FOR LIVE PROGRAM ONLY New Section 168(k) Bonus Depreciation Regulations: Claiming 100% First-Year Depreciation Deduction Under Tax Reform TUESDAY, OCTOBER 30, 2018, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at 1-800-926-7926 ext.1 (or 404-881-1141 ext. 1). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.
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New Section 168(k) Bonus Depreciation Regulations OCTOBER 30, 2018 David McGuire, Director McGuire Sponsel, Indianapolis dmcguire@mcguiresponsel.com Edward Meyette, Partner Crowe Horwath, Grand Rapids, Mich. edward.meyette@crowehorwath.com
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
New Section 168(k) Bonus Depreciation Regulations
Recent Changes To Depreciation Law In recent years there have been a number of changes to tax law affecting depreciation and cost segregation Tangible Property Regulations PATH Act Tax Cuts and Jobs Act of 2017 (Tax Reform) It is important to look at all of these changes together to ensure Depreciation is being accurately calculated. 6
Proposed Regs: REG-104397-18 August 8 th, 2018 Proposed Regulations covering 100% Bonus What Property Qualifies Transition Rules Public Comment Period Ended 10/9/18 7
Bonus Depreciation Prior to TCJA Section 168(k) prior to the act allowed additional first year depreciation of: 50% for property placed-in-service in 2017 40% for property placed-in-service in 2018 30% for property placed-in-service in 2019 Certain qualifying real property was eligible (QLI & QIP) Subject to First Use Restrictions 8
Bonus Depreciation Post TCJA Bonus Depreciation increased to 100% for property PIS between 9/27/17 and 1/1/23 1/1/24 for longer production period property and aircraft described in 168(k)(2)(B) or Subject to Binding Contract Restrictions QIP currently not qualified Qualified Used Property Included (elimination of first use test) 9
Bonus Eligibility Proposed Regulations follow section 168(k)(2), as amended by TCJA, and section 13201(h). 4 requirements to be qualified: 1. Depreciable Property Must be of a Specified Type 2. Meet Original Use, or for used property meet acquisition requirements of 168(k)(2)(E)(ii) 3. Placed in Service within specified time period 4. Acquired after 9/27/17 10
Property of a Specified Type 1. MACRS Property with recovery period of 20 years or less; 2. Computer software defined in, and depreciated under, 167(f)(1); 3. Water Utility property as defined in 168(e)(5); 4. Qualified film or television production as defined under 181(d) and for which a deduction would have been allowable under section 181; 5. Qualified live theatrical production as defined in 181(e) and for which a deduction would have been allowable under section 181; or 6. A specified plant as defined in section 168(k)(5)(B) for which the taxpayer has made an election to apply section 168(k)(5). 11
Qualified Improvement Property Definition of the following categories of Improvements changes as of 12/31/17: Qualified Improvement Property Qualified Leasehold Improvement Property Qualified Restaurant Property Qualified Retail Property For property PIS prior to 12/31/17 prior bonus treatment and depreciable lives apply Bonus amount depends on acquisition date (binding contract rules apply) 12
Restrictions to Bonus Election Out of Bonus ADS Life Election out of Interest Limitations Leased to Non-Profit Tax Exempt Bond Financed Foreign use asset Floorplan interest business 13
Restrictions to Bonus Electing Real Property Trade or Business (ERPTB) TCJA Sec. 13301 limits deduction for business interest expense to 30% of adjusted taxable income. Allows ERPTB to elect out of the limitation. TCJA Sec. 13204 adds Sec. 168(g)(8) requiring ERPTB to depreciate nonresidential real, residential real, and qualified improvement property under the ADS system, eliminating eligibility for bonus. Minimal impact unless QIP fix 14
Restrictions to Bonus Floorplan business TCJA Sec. 13201 excludes property used in a trade or business with floorplan financing from bonus depreciation eligibility. Unlike the real property trade or business election, the floorplan business exclusion applies to ALL bonus eligible property, including personal property and land improvements. Uncertainty as to the application of this rule to a related party real estate holding company. 15
