83_FR_39445 83 FR 39292 - Additional First Year Depreciation Deduction

83 FR 39292 - Additional First Year Depreciation Deduction

DEPARTMENT OF THE TREASURY
Internal Revenue Service

Federal Register Volume 83, Issue 153 (August 8, 2018)

Page Range39292-39322
FR Document2018-16716

This document contains proposed regulations that provide guidance regarding the additional first year depreciation deduction under section 168(k) of the Internal Revenue Code (Code). These proposed regulations reflect changes made by the Tax Cuts and Jobs Act. These proposed regulations affect taxpayers who deduct depreciation for qualified property acquired and placed in service after September 27, 2017.

Federal Register, Volume 83 Issue 153 (Wednesday, August 8, 2018)
[Federal Register Volume 83, Number 153 (Wednesday, August 8, 2018)]
[Proposed Rules]
[Pages 39292-39322]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-16716]



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Vol. 83

Wednesday,

No. 153

August 8, 2018

Part III





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





Additional First Year Depreciation Deduction; Proposed Rule

Federal Register / Vol. 83 , No. 153 / Wednesday, August 8, 2018 / 
Proposed Rules

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-104397-18]
RIN 1545-BO74


Additional First Year Depreciation Deduction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide 
guidance regarding the additional first year depreciation deduction 
under section 168(k) of the Internal Revenue Code (Code). These 
proposed regulations reflect changes made by the Tax Cuts and Jobs Act. 
These proposed regulations affect taxpayers who deduct depreciation for 
qualified property acquired and placed in service after September 27, 
2017.

