Proposed regulations address the new 100-percent depreciation deduction that allows businesses to write off most depreciable business assets in the year they are placed in service.

Background

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) amended Code Sec. 168(k) to increase the percentage of the additional first year depreciation deduction from 50 percent to 100 percent for property acquired after September 27, 2017. It also expanded the property eligible for the additional first year depreciation to include certain used depreciable property and certain film, television, or live theatrical productions.

Generally, the 100-percent depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Such assets include in part machinery, equipment, computers, appliances, and furniture.

The proposed regulations provide guidance on what property qualifies for the deduction, and rules for qualified film, television, live theatrical productions and certain plants.

Property of a Specified Type

In order to be considered qualified property, the proposed regulations require that property must be:

• MACRS property that has a recovery period of 20 years or less;
• computer software as defined in, and depreciated under, Code Sec. 167(f)(1);
• water utility property as defined in Code Sec. 168(e)(5);
• a qualified film or television production as defined in Code Sec. 181(d);
• a qualified live theatrical production as defined in Code Sec. 181(e); or
• a specified plant as defined in Code Sec. 168(k)(5)(B) and for which the taxpayer has made an election to apply Code Sec. 168(k)(5)(B).

Qualified improvement property acquired after September 27, 2017, and placed in service after September 27, 2017, and before January 1, 2018, also is qualified property.

Placed-in-Service Date

The proposed regulations provide that qualified property must be placed in service by the taxpayer after September 27, 2017, and before January 1, 2027, or before January 1, 2028, in the case of certain aircraft property described in Code Sec. 168(k)(2)(B) or (C).

For specified plants, if the taxpayer has made an election to apply Code Sec. 168(k)(5), the proposed regulations provide that the specified plant must be planted before January 1, 2027, or grafted before January 1, 2027.

The proposed regulations also provide that a qualified film or television production is treated as placed in service at the time of initial release or broadcast as defined under Reg. §1.181-1(a)(7). Further, a qualified live theatrical production is treated as placed in service at the time of the initial live staged performance.

Acquisition Date

The proposed regulations provide the date of acquisition rules for different types of property, including self-constructed qualified film, television, or live theatrical productions, and specified plants.

Under the proposed regulations, the property must be acquired by the taxpayer after September 27, 2017, or acquired by the taxpayer pursuant to a written binding contract after September 27, 2017. The proposed regulations also provide that property that is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract that is entered into before the manufacture, construction, or production of the property for use by the taxpayer in its trade or business or for its production of income is acquired pursuant to a written binding contract.

For self-constructed property, the proposed regulations provide that the acquisition rules are met if the taxpayer begins manufacturing, constructing, or producing the property after September 27, 2017.

The proposed regulations provide that a qualified film or television production is treated as acquired on the date principal photography commences. Qualified live theatrical production is treated as acquired on the date when all of the necessary elements for producing the live theatrical production are secured. These elements may include a script, financing, actors, set, scenic and costume designs, advertising agents, music, and lighting.

For a specified plant, the proposed regulations provide that the specified plant must be planted after September 27, 2017, or grafted after September 27, 2017, to a plant that has already been planted, by the taxpayer in the ordinary course of the taxpayer’s farming business.

Elections

The proposed regulations provide rules for making the election out of the additional first year depreciation deduction. Taxpayers who elect out of the 100-percent depreciation deduction must do so on a timely-filed return. Those who have already filed their 2017 return and either did not claim the mandatory deduction on qualifying property, or did not elect out but still wish to do so, will need to file an amended return.

Applicable Date

These regulations apply to qualified property placed in service or planted or grafted, as applicable, by the taxpayer during or after the taxpayer’s tax year that includes the date that the regulations are adopted as final. Pending the issuance of the final regulations, a taxpayer may choose to apply the proposed regulations to qualified property acquired and placed in service or planted or grafted, as applicable, after September 27, 2017, by the taxpayer during tax years ending on or after September 28, 2017.