Qualified Improvement Property Under the PATH Act a new category of property was formed Qualified Improvement Property or QIP. Under the PATH Act this property was subject to bonus depreciation and a 39-year life. Due to the wording under the new law QIP was inadvertently eliminated for assets PIS on or after 1/1/2018. This is widely seen as an error and a technical correction is expected. 17
Qualified Improvement Property Prior to TCJA the following types of property existed: Qualified Improvement Property 39 year Bonus Eligible Qualified Leasehold Property 15 year Bonus Eligible Qualified Retail Property 15 year Bonus Eligible Qualified Restaurant Property 15 year No Bonus Combined into one new category of property which is 179 eligible with a 39-year life. 18
Qualified Improvement Property Non-structural improvements to the interior of a building if such improvements are PIS after the building is originally PIS (timeline not defined). Does not include: Exterior HVAC Equipment Roofs Windows Stairs Elevators Etc. 19
Qualified Improvement Property Status Committee reports after TCJA included QIP as bonus eligible with a 15-year life. However this was an error in the drafting of the Law. Requires a technical correction which is slow due to political issues in Washington. Even if it passes Cost Segregation studies are valuable. Will need to break out noneligible assets to ensure the maximum amount is deducted (for example windows, roofs, HVAC, exterior work are not eligible) 20
179/Bonus Chart Asset Type Life Bonus Eligible 179 Eligible New Construction Renovation Purchase -Roofs 39-Year No No -HVAC 39-Year (typically) No No -Personal Property 5 or 7-Year Yes Yes -Land Improvements 15-Year Yes Depends -Roofs 39-Year No Yes -HVAC 39-Year No Yes -Qualified Improvement???? Yes -Personal Property 5 or 7-Year Yes Yes -Land Improvements 15-Year Yes Depends -Qualified Improvement 39-Year No No -Roof 39-Year No No 21
Contact Information David McGuire 317-564-5001 (office) 317-460-9814 (cell) dmcguire@mcguiresponsel.com 22
New Section 168(k) Bonus Depreciation Regulations Part 2 23
Bonus Eligibility Used Property Proposed Regulations follow section 168(k)(2), as amended by TCJA, and section 13201(h). Four requirements to be qualified: 1. must be depreciable property of a specified type 2. Meet Original Use, or for used property meet acquisition requirements of 168(k)(2)(E)(ii) 3. Placed in service within specified time period 4. Acquired after 9/27/17 24
Used Property Pursuant to section 168(k)(2)(A)(ii) and (k)(2)(e)(ii), used property is eligible if it meets the following requirements Property not used by the taxpayer or a predecessor at any time prior to acquisition; Acquisition meets the related party and carryover basis requirements of section 179(d)(2)(A), (B), and (C) as well as 1.179-4(c)(1)(ii), (iii), and (iv), or (c)(2); and The acquisition meets the cost requirements of section 179(d)(3) and 1.179-4(d) 25
Partnership / Corp. Transactions Partnership transactions 100% bonus depreciation generally is available for increases in basis attributable to Section 743 adjustments 100% bonus depreciation is not available for Section 734 adjustments 100% bonus depreciation is not available for remedial allocations under Section 704(c) The proposed regulations confirm that 100% bonus depreciation is available for acquisitions using Sections 338(h)(10) and 336(e) 26
Bonus Eligibility Placed in Service Requirement Proposed Regulations follow section 168(k)(2), as amended by TCJA, and section 13201(h). Four requirements to be qualified: 1. Must be depreciable property of a specified type 2. Meet original use, or for used property meet acquisition requirements of 168(k)(2)(E)(ii) 3. Placed in service within specified time period 4. Acquired after 9/27/17 27
Placed in Service Requirement Generally the Regs. retain the principles in the existing placed-in-service rules. Property must be placed in service after September 27, 2017 and before January 1, 2027 (or in the case of aircraft or long production period property January 1, 2028). Note the phase down percentages starting at 80% for property placed in service in 2023, phasing down 20% per year to 20%-2026. Special Rules Specified plants must be planted or grafted prior to 2027. Qualified film or television production treated as placed in service at the time of initial release or broadcast. Qualified live theatrical performance placed in service at the initial live staged performance 28