DATES: Written or electronic comments and requests for a public hearing 
must be received by October 9, 2018.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-104397-18), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
104397-18), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW, Washington, DC 20224, or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS REG-104397-18).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Elizabeth R. Binder, (202) 317-7005; concerning submissions of comments 
or requests for a public hearing, Regina L. Johnson, (202) 317-6901 
(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to 26 CFR part 1 under 
section 168(k). Section 168(k) was added to the Code by section 101 of 
the Job Creation and Worker Assistance Act of 2002, Public Law 107-147 
(116 Stat. 21). Section 168(k) allows an additional first year 
depreciation deduction in the placed-in-service year of qualified 
property. Subsequent amendments to section 168(k) increased the 
percentage of the additional first year depreciation deduction from 30 
percent to 50 percent (to 100 percent for property acquired and placed 
in service after September 8, 2010, and generally before January 1, 
2012), extended the placed-in-service date generally through December 
31, 2019, and made other changes. See section 201 of the Jobs and 
Growth Tax Relief Reconciliation Act of 2003, Public Law 108-27 (117 
Stat. 752), sections 403 and 408 of the Working Families Tax Relief Act 
of 2004, Public Law 108-311 (118 Stat. 1166), sections 336 and 337 of 
the American Jobs Creation Act of 2004, Public Law 108-357 (118 Stat. 
1418), sections 403 and 405 of the Gulf Opportunity Zone Act of 2005, 
Public Law 109-135 (119 Stat. 2577), section 103 of the Economic 
Stimulus Act of 2008, Public Law 110-185 (122 Stat. 613), section 3081 
of the Housing Assistance Tax Act of 2008, Public Law 110-289 (122 
Stat. 2654), section 1201 of the American Recovery and Reinvestment Tax 
Act of 2009, Public Law 111-5 (123 Stat. 115), section 2022 of the 
Small Business Jobs Act of 2010, Public Law 111-240 (124 Stat. 2504), 
section 401 of the Tax Relief, Unemployment Insurance Reauthorization, 
and Job Creation Act of 2010, Public Law 111-312 (124 Stat. 3296), 
section 331 of the American Taxpayer Relief Act of 2012, Public Law 
112-240 (126 Stat. 2313), sections 125, 202, 210, 212, and 214 of the 
Tax Increase Prevention Act of 2014, Public Law 113-295 (128 Stat. 
4010), and section 143 of the Protecting Americans from Tax Hikes Act 
of 2015, enacted as Division Q of the Consolidated Appropriations Act, 
2016, Public Law 114-113 (129 Stat. 2242).
    On December 22, 2017, section 168(k) and related provisions were 
amended by sections 12001(b)(13), 13201, and 13204 of the Tax Cuts and 
Jobs Act, Public Law 115-97 (131 Stat. 2054) (the ``Act'') to provide 
further changes to the additional first year depreciation deduction. 
Unless otherwise indicated, all references to section 168(k) 
hereinafter are references to section 168(k) as amended.
    Section 167(a) allows as a depreciation deduction a reasonable 
allowance for the exhaustion, wear and tear, and obsolescence of 
property used in a trade or business or of property held for the 
production of income. The depreciation deduction allowable for tangible 
depreciable property placed in service after 1986 generally is 
determined under the Modified Accelerated Cost Recovery System provided 
by section 168 (MACRS property). The depreciation deduction allowable 
for computer software that is placed in service after August 10, 1993, 
and is not an amortizable section 197 intangible, is determined under 
section 167(f)(1).
    Section 168(k), prior to amendment by the Act, allowed an 
additional first year depreciation deduction for the placed-in-service 
year equal to 50 percent of the adjusted basis of qualified property. 
Qualified property was defined in part as property the original use of 
which begins with the taxpayer.
    Section 13201 of the Act made several amendments to the allowance 
for additional first year depreciation deduction in section 168(k). For 
example, the additional first year depreciation deduction percentage is 
increased from 50 to 100 percent; the property eligible for the 
additional first year depreciation deduction is expanded to include 
certain used depreciable property and certain film, television, or live 
theatrical productions; the placed-in-service date is extended from 
before January 1, 2020, to before January 1, 2027 (from before January 
1, 2021, to before January 1, 2028, for longer production period 
property or certain aircraft property described in section 168(k)(2)(B) 
or (C)); and the date on which a specified plant is planted or grafted 
by the taxpayer is extended from before January 1, 2020, to before 
January 1, 2027.
    Section 168(k) allows a 100-percent additional first year 
depreciation deduction for qualified property acquired and placed in 
service after September 27, 2017, and placed in service before January 
1, 2023 (before January 1, 2024, for longer production period property 
or certain aircraft property described in section 168(k)(2)(B) or (C)). 
If a taxpayer elects to apply section 168(k)(5), the 100-percent 
additional first year depreciation deduction also is allowed for a 
specified plant planted or grafted after September 27, 2017, and before 
January 1, 2023. The 100-percent additional first year depreciation 
deduction is decreased by 20 percent annually for qualified property 
placed in service, or a specified plant planted or grafted, after 
December 31, 2022 (after December 31, 2023, for longer production 
period property or certain aircraft property described in section 
168(k)(2)(B) or (C)).
    Section 168(k)(2)(A), as amended by the Act, defines ``qualified 
property'' as meaning, in general, property (1) to which section 168 
applies that has a recovery period of 20 years or less, which is 
computer software as defined in section 167(f)(1)(B) for which a 
deduction is allowable under section 167(a) without regard to section 
168(k), which is water utility property, which is

[[Page 39293]]

