IRS Publishes Proposed Regulations Providing Additional Guidance Regarding Bonus Depreciation
The Tax Cuts and Jobs Act (TCJA) increased the allowance for bonus depreciation from 50% to 100% for property purchased after September 27, 2017 and before January 1, 2023. The TCJA also expanded the property eligible for bonus depreciation to include certain used property and certain film, television, or live theatrical productions. Recently, the IRS has published proposed regulations which provide additional guidance on the changes that have been made to bonus depreciation. Taxpayers may rely upon these proposed regulations until final regulations are issued.
Qualified Improvement Property
Since the TCJA was passed, there has been some confusion whether Qualified Improvement Property (QIP) is eligible for bonus depreciation. QIP includes certain improvements to the nonresidential real property that would otherwise be depreciated over a 39-year period. The proposed regulations provide an interim period between September 27, 2017 and December 31, 2017 when QIP is eligible for bonus depreciation. QIP acquired after December 31, 2017 is not eligible for bonus depreciation and must be depreciated over a 39-year period.
Bonus Depreciation Allowed on Used Property
Certain used property acquired after September 27, 2017 is now eligible for bonus depreciation. The proposed regulations provide additional guidance regarding which used property qualifies for bonus depreciation. The property must be acquired by purchase from an unrelated individual. The property cannot be previously used by the taxpayer. A taxpayer previously used a property only if the taxpayer or a predecessor had a depreciable interest in the property at any time before the acquisition. The proposed regulations also contain anti-abuse rules to prevent disguised sales between related parties.
Election to Use 50-Percent Rate
Taxpayers may elect the 50% bonus rate rather than the 100% rate for the tax year that includes September 27, 2017. The proposed regulations require that the election is “all or nothing,” meaning that 50% bonus depreciation must be used on all property purchased in the year the election is made. Taxpayers may continue to elect out of bonus depreciation completely but must make the election for each property class separately.
IRS Publishes Proposed Regulations Providing Additional Guidance Regarding the New Qualified Business Income Deduction
The TCJA created a new code section 199A which allows businesses to deduct up to 20% of their Qualified Business Income (QBI) from sole proprietorships, partnerships, trusts and S corporations. A Qualified Trade or Business is any trade or business other than a specified service trade or business (SSTB) or the trade or business of performing services as an employee. The IRS has recently released proposed regulations that provide additional guidance on 199A. Taxpayers may rely upon these proposed regulations until final regulations are issued.
Qualified Trade or Business
The proposed regulations define a “trade or business” by reference to IRC Section 162. Section 162 requires an activity to be continuous and regular with the primary purpose of generating income or profit. The proposed regulations include one exception to the 162 standard in which a rental activity is treated as a trade or business if it is commonly controlled. Businesses are commonly controlled if the same person or persons own at least 50% of each business.
Specified Service Trade or Business
An SSTB is any trade or business in certain specified service fields or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners. The proposed regulations provide further explanations and specific examples of what businesses are an SSTB.
A business where the principal asset is the reputation or skill of its employees or owners is defined narrowly. This business is an SSTB only if it is engaged in endorsing products or services, licensing the use of an individual’s image, name or trademark, or receiving appearance fees. De minimis rules apply to businesses with multiple activities. Please contact Rivero, Gordimer & Company regarding your specific business activity.
The proposed regulations try to limit attempts to spin-off parts of a service business into independent qualified businesses solely for taking the 199A deduction. This is sometimes referred to as “cracking.” The proposed regulations also prevent individuals from recharacterizing themselves from employees to independent contractors solely for taking the 199A deduction.
The proposed regulations permit a voluntary aggregation of separate trade or businesses for purposes of 199A. This would allow W2 wages and property basis to be spread out over multiple trade or businesses. The aggregation irrevocable and is made at the individual level by attaching a statement to the individual’s tax return identifying the aggregated trade or businesses. The businesses to be aggregated must have common ownership and be similar in nature or share significant facilities or business functions.
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Jill McSpadden joined Rivero, Gordimer & Company in 2016. Her areas of concentration include income tax preparation for individuals and closely held corporations and partnerships. She also is experienced in tax planning and consultation and QuickBooks consultation.