Bonus Eligibility Acquisition Date Proposed Regulations follow section 168(k)(2), as amended by TCJA, and section 13201(h). Four requirements to be qualified: 1. Must be depreciable property of a specified type 2. Meet original use, or for used property meet acquisition requirements of 168(k)(2)(E)(ii) 3. Placed in service within specified time period 4. Acquired after 9/27/17 29
Acquisition Date - Background Section 13201 of the TCJA provides that Property shall not be treated as acquired after the date on which a written binding contract is entered into for such acquisition TCJA left confusion over transition Most taxpayers assumed transition rules similar to those used after Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 would apply Different rules may apply for long production property, including Qualified Improvement Property 30
Acquisition Date Old (1.168(k)-1) Regs. Written binding contract rule. Self-constructed asset rule applies to third party construction contracts. Safe harbor (10%) for when construction begins New (1.168(k)-2) Regs. Written binding contract rule. Self-constructed asset rule DOES NOT apply to 3rd party const. contracts. Safe harbor (10%) for when construction begins, but not for 3 rd party contracts 31
Acquisition Date Example: New Facility Capex $100 million, 20% ($20M) personal property. General contract signed September 1, 2017 Placed into service May 2019 Old Regs - 2019 depreciation = $20M (100% * $20M) + $2M (2.5% * $80M) = $22M New Regs - 2019 Depreciation = $6M (30% * $20M) + $2.8M (20% * $14M) + $2M (2.5% * $80M) = $10.8M 32
Acquisition Date Written Binding Contract 1.168(k)-2(b)(5)(iii) Property manufactured, constructed, or produced for the taxpayer under written binding contract is considered acquired on date written contract entered into, taxpayer may not apply self-construction asset rules. A contract is binding only if it is enforceable under state law against the taxpayer or a predecessor and does not limit damages to a specified amount. Limitation to > 5% of contract price is not considered limiting. An option to acquire or sell a property is not binding contract. A letter of intent for an acquisition is not a binding contract. 33
Supply Agreements Supply or Similar Agreements - 1.168(k)-2(b)(5)(iii)(E) Not considered binding if the amount and design specifications of the property have not been specified Once the quantity and the design specifications are specified contract becomes binding Example: if the provisions of a supply agreement state the specifications but not the quantity, the contract becomes binding once a purchase order stating the quantity is created. 34
Binding Contract Components Components of larger properties - 1.168(k)-2(b)(5)(iii)(F) A binding contract to acquire one or more components of a larger property will not be considered binding to acquire the larger property If the binding contract to acquire the component does not meet the requirements the component does not meet qualify for 100% Bonus Tangible Property Regulations help determine if an acquisition is a component or an independent asset 35
Self-Constructed Property Self-Constructed Property 1.168(k)-2(b)(5)(iv) If a taxpayer manufactures, constructs, or produces property for use by the taxpayer in its trade or business acquisition rules are different: Acquisition rules considered met if the taxpayer begins manufacturing, constructing, or producing the property after 9/27/17. Does not apply to property that is manufactured, constructed, or produced by another person under a written or binding contract. 37
Self-Constructed When Production Begins Self-Constructed Property - 1.168(k)-2(b)(5)(iv)(B) Construction begins when physical work of a significant nature begins: Does not include preliminary activities (planning, designing, etc.) Land preparation costs are provided as an example of preliminary work (clearing a site, excavation, etc) Safe Harbor Physical work of significant nature begins when 10% of the cost paid or incurred 38
Components of Self-Constructed Property If a binding contract to acquire a component of a larger self-constructed property does not meet the requirements, the component is not eligible for bonus, but the the larger selfconstructed asset, net of the ineligible component, may be eligible. If the larger self-constructed asset begins work prior to 9/28/17, then the larger selfconstructed asset and all related components are not eligible for the 100% bonus Tangible property regulations can be referenced for when determining if an acquisition is a component, or an independent asset 39