a qualified film or television production as defined in section 181(d) 
for which a deduction would have been allowable without regard to 
section 181(a)(2) or (g) or section 168(k), or which is a qualified 
live theatrical production as defined in section 181(e) for which a 
deduction would have been allowable without regard to section 181(a)(2) 
or (g) or section 168(k); (2) the original use of which begins with the 
taxpayer or the acquisition of which by the taxpayer meets the 
requirements of section 168(k)(2)(E)(ii); and (3) which is placed in 
service by the taxpayer before January 1, 2027. Section 
168(k)(2)(E)(ii) requires that the acquired property was not used by 
the taxpayer at any time prior to such acquisition and the acquisition 
of such property meets the requirements of section 179(d)(2)(A), (B), 
and (C) and section 179(d)(3).
    However, section 168(k)(2)(D) provides that qualified property does 
not include any property to which the alternative depreciation system 
under section 168(g) applies, determined without regard to section 
168(g)(7) (relating to election to have the alternative depreciation 
system apply), and after application of section 280F(b) (relating to 
listed property with limited business use).
    Section 13201(h) of the Act provides the effective dates of the 
amendments to section 168(k) made by section 13201 of the Act. Except 
as provided in section 13201(h)(2) of the Act, section 13201(h)(1) of 
the Act provides that these amendments apply to property acquired and 
placed in service after September 27, 2017. However, property is not 
treated as acquired after the date on which a written binding contract 
is entered into for such acquisition. Section 13201(h)(2) provides that 
the amendments apply to specified plants planted or grafted after 
September 27, 2017.
    Additionally, section 12001(b)(13) of the Act repealed section 
168(k)(4) (relating to the election to accelerate alternative minimum 
tax credits in lieu of the additional first year depreciation 
deduction) for taxable years beginning after December 31, 2017. 
Further, section 13204(a)(4)(B)(ii) repealed section 168(k)(3) 
(relating to qualified improvement property) for property placed in 
service after December 31, 2017.

Explanation of Provisions

    The proposed regulations describe and clarify the statutory 
requirements that must be met for depreciable property to qualify for 
the additional first year depreciation deduction provided by section 
168(k). Further, the proposed regulations instruct taxpayers how to 
determine the additional first year depreciation deduction and the 
amount of depreciation otherwise allowable for this property. Because 
the Act made substantial amendments to section 168(k), the proposed 
regulations update existing regulations in Sec.  1.168(k)-1 by 
providing a new section at Sec.  1.168(k)-2 for property acquired and 
placed in service after September 27, 2017, and make conforming 
amendments to the existing regulations.

1. Eligibility Requirements for Additional First Year Depreciation 
Deduction

    The proposed regulations follow section 168(k)(2), as amended by 
the Act, and section 13201(h) of the Act to provide that depreciable 
property must meet four requirements to be qualified property. These 
requirements are (1) the depreciable property must be of a specified 
type; (2) the original use of the depreciable property must commence 
with the taxpayer or used depreciable property must meet the 
acquisition requirements of section 168(k)(2)(E)(ii); (3) the 
depreciable property must be placed in service by the taxpayer within a 
specified time period or must be planted or grafted by the taxpayer 
before a specified date; and (4) the depreciable property must be 
acquired by the taxpayer after September 27, 2017.

