Bonus Depreciation and AMT: Understanding the Tax Implications

Taxpayers may find it challenging to identify and allocate costs to portions of facilities used in non-qualifying activities. Even more challenging could be facilities, or portions thereof, that are used for more than one activity. For example, taxpayers may use their manufacturing line for test or sample runs of new products, which may constitute a research activity. It is unclear if limited or de minimis use of an otherwise qualified facility might cause it to be unqualified. The Tax Cuts and Jobs Act (TCJA) brought substantial changes to this area of tax law, particularly for corporations. This repeal eliminated the need for the previously available election that allowed corporations to forgo bonus depreciation in exchange for accelerated AMT credit refunds.

That said, there is a real possibility that in their next special or regular legislative session several of these states will act to decouple from Section 168(n) to maintain consistency with their current Section 168(k) conformity policy. At the same time, it is possible that some of the states that decouple from Section 168(n) because they have not yet conformed to the Internal Revenue Code as of a date post-OBBBA enactment will conform to this provision once they have advanced their conformity date past July 4, 2025. Taxpayers also should consider the state tax implications, which are essential for comprehensive tax planning.

CHIPS Act final regs. offer many taxpayer-friendly provisions

However, if the cost of the used parts in such property is not more than 20 percent of the total cost of the property, whether acquired or self-constructed, the property is treated as meeting the original use requirement. Such property is no longer treated as self-constructed property, so the date that the contract is entered into generally is the date of acquisition. Sec. 179 deductions can also be claimed for real estate QIP, roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real  property.

The property must be placed in service in the United States or a U.S. possession before 2031. A new property category was introduced in the new tax legislation, known as Qualified Production Property under Section 168(n). The legislation provides full expensing for Qualified Production Property, nonresidential property used in qualified production activities.

Is there a chance that this legislation gets changed after mid-term elections?

As such, the taxpayer will be required to recognize a Sec. 481(a) adjustment to add back the loss previously claimed on the partial disposition, adjusted for any additional depreciation allowance that would have been claimed had the partial disposition not occurred. An expenditure results in an adaptation to a new or different use if it adapts the unit of property to a use inconsistent with the taxpayer’s intended ordinary use at the time the taxpayer originally placed the property into service (Regs. Sec. 1.263(a)-3(l)(1)). In 2022, some countries allowed businesses to deduct the full costs of investment, including Chile, Estonia, and Latvia.

bonus depreciation regs are favorable for taxpayers

Qualified Production Property

In an increasingly digital profession, data security has become one of the most critical challenges facing finance and accounting professionals today. Stay up to date with practical guidance to help you mitigate these risks and strengthen your security posture. The Tax Adviser is the AICPA’s monthly journal of tax planning, trends, and techniques. By granting them a profits interest, entities taxed as partnerships can reward employees with equity.

The amount of the allowable deduction will begin to phase out in 2023, dropping 20 percentage points each year for four years until it vanishes in 2027, absent congressional action. The applicable percentage for qualified property acquired before September 28, 2017, and placed in service in 2019, is 30%. The Tax Cuts and Jobs Act (TCJA) amended Internal Revenue Code (IRC) Section 168(k) to extend and modify bonus depreciation for qualified property purchased after September 27, 2017, and before January 1, 2023, including business vehicles. Businesses can expense 100% of the cost of such property (both new and used, subject to certain conditions) in the year the property is placed in service. The rules regarding the eligibility of acquired used property could have a significant impact on mergers, acquisitions and divestitures.

One, Big, Beautiful Bill Act of 2025 provisions

For smaller acquisitions such as computers or furniture, that might not be significantly different than the date the property is received and placed in service. The new tax legislation restores 100% bonus depreciation, allowing businesses to immediately deduct the full cost of qualifying property in the year it is placed in service. This reverses the phase-down schedule that began after 2022 under the Tax Cuts and Jobs Act. As bonus depreciation continues to phase out, Sec. 179 expensing will play a more significant role in maximizing deductions for fixed-asset purchases. It will be important for practitioners to understand the differences between the rules for bonus depreciation and Sec. 179 expensing to avoid tax return errors and maximize tax savings.

Practitioners will also need to analyze and compare the tax savings between bonus depreciation vs. Sec. 179 expensing deductions to determine the best outcome for taxpayers. Additionally, Sec. 162 expenses do not include interest, taxes, and depreciation expense. In many situations, the remainder of the rental expenses do not exceed 15% of the rent income. Therefore, bonus depreciation will often provide a more favorable tax result in these circumstances. The final regulations provide that this rule applies to all property, including self-constructed property or property described in Code Sec. 168(k)(2)(B) or (C).

ADDITIONAL RESOURCES

For property not acquired under a binding contract, the acquisition date is deferred until the date that the taxpayer has paid or incurred more than 10% of the cost of the property. This is similar to the safe harbor for self-constructed property in the final regulations. The TCJA also expanded bonus depreciation to certain used property, which is beneficial for taxpayers that acquire property that is not original-use. This change, among others, led to the need for new rules to address bonus depreciation post-TCJA.

  • Under OBBBA, 100% bonus depreciation for qualifying property is reinstated and made permanent.
  • Taxpayers should carefully analyze both the acquisition and placed-in-service dates.
  • Property acquired under a contract that was signed prior to Sept. 27, 2017, but became binding at a later point qualifies for 100% bonus depreciation.
  • Depreciation is a complicated business process, and the laws regarding depreciation, particularly bonus depreciation and Section 179 deductions, are always changing.
  • Bonus depreciation provides a valuable tax incentive by allowing businesses to claim an additional first-year depreciation deduction on eligible assets placed in service.

AMT Historical Perspective

To qualify, the assets must be used in a trade or business and bonus depreciation regs are favorable for taxpayers have a recovery period of 20 years or less under the tax law. Under pre-TCJA law, businesses could claim a first-year bonus depreciation deduction equal to 50% of the basis of qualifying new (not used) assets placed in service in 2017. The deduction was available for the cost of qualifying new assets, including computers, purchased software, vehicles, machinery, equipment and office furniture.

  • Cost segregation studies will remain important and provide support in the event of an IRS audit for the assignment of shorter and accurate MACRS class lives for building components.
  • For certain assets with longer production periods, these percentage cutbacks were delayed by one year.
  • As bonus depreciation winds down, taxpayers should pay close attention to the date on which property is placed in service.

Depreciation Provisions in Recent Tax Legislation

A member’s departure by acquisition may raise bonus depreciation issues since the member may be acquired by actual or deemed asset purchase. Additionally, the departing member may acquire assets from one or more members that remain in the consolidated group after the acquisition. The proposed regulations provide a framework for when a member of a consolidated group is sold to a third party. Internal Revenue Code Section 179 allows taxpayers to deduct the cost of qualifying property as an expense in the year the property is first placed into service. This deduction applies to tangible property such as machinery, equipment, and software used in a trade or business. Qualified property also doesn’t encompass property that must be depreciated under the Alternative Depreciation System (ADS).

The unadjusted depreciable basis generally is limited to the property’s basis attributable to manufacture, construction or production of the property before January 1, 2027. Taxpayers should begin evaluating their capital expenditure plans for 2025 and beyond to identify property eligible for immediate expensing. For production facilities, careful cost segregation of building use and documentation will be essential to substantiate eligibility for the increased deduction. Modeling the impact of accelerated deductions on taxable income, interest limitations and state conformity will be critical to optimizing the benefits of these provisions. Taxpayers should review the recovery periods over which they are depreciating fixed assets.

Publié dans Bookkeeping