Example 1 On September 1, 2017, BB, a corporation, entered into a written agreement with CC, a manufacturer, to purchase 20 new lamps for $100 each within the next two years. Although the agreement specifies the number of lamps to be purchased, the agreement does not specify the design of the lamps to be purchased. Accordingly, the agreement is not a binding contract pursuant to 1.168(k)-2(b)(5)(iii)(E). 40
Example 2 The facts are the same as in Example 1. On December 1, 2017, BB placed a purchase order with CC to purchase 20 new model XPC5 lamps for $100 each for a total amount of $2,000. Because the agreement specifies the number of lamps to be purchased and the purchase order specifies the design of the lamps to be purchased, the purchase order placed by BB with CC on December 1, 2017, is a binding contract pursuant to 1.168(k)- 2(b)(5)(iii)(E). Accordingly, assuming all other requirements are met, the cost of the 20 lamps qualifies for the 100-percent additional first year depreciation deduction. 41
Example 3 The facts are the same as in Example 1, except that the written agreement between BB and CC is to purchase 100 model XPC5 lamps for $100 each within the next two years. Because this agreement specifies the amount and design of the lamps to be purchased, the agreement is a binding contract pursuant to 1.168(k)-2(b)(5)(iii)(E). However, because the agreement was entered into before September 28, 2017, no lamp acquired by BB under this contract qualifies for the 100-percent additional first year depreciation deduction. 42
Example 4 On September 1, 2017, DD began constructing a retail motor fuels outlet for its own use. On November 1, 2018, DD ceases construction of the retail motor fuels outlet prior to its completion. Between September 1, 2017, and November 1, 2018, DD incurred $3,000,000 of expenditures for the construction of the retail motor fuels outlet. On May 1, 2019, DD resumed construction of the retail motor fuels outlet and completed its construction on August 31, 2019. Between May 1, 2019, and August 31, 2019, DD incurred another $1,600,000 of expenditures to complete the construction of the retail motor fuels outlet and, on September 1, 2019, DD placed the retail motor fuels outlet in service. None of DD' s total expenditures of $4,600,000 qualify for the 100-percent additional first year depreciation deduction because, pursuant to paragraph (b)(5)(iv)(a) of this section, DD began constructing the retail motor fuels outlet before September 28, 2017. 43
Example 5 The facts are the same as in Example 4 except that DD began constructing the retail motor fuels outlet for its own use on October 1, 2017, and DD incurred the $3,000,000 between October 1, 2017, and November 1, 2018. DD' s total expenditures of $4,600,000 qualify for the 100-percent additional first year depreciation deduction because, pursuant to paragraph (b)(5)(iv)(a) of this section, DD began constructing the retail motor fuels outlet after September 27, 2017, and DD placed the retail motor fuels outlet in service on September 1, 2019. Accordingly, assuming all other requirements are met, the additional first year depreciation deduction for the retail motor fuels outlet will be $4,600,000, computed as $4,600,000 multiplied by 100 percent. 44
Example 6 On August 15, 2017, EE entered into a written binding contract with FF to manufacture an aircraft described in section 168(k)(2)(C) for use in EE' s trade or business. FF begins to manufacture the aircraft on October 1, 2017. EE places the aircraft in service on March 1, 2018. Pursuant to paragraph (b)(5)(ii) of this section, the aircraft is acquired by EE pursuant to a written binding contract. Because EE entered into such contract before September 28, 2017, the aircraft does not qualify for the 100-percent additional first year depreciation deduction. 45
