Special Tax Alert

Bonus Depreciation Regulations Provide Bonus Headaches with a Side of Complexity

Kevin M. Jacobs, Managing Director

kjacobs@alvarezandmarsal.com

Andrew Johnson, Managing Director

ajohnson@alvarezandmarsal.com

October 6, 2020 / North America

The Treasury and the Internal Revenue Service have released the latest round of final regulations for additional first year (bonus) depreciation. As part of TCJA, the rules governing bonus depreciation were modified so that property that is placed in service after September 27, 2017, and before January 1, 2023, is eligible for 100% bonus depreciation (decreasing by 20% every year after 2022), regardless of whether the taxpayer is the original user of the property, so long as the property’s cost recovery period is 20 years or less under MACRS, the taxpayer did not have a previous prior depreciable interest in the property, and it was not acquired from a related party. The release was highly anticipated as Treasury had previously indicated that it was attempting to release all TCJA-related guidance by October 1st. The final regulations generally adopt the September 24, 2019 proposed regulations. This alert highlights some of the more notable changes to the proposed regulations.

Series of Related Transactions

If a taxpayer acquires depreciable property as a part of a “series of related transactions,” then the bonus depreciation regulations provide rules to determine whether the transferee acquired the property from a related person, which would render it ineligible for bonus depreciation. The most recent final regulations expand the scope of the relatedness testing by requiring that testing must occur both before the initial transfer from the original transferor and immediately before the transferee’s acquisition of the property.

Example: As part of a series of related transactions, A sells depreciable property to B (who is unrelated to both A and C), who in turn sells it to C. At the time A sold the property to B, A and C were related. However, at the time B sold the property to C, A and C were not related. Under the proposed regulations, C would test for relatedness at the time it acquired the property and therefore would be treated as acquiring the property from a related person. However, under the final regulations, at the time of the initial transfer, A and C were related and as a result, C would be treated as acquiring the property from a related person and therefore would be ineligible for bonus depreciation.

Additionally, a transferee must test whether it is related to the transferor from whom it obtained the property and the original transferor.

Example: As part of a series of related transactions, A sells depreciable property to B, who in turn sells it to C, who in turn sells it to D. Under the proposed regulations, B would test relatedness with respect to A, C would test relatedness with respect to B, and D would test relatedness with respect to both A and C. Under the final regulations, B would test relatedness with respect to A, C would test relatedness with respect to both A and B, and D would test relatedness with respect to both A and C. Therefore, if A and C were related, then C would be ineligible for bonus depreciation under the final regulations.

  • A&M Insight: As highlighted in the examples, the modification of the “series of related transactions” rule can ensnare taxpayers that planned to claim bonus depreciation. In addition, due to the expanded relationships that must be tested and the times at which those relationships must be tested, claiming bonus depreciation has become more complex. A&M is happy to discuss your transaction to help ascertain whether bonus depreciation is available for the acquired assets…

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