Final 2020 bonus depreciation regulations

The IRS has released yet another batch of regulations on bonus depreciation. These final regulations address various questions left unresolved by the 2019 final and proposed regulations as well as several issues raised by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The most important news is that the IRS confirmed the interaction of bonus depreciation with the floor plan financing interest rule. Under section 163(j), property used in a trade or business that has floor plan financing indebtedness is not eligible for bonus depreciation, if the floor plan interest expense is “taken into account” in the interest limitation calculation. If the taxpayer’s total business interest expense is greater than the sum of the amounts calculated under the first two components of the interest limitation formula — i.e., business interest income plus a percentage of adjusted taxable income — the floor plan financing interest is “taken into account,” and the taxpayer’s property is not bonus eligible. Taxpayers cannot opt out of this rule. The IRS is planning to issue transition guidance for taxpayers that took a different approach to this calculation on prior returns.

The 2020 final regulations also provide guidance on bonus depreciation for used property. Prior to tax reform, used property was not eligible for bonus depreciation. The Tax Cuts and Jobs Act relaxed this rule, as long as taxpayers do not have a “prior depreciable interest” in the property they are acquiring. For partnerships, this meant that anyone who was a partner during a five-year lookback period when the partnership owned property was deemed to have a prior depreciable interest in that property. Thus, in many common partnership transactions, property acquired from a partnership by one of the partners would not be eligible for bonus. The final regulations withdraw this partnership look-through rule. A partner will not be treated as having a prior depreciable interest in partnership property solely by virtue of being a partner in a partnership.

Finally, the regulations also clarify when qualified improvement property acquired in a tax-free transfer (such as a contribution to a partnership or corporation) is eligible for bonus depreciation, outline when taxpayers can treat one or more components of larger self-constructed property as eligible for bonus, and address the acquisition of property by members of consolidated groups.

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