Example 7 On June 1, 2017, HH entered into a written binding contract to acquire a new component part of property that is being constructed by HH for its own use in its trade or business. HH commenced construction of the property in November 2017, and placed the property in service in November 2018. Because HH entered into a written binding contract to acquire a component part prior to September 28, 2017, pursuant to paragraphs (b)(5)(ii) and (b)(5)(iv)(c)(1) of this section, the component part does not qualify for the 100-percent additional first year depreciation deduction. However, pursuant to paragraphs (b)(5)(iv)(a) and (b)(5)(iv)(c)(1) of this section, the property constructed by HH will qualify for the 100- percent additional first year depreciation deduction, because construction of the property began after September 27, 2017, assuming all other requirements are met. Accordingly, the unadjusted depreciable basis of the property that is eligible for the 100-percent additional first year depreciation deduction must not include the unadjusted depreciable basis of the component part. 46
Example 8 The facts are the same as in Example 7 of this paragraph (b)(5)(vii) except that HH entered into the written binding contract to acquire the new component part on September 30, 2017, and HH commenced construction of the property on August 1, 2017. Pursuant to paragraphs (b)(5)(iv)(a) and (C) of this section, neither the property constructed by HH nor the component part will qualify for the 100-percent additional first year depreciation deduction, because HH began construction of the property prior to September 28, 2017. 47
Example 9 On September 1, 2017, II acquired and placed in service equipment. On October 15, 2017, II sells the equipment to JJ and leases the property back from JJ in a sale-leaseback transaction. Pursuant to paragraph (b)(5)(ii) of this section, II' s cost of the equipment does not qualify for the 100-percent additional first year depreciation deduction because IIacquired the equipment prior to September 28, 2017. However, JJacquired used equipment from an unrelated party after September 27, 2017, and, assuming all other requirements are met, JJ' s cost of the used equipment does qualify for the 100-percent additional first year depreciation deduction for JJ. 48
Example 10 On July 1, 2017, KK began constructing property for its own use in its trade or business. KK placed this property in service on September 15, 2017. On October 15, 2017, KK sells the property to LL and leases the property back from LL in a sale-leaseback transaction. Pursuant to paragraph (b)(5)(iv) of this section, KK' s cost of the property does not qualify for the 100-percent additional first year depreciation deduction because construction began prior to September 28, 2017. However, LL acquired used property from an unrelated party after September 27, 2017, and, assuming all other requirements are met, LL' s cost of the used property does qualify for the 100-percent additional first year depreciation deduction for LL. 49
Thank you Edward Meyette 616.752.4234 (office) 616.406.9544(cell) Edward.Meyette@crowe.com Crowe is the brand name under which the member firms of Crowe Global operate and provide professional services, and those firms together form the Crowe Global network of independent audit, tax, and consulting firms. Crowe may be used to refer to individual firms, to several such firms, or to all firms within the Crowe Global network. The Crowe Horwath Global Risk Consulting entities, Crowe Healthcare Risk Consulting LLC, and Crowe Horwath Cayman Ltd. are subsidiaries of Crowe LLP. Crowe LLP is an Indiana limited liability partnership and the U.S. member firm of Crowe Global. Services to clients are provided by the individual member firms of Crowe Global, but Crowe Global itself is a Swiss entity that does not provide services to clients. Each member firm is a separate legal entity responsible only for its own acts and omissions and not those of any other Crowe Global network firm or other party. Visit www.crowe.com/disclosure for more information about Crowe LLP, its subsidiaries, and Crowe Global. The information in this document is not and is not intended to be audit, tax, accounting, advisory, risk, performance, consulting, business, financial, investment, legal, or other professional advice. Some firm services may not be available to attest clients. The information is general in nature, based on existing authorities, and is subject to change. The information is not a substitute for professional advice or services, and you should consult a qualified professional adviser before taking any action based on the information. Crowe is not responsible for any loss incurred by any person who relies on the information discussed in this document.. 50