Tax News

CCH (cch.taxgroup.com) reports:

The IRS has issued final regulations detailing the Modified Accelerated Depreciation System (MACRS) bonus depreciation allowance (Code Sec. 168(k)) and the New York Liberty Zone bonus depreciation allowance (Code Sec. 1400L(b)). Administrative guidance will be issued to provide procedures for securing automatic consent to change an accounting method to comply with these regulations. They generally apply to property acquired after September 10, 2001, if 30 percent bonus depreciation is claimed and after May 5, 2003, if 50 percent bonus depreciation is claimed.
Qualifying Property
The final regulations clarify that all requirements relating to the definition of qualified property must be satisfied in the first tax year that the property is placed in service.
An additional clarification provides that property used in a farming business does not qualify for bonus depreciation if it must be depreciated using the MACRS alternative depreciation system (ADS) because an election under Code Sec. 263A(d)(3) was made by either the taxpayer or a related person not to apply the uniform capitalization rules to the taxpayer's crops.
Original Use Requirement
The final regulations provide that the 20 percent test for determining whether property is reconditioned or rebuilt applies to self-constructed property, as well as acquired property.
Another clarification to the original use requirement provides that holding an item as inventory is not considered original use. Thus, a taxpayer who purchases an item of inventory (e.g., a car (including a demonstration vehicle) from a dealer's lot) and uses it in a trade or business is considered the original user of the property. The holder of an inventory item can be treated as the original user and qualify for bonus depreciation if the item is withdrawn from inventory and used in the holder's trade or business.
References to "syndication transactions," in Temporary Reg. §1.168(k)-1T(b)(3)(iii)( are changed to reflect the fact that the rules described there can apply to any sale of property within three months after the date it is placed in service, regardless of whether the sale is a syndication.
The final regulations reflect certain Code amendments made after the temporary regulations were issued that apply specifically to syndication transactions. These include Code Sec. 168(k)(2)(E)(iii) relating to syndication transactions in general and Code Sec. 168(k)(2)(E)(iii)(II) relating to multiple units of property subject to the same lease in a syndication transaction.
An example is added to illustrate that where property placed in service by a person is sold and leased back within three months, and a syndication transaction occurs within three months after the sale-leaseback, the purchaser of the property in the syndication transaction is considered the original user of the property and the property is treated as placed in service by the purchaser in the syndication transaction.
The final regulations clarify that when fractional interests of bonus depreciation property are sold to third parties, a fractional owner of the property is considered as the original user of its proportionate share of the property only if unrelated to the seller. It is not necessary that the buyers be unrelated.
Binding Contracts
The final regulations provide that a contract is not considered binding if it provides for a full refund of the purchase price in lieu of any damages allowed by law in the event of breach or cancellation by either
the buyer or the seller. The temporary regulations limited the rule to such breaches or cancellations by the seller.
With respect to contracts subject to a condition, the final regulations clarify that a contract that imposes significant obligations on the taxpayer is treated as binding notwithstanding the fact that certain substantial terms remain to be negotiated.
The final regulations provide that pricing terms are not relevant in determining whether a supply agreement is a binding contract.
Self-Constructed Property
The final regulations clarify that the rules in the temporary regulations for determining when construction of self-constructed property begins are intended to apply to manufactured or produced property.
They also provide that if a taxpayer entered into a written binding contract after September 10, 2001, and before January 1, 2005, with another person to manufacture, construct, or produce longer production property and the manufacture, construction, or production begins after December 31, 2004, the taxpayer has acquired the property pursuant to a written binding contract entered into after September 10, 2001, and before January 1, 2005 (for 30 percent bonus depreciation property) or after May 5, 2003, and before January 1, 2005 (for 50-percent bonus depreciation property).
Under the temporary regulations, construction is considered to have begun after a taxpayer incurs or pays more than 10 percent of the total cost of the property. The final regulations clarify that 10 percent test is a safe harbor and that a facts and circumstances test is also applicable. When another party manufactures, constructs, or produces property for the taxpayer, the safe harbor test must be satisfied by the taxpayer.
Disqualified Transactions
The final regulations update certain disqualified transaction rules added to Code Sec. 168(k)(2)(E)(iv) by the Working Families Tax Relief Act of 2004. Under these rules, bonus depreciation may not be claimed on property if the user of the property on the date it is originally placed in service or a person related to the user or the taxpayer had a pre-September 10, 2001 written binding contract in effect for the acquisition of the property. Illustrative examples are included.
Placed in Service Date
The final regulations clarify that the extended January 1, 2006 placed in service date applies to aircraft (described in Code Sec. 168(k)(2)(C)). The regulations are also updated to reflect the extended January 1, 2007, placed in service date for certain property with a long-production period that is placed in service or manufactured in one of the Hurricane disaster zones (see Announcement 2006-29, TAXDAY, 2006/04/20, I.1).
Election Out
The final regulations clarify that only one election out is needed to elect not to deduct both the 30-percent and 50-percent additional first year depreciation allowance for 50 percent bonus depreciation property for which a taxpayer could otherwise elect a 30 percent rate.
If a taxpayer elects out of bonus depreciation, the final regulations provide that alternative minimum tax depreciation adjustments apply to the property even though it could have qualified for the bonus depreciation deduction.
Procedures provided by section 3.04 of Rev. Proc. 2002-33 (2002-1 C.B. 963) for revoking an election not to deduct bonus depreciation for a particular class of property are incorporated into the final regulations. However, the final regulations provide an automatic 6-month extension from the due date of the taxpayer's return (excluding extensions) for the placed-in service year to revoke the election if the taxpayer timely filed its return for the placed-in-service year.
Property Placed in Service and Disposed of in Same Tax Year
Property placed in service and disposed of in the same tax year is not eligible for bonus depreciation. The final regulations clarify that if such property is reacquired by the taxpayer in a subsequent tax year bonus depreciation may not be claimed.
Rehabilitation Credit
The final regulations provide that if qualified rehabilitation expenditures qualify for bonus depreciation, the taxpayer may claim the bonus depreciation deduction for the unadjusted depreciable basis of the qualified rehabilitation expenditures and may claim the rehabilitation credit for the remaining basis provided the taxpayer depreciates the remaining basis using the an MACRS straight-line method.
T.D. 9283, 2006FED ¶47,057
Other References:
Code Sec. 48
CCH Reference - 2006FED ¶4609
Code Sec. 167
CCH Reference - 2006FED ¶11,030D
CCH Reference - 2006FED ¶11,030G
Code Sec. 168
CCH Reference - 2006FED ¶11,260
CCH Reference - 2006FED ¶11,260C
CCH Reference - 2006FED ¶11,276K
CCH Reference - 2006FED ¶11,277C
CCH Reference - 2006FED ¶11,277C
CCH Reference - 2006FED ¶11,277E
Code Sec. 169
CCH Reference - 2006FED ¶11,505
CCH Reference - 2006FED ¶11,505C
Code Sec. 312
CCH Reference - 2006FED ¶15,611J
Code Sec. 1400L
CCH Reference - 2006FED ¶32,475
CCH Reference - 2006FED ¶32,475