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taxnotes® Volume 160, Number 4 ■ July 23, 2018 Bonus Questions on the New Bonus Depreciation Rules by Richard M. Nugent, Sean E. Jackowitz, and L. Matthew Waterhouse Reprinted from Tax Notes, July 23, 2018, p. 457 For more Tax Notes content, please visit www.taxnotes.com. © 2018 Tax Analysts. All rights reserved. Analysts does not claim copyright in any public domain or third party content. SPECIAL REPORT tax notes® Bonus Questions on the New Bonus Depreciation Rules by Richard M. Nugent, Sean E. Jackowitz, and L. Matthew Waterhouse A. Brief History of U.S. Tax Richard M. Nugent is a partner and Sean E. Jackowitz and L. Matthew Waterhouse are Depreciation . 458 associates with Jones Day. B. Development of MACRS & ACRS . 460 C. Enactment of Bonus Depreciation. 463 In this report, the authors discuss the history of the U.S. depreciation rules and explain the III. Tax Reform & Accelerated changes made by the Tax Cuts and Jobs Act, Depreciation . 464 including the section 168(k) amendments that A. 100 Percent Bonus Depreciation . 465 enact immediate expensing. They also identify B. Section 179 Expensing. 467 potential interpretative issues under section C. Additional Depreciation-Related 168(k) in the corporate and partnership areas Changes. 467 that may benefit from IRS and Treasury IV. Technical Issues Under New Section guidance. 168(k) . 468 Nugent presented an earlier version of this A. Binding Contract Rule . 469 report to the Tax Forum in New York on May 7. B. Prior Use by Lessees . 470 The authors are grateful to the members of the C. Qualified Improvement Property . 471 Tax Forum for their helpful comments, as well as comments from, or conferences with, the D. Mismatch of Effective Dates. 472 following people: Brandon C. Carlton, Michael E. Property Used in Excluded Trade or A. Chou, Robert J. Crnkovich, William S. Dixon, Business. 473 Andrew M. Eisenberg, Phillip J. Gall, Gregory F. Lease Syndication Transactions. 473 W. Gallagher, Craig Gerson, Stuart J. Goldring, V. Section 168(k) Corporate Issues . 473 Jacob C. Greenberg, Monte A. Jackel, Rachel C. A. Sections 168(k) & 338. 474 Karpoff, Gregory Kidder, Shane Kiggen, Steven W. Magnusson, Todd F. Maynes, Patrick B. B. Intragroup Stock Transfer & O'Brien, Ross E. Poulsen, Tim Powell, Christian Disposition . 475 A. Pritchett, Scott H. Rabinowitz, Michael L. C. Section 168(k) Under Notice Schler, Neil C. Scott, Sam P. Weiler, and Lisa M. 2003-65. 484 Zarlenga. VI. Section 168(k) Partnership Issues . 485 As this report went to press, the A. Basis Adjustments Under government’s initial guidance on section 168(k) Subchapter K . 486 was expected shortly. B. Section 197 Anti-Churning Rules . 488 Copyright 2018 Richard M. Nugent, C. Applying Section 168(k) to Basis Sean E. Jackowitz, and L. Matthew Waterhouse. Adjustments . 491 All rights reserved. VII. Conclusion. 498 Table of Contents I. Introduction I. Introduction . 457 Enacted in December 2017, the Tax Cuts and II. Tax Depreciation Background. 458 Jobs Act (P.L. 115-97) is the most comprehensive TAX NOTES, JULY 23, 2018 457 For more Tax Notes content, please visit www.taxnotes.com. SPECIAL REPORT © 2018 Tax Analysts. All rights reserved. Analysts does not claim copyright in any public domain or third party content. tax reform legislation adopted in the United States law’s application to used property (rather than in a generation.1 In addition to lowering corporate just property for which taxpayers are making an and individual tax rates, permitting some small “original use”) may encourage transaction businesses to reduce their tax rate through a structures that are treated as asset purchases for passthrough income deduction, significantly U.S. tax purposes, including a deemed purchase changing the international aspects of the U.S. under section 338(h)(10), given the potential for federal income tax system, and making various immediate expensing. Noncorporate purchasers revisions to fundamental provisions of the code, may find the new immediate expensing rules the TCJA introduced immediate expensing for especially desirable given that those purchasers some business assets. That expensing concept, generally are now subject to higher U.S. tax rates which is in section 168(k) and mirrored in a than corporations.4 somewhat similar provision in section 179, is the This report discusses the history of focus of this report. depreciation generally and immediate expensing The TCJA generally allows full immediate in U.S. tax law, including the latter’s origins in the expensing (that is, a first-year deduction equal to movement toward accelerated depreciation 100 percent of cost)2 for qualified property deductions. It explains the TCJA’s changes to the (generally, tangible depreciable property with a depreciation rules, most important those to recovery period of 20 years or less and some other section 168(k) that enact immediate expensing. types of property) acquired and placed in service Finally, the report also describes