2. Property of a Specified Type

A. Property Eligible for the Additional First Year Depreciation 
Deduction
    The proposed regulations follow the definition of qualified 
property in section 168(k)(2)(A)(i) and (k)(5) and provide that 
qualified property must be one of the following: (1) MACRS property 
that has a recovery period of 20 years or less; (2) computer software 
as defined in, and depreciated under, section 167(f)(1); (3) water 
utility property as defined in section 168(e)(5) and depreciated under 
section 168; (4) a qualified film or television production as defined 
in section 181(d) and for which a deduction would have been allowable 
under section 181 without regard to section 181(a)(2) and (g) or 
section 168(k); (5) a qualified live theatrical production as defined 
in section 181(e) and for which a deduction would have been allowable 
under section 181 without regard to section 181(a)(2) and (g) or 
section 168(k); or (6) a specified plant as defined in section 
168(k)(5)(B) and for which the taxpayer has made an election to apply 
section 168(k)(5). 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.
    For property placed in service after December 31, 2017, section 
13204 of the Act amended section 168(e) to eliminate the 15-year MACRS 
property classification for qualified leasehold improvement property, 
qualified restaurant property, and qualified retail improvement 
property, and amended section 168(k) to eliminate qualified improvement 
property as a specific category of qualified property. Because of the 
effective date of section 13204 of the Act (property placed in service 
after December 31, 2017), the proposed regulations provide that MACRS 
property with a recovery period of 20 years or less includes the 
following MACRS property that is acquired by the taxpayer after 
September 27, 2017, and placed in service by the taxpayer after 
September 27, 2017, and before January 1, 2018: (1) Qualified leasehold 
improvement property; (2) qualified restaurant property that is 
qualified improvement property; and (3) qualified retail improvement 
property. For the same reason, the proposed regulations provide that 
qualified property includes qualified improvement property that is 
acquired by the taxpayer after September 27, 2017, and placed in 
service by the taxpayer after September 27, 2017, and before January 1, 
2018. Further, to account for the statutory amendments to the 
definition of qualified improvement property made by the Act, the 
proposed regulations define qualified improvement property for purposes 
of section 168(k)(3) (before amendment by section 13204 of the Act) and 
section 168(e)(6) (as amended by section 13204 of the Act).
    For purposes of determining the eligibility of MACRS property as 
qualified property, the proposed regulations retain the rule in Sec.  
1.168(k)-1(b)(2)(i)(A) that the recovery period applicable for the 
MACRS property under section 168(c) of the general depreciation system 
(GDS) is used, regardless of any election made by the taxpayer to 
depreciate the class of property under the alternative depreciation 
system of section 168(g) (ADS).
B. Property Not Eligible for the Additional First Year Depreciation 
Deduction
    The proposed regulations provide that qualified property does not 
include (1) property excluded from the application of section 168 as a 
result of section 168(f); (2) property that is required to be 
depreciated under the ADS (as described below); (3) any class of

[[Page 39294]]

property for which the taxpayer elects not to deduct the additional 
first year depreciation under section 168(k)(7); (4) a specified plant 
placed in service by the taxpayer in the taxable year and for which the 
taxpayer made an election to apply section 168(k)(5) for a prior year 
under section 168(k)(5)(D); (5) any class of property for which the 
taxpayer elects to apply section 168(k)(4) (this exclusion applies to 
property placed in service in any taxable year beginning before January 
1, 2018, because section 12001(b)(13) of the Act repealed section 
168(k)(4) for taxable years beginning after December 31, 2017); or (6) 
property described in section 168(k)(9)(A) or (B). Section 168(k)(9) 
provides that qualified property does not include (A) any property that 
is primarily used in a trade or business described in section 
163(j)(7)(A)(iv), or (B) any property used in a trade or business that 
has had floor plan financing indebtedness (as defined in section 
163(j)(9)) if the floor plan financing interest related to such 
indebtedness was taken into account under section 163(j)(1)(C). Section 
163(j) applies to taxable years beginning after December 31, 2017. 
Accordingly, the exclusion of property described in section 168(k)(9) 
from the additional first year depreciation deduction applies to 
property placed in service in any taxable year beginning after December 
31, 2017.
    Property is required to be depreciated under the ADS if the 
property is described under section 168(g)(1)(A), (B), (C), (D), (F), 
or (G) or if other provisions of the Code require depreciation for the 
property to be determined under the ADS. Accordingly, MACRS property 
that is nonresidential real property, residential rental property, and 
qualified improvement property held by an electing real property trade 
or business (as defined in section 163(j)(7)(B)), and property with a 
recovery period of 10 years or more that is held by an electing farming 
business (as defined in section 163(j)(7)(C)), are not eligible for the 
additional first year depreciation deduction for taxable years 
beginning after December 31, 2017. Pursuant to section 168(k)(2)(D), 
MACRS property for which the taxpayer makes an election under section 
168(g)(7) to depreciate the property under the ADS is eligible for the 
additional first year depreciation deduction (assuming all other 
requirements are met).
C. Elections
    The proposed regulations provide rules for making the election out 
of the additional first year depreciation deduction pursuant to section 
168(k)(7) and for making the election to apply section 168(k)(5) to a 
specified plant. Additionally, the proposed regulations provide rules 
for making the election under section 168(k)(10) to deduct 50 percent, 
instead of 100 percent, additional first year depreciation for 
qualified property acquired after September 27, 2017, by the taxpayer 
and placed in service or planted or grafted, as applicable, by the 
taxpayer during its taxable year that includes September 28, 2017. 
Because section 168(k)(10) does not state that the election may be made 
``with respect to any class of property'' as stated in section 
168(k)(7) for making the election out of the additional first year 
depreciation deduction, the proposed regulations provide that the 
election under section 168(k)(10) applies to all qualified property.

