IRS Publishes Final Rule Regarding Additional First Year Depreciation Deduction for Used Property Passed as Part of TCJA
Back in 2017, SWACCA’s public policy team successfully lobbied to extend the 100 percent first year depreciation in the Tax Cuts and Jobs Act to used property so that SWACCA members could remove tax considerations from the business decision on whether to buy new or used construction equipment. Today, the IRS has published a final rule clarifying outstanding issues arising from its initial 2019 regulations governing the additional first year depreciation deduction for used property that is now section 168(k) of the Internal Revenue Code.
Today’s final rule clarifies implementation of the 100 percent additional first year depreciation deduction that allows businesses to write off the cost of most depreciable business assets in the year they are placed into service by the business. The 100 percent depreciation applies to depreciable business assets with a recovery period of 20 years or less and certain other property. The IRS notes that machinery, equipment, computers, appliances, and furniture generally qualify. The deduction applies to both new and used qualifying property acquired and placed into service after September 27, 2017.
Specifically, with respect to used property, the September 2019 rule provided that property is treated as used by the taxpayer or a predecessor at any time prior to acquisition by the taxpayer or predecessor if the taxpayer or the predecessor had a depreciable interest in the property at any time prior to such acquisition, whether or not the taxpayer or the predecessor claimed depreciation deductions for the property. Today’s rule clarifies the determination of whether the taxpayer or a predecessor had a depreciable interest in the property at any time prior to acquisition. Today’s rule also clarifies the 2019 rule’s requirement 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) in making this determination. Specifically, today the IRS is amending the September 2019 rule’s Five-Year Safe Harbor to provide 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 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. Today’s final rule also implements provisions related to: (1) “de minimis use,” providing an exception to prior depreciable interest requirements when the taxpayer disposes of property to an unrelated party within 90 calendar days after the taxpayer originally placed such property in service; (2) the partnership look-through requirement, which generally 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; (3) requirements for related transactions, which generally provide that the relationship between parties 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; and (4) the availability of the additional first year depreciation deduction upon the acquisition of depreciable property by a member of a consolidated group.
Today’s final rule is effective as of January 11, 2021.
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