several after September 27, 2017, and before January 1, interpretative issues and interesting transactions 2023.3 Prior law allowed full expensing only in that may arise under the new section 168(k) in limited instances and, for much of the property both the corporate and partnership contexts and now eligible for full expensing, normally required that may benefit from IRS and Treasury taxpayers to recover their costs over the guidance.5 property’s legally mandated recovery period or its useful life. Significantly, the new law permits II. Tax Depreciation Background expensing of used property and thus does not This section briefly discusses the development require that the taxpayer be the original user of of tax depreciation rules leading to the enactment the property. of sections 179 and 168(k).6 Immediate expensing generally should reduce the cost of capital investments to taxpayers A. Brief History of U.S. Tax Depreciation through accelerated tax savings, though these Depreciation — or the concept of recovering savings are likely reduced because of the TCJA’s the cost of an asset through multiple deductions reduction in business tax rates. Also, the new over a period of years, approximating the asset’s decline in value — did not gain broad acceptance 1 The House bill and Senate amendment that preceded the final version of P.L. 115-97 used the short title “Tax Cuts and Jobs Act,” but the final version of the bill did not. Nevertheless, the title “Tax Cuts and Jobs Act” continues to be widely used in referring to the new law, including by the White House. See, e.g., White House, “Remarks by President Trump at Signing of H.R. 1, Tax Cuts and Jobs Bill Act, and H.R. 1370” (Dec. 22, 2017). Accordingly, this report refers to P.L. 115-97 4 by its unofficial title. Some have praised the TCJA’s changes to section 168(k) as giving 2 The concept of allowing taxpayers a full or larger depreciation the United States a competitive advantage over other jurisdictions in the deduction in the first year of an asset’s service has used several names, area of cost recovery. See, e.g., Tax Foundation, “Capital Cost Recovery including “immediate expensing,” “additional first-year depreciation,” Across the OECD, 2018,” at 2 and 4 (May 24, 2018) (the OECD average deduction for machinery is 83.5 percent, excluding the United States). and “bonus depreciation.” Each of those terms has its advantages and 5 disadvantages. This report generally uses the terms “bonus For a more detailed discussion of the history of depreciation and the depreciation” and “expensing” interchangeably. issues discussed in this report, see Richard M. Nugent, “Section 168(k): 3 See TCJA section 13201. Unless extended, the new expensing system Bonus Questions on the New Depreciation Rules,” Tax Forum No. 690 (May 11, 2018) (on file with the authors). will phase out over several years beginning in 2023. See TCJA section 6 13201(a)(1)(B); and section 168(k)(6). The business community appears Some important aspects of the law of depreciation are beyond the generally supportive of an extension. See, e.g., Lydia O’Neal, “Business scope of this report, including concepts such as group accounts, the Owners Praise 100 Percent Expensing, Want It Permanent,” DTR, May general and bonus depreciation recapture rules, and most of the 24, 2018. accounting aspects of depreciation. 458 TAX NOTES, JULY 23, 2018 For more Tax Notes content, please visit www.taxnotes.com. SPECIAL REPORT © 2018 Tax Analysts. All rights reserved. Analysts does not claim copyright in any public domain or third party content. as an accounting concept in the United States until In that early stage, the boundaries of the the early 20th century.7 Critics of depreciation concept of tax depreciation — when to allow deductions often described depreciation as taxpayers to take deductions for depreciation, in speculative and insufficiently connected to the what amounts, and for which items of property — incurrence of actual costs8 or rejected its were not firmly set. Moreover, because of the underlying theory of valuation.9 relative paucity of guidance, taxpayers had The government initially came to accept the significant leeway in structuring depreciation use of depreciation deductions for accounting deductions. For instance, taxpayers selected purposes, at least among some classes of comparatively short useful lives in many cases businesses.10 In many cases, the government and thus recovered the cost of depreciable assets moved to standardize depreciation in regulated relatively quickly.13 industries, including railroads, which had begun Requirements about the timing of using depreciation for their own accounting depreciation deductions grew more formalized purposes.11 U.S. tax law first explicitly permitted over time, which generally led to a lengthening of deductions for depreciation in 1909, when asset lives and increased conflicts between Congress enacted a new corporate income tax that taxpayers and the government.
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