3. New and Used Property

A. New Property
    The proposed regulations generally retain the original use rules in 
Sec.  1.168(k)-1(b)(3). Pursuant to section 168(k)(2)(A)(ii), the 
proposed regulations do not provide any date by which the original use 
of the property must commence with the taxpayer. Because section 13201 
of the Act removed the rules regarding sale-leaseback transactions, the 
proposed regulations also do not retain the original use rules in Sec.  
1.168(k)-1(b)(3)(iii)(A) and (C) regarding such transactions, including 
a sale-leaseback transaction followed by a syndication transaction. The 
rule in the proposed regulations for syndication transactions involving 
new or used property is explained later in the preamble.
B. Used Property
    Pursuant to section 168(k)(2)(A)(ii) and (k)(2)(E)(ii), the 
proposed regulations provide that the acquisition of used property is 
eligible for the additional first year depreciation deduction if such 
acquisition meets the following requirements: (1) The property was not 
used by the taxpayer or a predecessor at any time prior to the 
acquisition; (2) the acquisition of the property meets the related 
party and carryover basis requirements of section 179(d)(2)(A), (B), 
and (C) and Sec.  1.179-4(c)(1)(ii), (iii), and (iv), or (c)(2); and 
(3) the acquisition of the property meets the cost requirements of 
section 179(d)(3) and Sec.  1.179-4(d).
i. Section 336(e) Election
    A section 338 election and a section 336(e) election share many of 
the same characteristics. Therefore, the proposed regulations modify 
Sec.  1.179-4(c)(2), which addresses the treatment of a section 338 
election, to include property deemed to have been acquired by a new 
target corporation as a result of a section 336(e) election. Section 
1.336-1(a)(1) provides that to the extent not inconsistent with section 
336(e) or the regulations under section 336(e), the principles of 
section 338 and the regulations under section 338 apply for purposes of 
the regulations under section 336. To the extent that property is 
deemed to have been acquired by a ``new target corporation,'' the 
Treasury Department and the IRS read Sec.  1.179-4(c)(2), without 
modification, as applying to the deemed acquisition of property by a 
new target corporation as a result of a section 336(e) election, just 
as it applies as the result of a section 338 election. However, to 
remove any doubt, the proposed regulations modify Sec.  1.179-4(c)(2) 
to provide that property deemed to have been acquired by a new target 
corporation as a result of a section 338 or a section 336(e) election 
will be considered acquired by purchase for purposes of section 179.
ii. Property Not Previously Used by the Taxpayer
    The proposed regulations provide that the property is treated as 
used by the taxpayer or a predecessor at any time before its 
acquisition of the property only if the taxpayer or the predecessor had 
a depreciable interest in the property at any time before the 
acquisition, whether or not the taxpayer or the predecessor claimed 
depreciation deductions for the property. If a lessee has a depreciable 
interest in the improvements made to leased property and subsequently 
the lessee acquires the leased property of which the improvements are a 
part, the proposed regulations provide that the unadjusted depreciable 
basis, as defined in Sec.  1.168(b)-1(a)(3), of the acquired property 
that is eligible for the additional first year depreciation deduction, 
assuming all other requirements are met, does not include the 
unadjusted depreciable basis attributable to the improvements.
    Further, if a taxpayer initially acquires a depreciable interest in 
a portion of the property and subsequently acquires an additional 
depreciable interest in the same property, the proposed regulations 
also provide that such additional depreciable interest is not treated 
as being previously used by the taxpayer. However, if a taxpayer holds 
a depreciable interest in a portion of the property, sells that portion 
or a part of that portion, and subsequently acquires a depreciable 
interest in another portion

