September 25, 2020

IRS Issues Final Bonus Depreciation Rules

It can be difficult to find a silver lining in a year when so much has happened, often unwelcome, due to the COVID-19 pandemic. Many Atlanta businesses fought hard to survive the forced business closures, stay at home orders, and changing consumer behavior due to transmission fears. Now, more than ever, maintaining positive cash flow and working capital rank amongst the highest concerns. With this in mind, businesses are leveraging every option which includes exploring tax-saving opportunities. The good news is there are many new and expanded tax incentives available including bonus depreciation. Since the Tax Cuts and Jobs Act (TCJA) extended it through 2023, taxpayers have been waiting for the final rule and additional guidance. The good news is that on September 21, 2020, the IRS issued final rules providing anticipated updates. To help clients, prospects, and others, Wilson Lewis has provided a summary overview of key changes below.  

Bonus Depreciation Basics

Bonus depreciation allows taxpayers to deduct the cost of certain business assets in the first year they are placed in service, instead of deducting the cost over the asset’s useful life. Prior to the TCJA, taxpayers were permitted to only deduct 50 percent of qualified property. After TCJA was passed, first-year bonus depreciation went up to 100 percent for property placed in service after September 27, 2017, and before January 1, 2023. Qualified used property was also included in the TCJA. In 2019, the IRS issued both proposed and final rules governing bonus depreciation but left out several topics that are addressed in the new final rule.

Final Rules – What’s New?

The 2020 Final Rule provides important updates to the 2019 version and withdrawals various proposed changes based on the comment received. The changes include:

• The definition of Qualified Improvement Property (QIP) was modified to incorporate changes made by the CARES Act.
• Clarification of the five-year safe harbor to mean the five calendar years immediately preceding the current year, when determining whether an individual had prior depreciable interest in an asset.
• Elimination of the Partnership Lookthrough Rule which changes the treatment of a partner as having a depreciable interest in partnership property only because they were a partner.
• Additional clarification was provided on the DeMinimus Rule based on comments and questions received.
• Clarification of the Group Prior Use Rule which states a member of a consolidated group will be treated as having an interest if the group had an interest within the lookback period. Taxpayers should understand this period to be the five calendar years immediately preceding the current calendar year in which the property was placed into service.
• Expansion of the election to treat one or more components of larger self-constructed property as eligible for 100% bonus depreciation
• Clarification of the type of property and assets that qualify for bonus depreciation under the Component Election.

Contact Us

The IRS has indicated they will be issuing procedural guidance for taxpayers that elect to apply the new final regulations to prior tax years. This means taxpayers may benefit from filing amended returns for past years to claim additional tax savings. Bonus depreciation is a complicated topic but represents an important opportunity many businesses cannot afford to miss. If you have questions about the information outline above or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.