The Tax Cut and Jobs Act of 2017 (TCJA) has made several changes to bonus depreciation. The new law not only increased the additional first-year depreciation from 50 to 100 percent of the cost, but it also allows certain used property to be eligible. The TCJA defines qualified property as the original use of property that begins with the taxpayer or the acquisition by the taxpayer if it meets the acquisition requirements of section 168(k)(2)(E)(ii).
The original use definition stays the same as before TCJA: any new property used for the first time in a trade or business. For example, a business owner goes to a supplier to purchase a new tractor that has never then used. Under the acquisition requirements, used property can now qualify for bonus due to the expanded definition from TCJA, as long as the following factors apply:
- The taxpayer or its predecessor didn’t use the property at any time before acquiring it.
- The taxpayer didn’t acquire the property from a related party.
- The taxpayer didn’t acquire the property from a component member of a controlled group of corporations.
- The taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor.
- The taxpayer’s basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent.
- The cost of the used property eligible for bonus depreciation doesn’t include the basis of property determined by reference to the basis of other property held at any time by the taxpayer (for example, in a like-kind exchange or involuntary conversion).
Let’s look at some examples to see how the factors above would apply. This first example looks at the original use and used property acquisition.
On Feb. 1, 2018, Al’s Plumbing buys a new machine for $22,000 from a supplier for use in Al’s Plumbing business. On Aug. 1, 2020, Berry’s Plumbing buys that machine from Al’s Plumbing for $12,000 for use in Berry’s Plumbing business. On Oct. 1, 2020, Berry’s Plumbing makes a $3,000 expenditure to recondition the machine. Berry’s Plumbing did not have any depreciable interest in the machine before acquiring it in 2020, nor was Berry related to Al.
Al’s Plumbing purchase price of $22,000 satisfies the original use requirement and, assuming all other requirements are met, qualifies for the bonus depreciation deduction.
Berry’s Plumbing purchase price of $12,000 does not satisfy the original use requirement, but it does satisfy the used property acquisition requirements. Assuming all other requirements are met, the $12,000 purchase price qualifies for the bonus depreciation deduction. Further, Berry’s Plumbing expenditure of $3,000 satisfies the original use requirement and, assuming all other requirements are met, qualifies for the bonus depreciation deduction, regardless of whether the $3,000 is added to the basis of the machine or is capitalized as a separate asset.
This next example looks at related party transfer of assets under the acquisition requirements.
A father sells a machine to an unrelated party, who sells the machine to the father’s daughter for use in the daughter’s business. The transfers of the machine are treated as a direct transfer from the father to his daughter, and the time to test whether the parties are related is immediately after the last transaction in the series. Because the father and the daughter are related parties, the daughter’s acquisition of the machine does not satisfy the used property acquisition requirements. Because the transfers of the machine are treated as a direct transfer from the father to his daughter, the unrelated party’s acquisition of the machine is not eligible for the additional first year depreciation deduction.
Applying the factors above will help you determine if used property is allowed bonus depreciation. You will need to consider all the factors, not just one. A tax professional with the knowledge of these acquisition factors will be able to advise clients on properly taking the 100 percent bonus depreciation deduction.
For more information see the IRS guidance, please see REG-104397-18.