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of the same property, the proposed regulations provide that the 
taxpayer will be treated as previously having a depreciable interest in 
the property up to the amount of the portion for which the taxpayer 
held a depreciable interest in the property before the sale.
    The Treasury Department and the IRS request comments on whether a 
safe harbor should be provided on how many taxable years a taxpayer or 
a predecessor should look back to determine if the taxpayer or the 
predecessor previously had a depreciable interest in the property. Such 
comments should provide the number of taxable years recommended for the 
look-back period and the reasoning for such number.
iii. Rules Applying to Consolidated Groups
    Members of a consolidated group generally are treated as separate 
taxpayers. See Woolford Realty Co. v. Rose, 286 U.S. 319, 328 (1932) 
(``[a] corporation does not cease to be [a taxpayer] by affiliating 
with another''). However, the Treasury Department and the IRS believe 
that the additional first year depreciation deduction should not be 
permitted to members of a consolidated group when property is disposed 
of by one member of a consolidated group outside the group and 
subsequently acquired by another member of the same group because 
permitting such a deduction would not clearly reflect the group's 
income tax liability. See section 1502 (permitting consolidated group 
regulations different from the rules of chapter 1 of subtitle A of the 
Code otherwise applicable to separate corporations to clearly reflect 
the income tax liability of a consolidated group or each member of the 
group). To implement this position, these proposed regulations treat a 
member of a consolidated group as previously having a depreciable 
interest in all property in which the consolidated group is treated as 
previously having a depreciable interest. For purposes of this rule, a 
consolidated group will be treated as having a depreciable interest in 
property if any current or previous member of the group had a 
depreciable interest in the property while a member of the group.
    The Treasury Department and the IRS also believe that the 
additional first year depreciation deduction should not be allowed 
when, as part of a series of related transactions, one or more members 
of a consolidated group acquire both the stock of a corporation that 
previously had a depreciable interest in the property and the property 
itself. Assume a corporation (the selling corporation) has a 
depreciable interest in property and sells it to an unrelated party. 
Subsequently, as part of a series of related transactions, a member of 
a consolidated group, unrelated to the selling corporation, acquires 
the property and either that member or a different member of the group 
acquires the stock of the selling corporation. In substance, the series 
of transactions is the same as if the selling corporation reacquired 
the property and then transferred it to another member of the group, in 
which case the additional first year depreciation deduction would not 
be allowed. Accordingly, these proposed regulations deny the deduction 
in such circumstances.
    Additionally, if the acquisition of property is part of a series of 
related transactions that also includes one or more transactions in 
which the transferee of the property ceases to be a member of a 
consolidated group, then whether the taxpayer is a member of a 
consolidated group is tested immediately after the last transaction in 
the series.
iv. Series of Related Transactions
    In determining whether property meets the requirements of section 
168(k)(2)(E)(ii), the Treasury Department and the IRS believe that the 
ordering of steps, or the use of an unrelated intermediary, in a series 
