the deemed sale amount for the taxable year in 
which it places New Equipment #6 in service.
    (iii) T owns multiple assets. The facts are the same as in 
paragraph (d)(6)(i) of this section, except that, in addition to 
Equipment #6, T also owns Asset A (depreciable real estate that is not 
eligible property). With respect to Equipment #6, the results are the 
same as in paragraph (d)(6)(ii) of this section. However, the 
Consolidated Deemed Acquisition Rule does not apply to Asset A because 
it is not eligible property. Accordingly, New T is not treated as 
transferring Asset A to an unrelated person on June 2, 2019 and then, 
immediately thereafter, acquiring deemed replacement property for Asset 
A. If Equipment #6 had ceased to be eligible property as of June 1, 
2019, the Consolidated Deemed Acquisition Rule also would not apply to 
Equipment #6.
    (7) Example 7: Section 355 transaction following a section 
338(h)(10) transaction pursuant to the same series of related 
transactions--(i) Facts. T has a depreciable interest in Equipment #7. 
On January 1, 2019, Parent contributes all of the stock of T to B in 
exchange for common and non-voting preferred stock of B and sells the 
non-voting preferred stock of B to U pursuant to a binding commitment 
entered into prior to the contribution (T Exchange). The non-voting 
preferred stock is not treated as ``stock'' for purposes of section 
1504(a). See section 1504(a)(4). Parent and B jointly make an election 
under section 338(h)(10) with respect to the T Exchange. On June 1, 
2019, as part of the same series of related transactions that includes 
the T Exchange, Parent contributes the stock of B and assets comprising 
an active trade or business (within the meaning of section 355(b)) to 
Controlled in exchange for Controlled common stock and then distributes 
the Controlled common stock to Parent's shareholders in a distribution 
qualifying under section 355(a) (Controlled Distribution). In the 
Controlled Distribution, T and B cease to be Related to Parent. 
Equipment #7 remains eligible property on June 1, 2019.
    (ii) Section 338(h)(10) election. Immediately after the Controlled 
Distribution, Parent and B are not related as determined under section 
338(h)(3)(A)(iii). Further, B's basis in the T stock is not determined, 
in whole or in part, by reference to the adjusted basis of the T stock 
in the hands of Parent, and the stock is not acquired in an exchange to 
which section 351, 354, 355, or 356 applies. Accordingly, the T 
Exchange qualifies as a ``purchase'' within the meaning of section 
338(h)(3). Pursuant to the section 338(h)(10) election, Old T is 
treated as transferring all of its assets, including Equipment #7, to 
an unrelated person in a single transaction in exchange for 
consideration at the close of the acquisition date (January 1, 2019), 
and New T is treated as acquiring all of its assets, including 
Equipment #7, from an unrelated person in exchange for consideration. 
Old T is deemed to liquidate following the deemed asset sale. See Sec.  
1.338-1(a)(1).
    (iii) Application of the Consolidated Deemed Acquisition Rule. New 
T was a member of the Parent group when New T acquired Equipment #7 
from an unrelated person. Because Old T, another member of the Parent 
group, had a depreciable interest in Equipment #7 while a member of the 
group within the lookback period, New T would be treated as having a 
prior depreciable interest in Equipment #7 under the Group Prior Use 
Rule and New T's acquisition of Equipment #7 would not satisfy the No 
Prior Use Requirement. However, New T's acquisition of Equipment #7 
satisfies the requirements of the Consolidated Deemed Acquisition Rule 
in paragraph (c)(2)(ii) of this section. Thus, New T is treated for all 
Federal income tax purposes as transferring Equipment #7 to an 
unrelated person on June 2, 2019, in exchange for an amount of cash 
equal to the deemed sale amount and, immediately thereafter, acquiring 
deemed replacement property (New Equipment #7) from an unrelated person 
for an amount of cash equal to the deemed sale amount. Accordingly, 
assuming all other requirements in Sec.  1.168(k)-2 are satisfied, New 
T is eligible to claim the additional first year depreciation deduction 
for an amount equal to the deemed sale amount for the

[[Page 71770]]

taxable year in which it places New Equipment #7 in service.
    (e) Applicability dates--(1) In general. Except as provided in 
paragraph (e)(2) of this section, this section applies to--
    (i) Depreciable property acquired after September 27, 2017, by the 
taxpayer and placed in service by the taxpayer during or after the 
taxpayer's taxable year that begins on or after January 1, 2021;
    (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 begins on or after January 1, 2021; 
and
    (iii) Components acquired or self-constructed after September 27, 
2017, of larger self-constructed property described in Sec.  1.168(k)-
2(c)(2) and placed in service by the taxpayer during or after the 
taxpayer's taxable year that begins on or after January 1, 2021.
    (2) Early application of this section and Sec.  1.168(k)-2--(i) In 
general. Subject to paragraphs (e)(2)(ii) and (iii) of this section, 
and provided that all members of a consolidated group consistently 
apply the same set of rules, a taxpayer may choose to apply both the 
rules of this section and the rules of Sec.  1.168(k)-2, in their 
entirety and in a consistent manner, to--
    (A) Depreciable property acquired after September 27, 2017, by the 
taxpayer and placed in service by the taxpayer during a taxable year 
ending on or after September 28, 2017;
    (B) A specified plant for which the taxpayer properly made an 
election to apply section 168(k)(5) and that is planted, or grafted to 
a plant that was previously planted, after September 27, 2017, by the 
taxpayer during a taxable year ending on or after September 28, 2017; 
and
    (C) Components acquired or self-constructed after September 27, 
2017, of larger self-constructed property described in Sec.  1.168(k)-
2(c)(2) and placed in service by the taxpayer during a taxable year 
ending on or after September 28, 2017.
    (ii) Early application to certain transactions. In the case of 
property described in paragraph (e)(2)(i) of this section that is 
acquired in a transaction that satisfies the requirements of paragraph 
(c)(1)(ii) or (c)(2)(ii) of this section, the taxpayer may apply the 
rules of this section and the rules of Sec.  1.168(k)-2, in their 
entirety and in a consistent manner, to such property only if those 
rules are applied, in their entirety and in a consistent manner, by all 
parties to the transaction (including the transferor member, the 
transferee member, and the target, as applicable) and the consolidated 
groups of which they are members, for the taxable year(s) in which the 
transaction occurs and the taxable year(s) that includes the day after 
the deconsolidation date.
    (iii) Bound by early application. Once a taxpayer applies the rules 
of this section and the rules of Sec.  1.168(k)-2, in their entirety, 
for a taxable year, the taxpayer must continue to apply the rules of 
this section and the rules of Sec.  1.168(k)-2, in their entirety, for 
the taxpayer's subsequent taxable years.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
    Approved: September 16, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-21112 Filed 11-5-20; 4:15 pm]
BILLING CODE 4830-01-P