of related transactions should not control. For example, if a father 
buys and places equipment in service for use in the father's trade or 
business and subsequently the father sells the equipment to his 
daughter for use in her trade or business, the father and daughter are 
related parties under section 179(d)(2)(A) and Sec.  1.179-4(c)(1)(ii) 
and therefore, the daughter's acquisition of the equipment is not 
eligible for the additional first year depreciation deduction. However, 
if in a series of related transactions, the father sells the equipment 
to an unrelated party and then the unrelated party sells the equipment 
to the father's daughter, the daughter's acquisition of the equipment 
from the unrelated party, absent the rule in the proposed regulations, 
is eligible for the additional first year depreciation deduction 
(assuming all other requirements are met). Thus, the proposed 
regulations provide that in the case of a series of related 
transactions, the transfer of the property will be treated as directly 
transferred from the original transferor to the ultimate transferee, 
and the relation between the original transferor and the ultimate 
transferee is tested immediately after the last transaction in the 
series.
C. Application to Partnerships
    On September 8, 2003, the Treasury Department and the IRS published 
temporary regulations (T.D. 9091, 2003-2 C.B. 939) in the Federal 
Register (68 FR 52986) relating to the additional first year 
depreciation deduction provisions of sections 168(k) and 1400L(b) 
(before amendment by sections 403 and 408 of the Working Families Tax 
Relief Act of 2004). Those regulations provided that any increase in 
the basis of qualified property due to a section 754 election generally 
is not eligible for the additional first year depreciation deduction. 
The preamble to those regulations explained that any increase in basis 
due to a section 754 election does not satisfy the original use 
requirement. The final regulations (T.D. 9283, 2006-2 C.B. 633, 642-43) 
published in the Federal Register on August 31, 2006 (71 FR 51738) 
retained the rule for increases in basis due to section 754 elections 
at Sec.  1.168(k)-1(f)(9). Because the Act amended section 168(k) to 
allow the additional first year depreciation deduction for certain used 
property in addition to new property, the Treasury Department and the 
IRS have reconsidered whether basis adjustments under sections 734(b) 
and 743(b) now qualify for the additional first year depreciation 
deduction. The Treasury Department and the IRS also have considered 
whether certain section 704(c) adjustments as well as the basis of 
distributed property determined under section 732 should qualify for 
the additional first year depreciation deduction.
i. Section 704(c) Remedial Allocations
    Section 1.704-3(d)(2) provides, in part, that under the remedial 
allocation method, the portion of a partnership's book basis in 
contributed property that exceeds its adjusted tax basis is recovered 
using any recovery period and depreciation (or other cost recovery) 
method available to the partnership for newly purchased property (of 
the same type as the contributed property) that is placed in service at 
the time of contribution. The proposed regulations provide that 
remedial allocations under section 704(c) do not qualify for the 
additional first year depreciation deduction under section 168(k).
    Notwithstanding the language of Sec.  1.704-3(d)(2) that any method 
available to the partnership for newly purchased property may be used 
to recover the portion of the partnership's book basis in contributed 
property that exceeds its adjusted tax basis, remedial allocations do 
not meet the requirements of section 168(k)(2)(E)(ii).

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Because the underlying property is contributed to the partnership in a 
section 721 transaction, the partnership's basis in the property is 
determined by reference to the contributing partner's basis in the 
property, which violates sections 179(d)(2)(C) and 
168(k)(2)(E)(ii)(II). In addition, the partnership has already had a 
depreciable interest in the contributed property at the time the 
remedial allocation is made, which is in violation of section 
168(k)(2)(E)(ii)(I) as well as the original use requirement.
    The same rule applies in the case of revaluations of partnership 
property (reverse section 704(c) allocations).
ii. Zero Basis Property
    Section 1.704-1(b)(2)(iv)(g)(3) provides that, if partnership 
property has a zero adjusted tax basis, any reasonable method may be 
used to determine the book depreciation, depletion, or amortization of 
the property. The proposed regulations provide that the additional 
first year depreciation deduction under section 168(k) will not be 
allowed on property contributed to the partnership with a zero adjusted 
tax basis because, with the additional first year depreciation 
deduction, the partners have the potential to shift built-in gain among 
partners.
iii. Basis Determined Under Section 732
    Section 732(a)(1) provides that the basis of property (other than 
money) distributed by a partnership to a partner other than in 
liquidation of the partner's interest is its adjusted basis to the 
partnership immediately before the distribution. Section 732(a)(2) 
provides that the basis determined under section 732(a)(1) shall not 
exceed the adjusted basis of the partner's interest in the partnership 
reduced by any money distributed in the same transaction. Section 
732(b) provides that the basis of property (other than money) 
distributed by a partnership to a partner in liquidation of the 
partner's interest is equal to the adjusted basis of the partner's 
interest in the partnership reduced by any money distributed in the 
same transaction.
    Property distributed by a partnership to a partner fails to satisfy 
the original use requirement because the partnership used the property 
prior to the distribution. Distributed property also fails to satisfy 
the acquisition requirements of section 168(k)(2)(E)(ii)(II). Any 
portion of basis determined by section 732(a)(1) fails to satisfy 
section 179(d)(2)(C) because it is determined by reference to the 
partnership's basis in the distributed property. Similarly, any portion 
of basis determined by section 732(a)(2) or (b) fails to satisfy 
section 179(d)(3) because it is determined by reference to the 
distributee partner's basis in its partnership interest (reduced by any 
money distributed in the same transaction).
iv. Section 734(b) Adjustments
    Section 734(b)(1) provides that, in the case of a distribution of 
property to a partner with respect to which a section 754 election is 
in effect (or when there is a substantial basis reduction under section 
734(d)), the partnership will increase the adjusted basis of 
partnership property by the sum of (A) the amount of any gain 
recognized to the distributee partner under section 731(a)(1), and (B) 
in the case of distributed property to which section 732(a)(2) or (b) 
applies, the excess of the adjusted basis of the distributed property 
to the partnership immediately before the distribution (as adjusted by 
section 732(d)) over the basis of the distributed property to the 
distributee, as determined under section 732.
    Because a section 734(b) basis adjustment is made to the basis of 
partnership property (i.e., non-partner specific basis) and the 
partnership used the property prior to the partnership distribution 
giving rise to the basis adjustment, a section 734(b) basis adjustment 
fails the original use clause in section 168(k)(2)(A)(ii) and also 
fails the used property requirement in section 168(k)(2)(E)(ii)(I). The 
proposed regulations therefore provide that section 734(b) basis 
adjustments are not eligible for the additional first year depreciation 
deduction.
v. Section 743(b) Adjustments
    Section 743(b)(1) provides that, in the case of a transfer of a 
partnership interest, either by sale or exchange or as a result of the 
death of a partner, a partnership that has a section 754 election in 
effect (or if there is a substantial built-in loss immediately after 
such partnership interest transfer under section 743(d)), will increase 
the adjusted basis of partnership property by the excess of the 
transferee's basis in the transferred partnership interest over the 
transferee's share of the adjusted basis of partnership's property. 
This increase is an adjustment to the basis of partnership property 
with respect to the transferee partner only and, therefore, is a 
partner specific basis adjustment to partnership property. The section 
743(b) basis adjustment is allocated among partnership properties under 
section 755. As stated above, prior to the Act, a section 743(b) basis 
adjustment would always fail the original use requirement in section 
168(k)(2)(A)(ii) because partnership property to which a section 743(b) 
basis adjustment relates would have been previously used by the 
partnership and its partners prior to the transfer that gave rise to 
the section 743(b) adjustment. After the Act, while a section 743(b) 
basis adjustment still fails the original use clause in section 
168(k)(2)(A)(ii), a transaction giving rise to a section 743(b) basis 
adjustment may satisfy the used property clause in section 
168(k)(2)(A)(ii) because of the used property acquisition requirements 
of section 168(k)(2)(E)(ii), depending on the facts and circumstances.
    Because a section 743(b) basis adjustment is a partner specific 
basis adjustment to partnership property, the proposed regulations take 
an aggregate view and provide that, in determining whether a section 
743(b) basis adjustment meets the used property acquisition 
requirements of section 168(k)(2)(E)(ii), each partner is treated as 
having owned and used the partner's proportionate share of partnership 
property. In the case of a transfer of a partnership interest, section 
168(k)(2)(E)(ii)(I) will be satisfied if the partner acquiring the 
interest, or a predecessor of such partner, has not used the portion of 
the partnership property to which the section 743(b) basis adjustment 
relates at any time prior to the acquisition (that is, the transferee 
has not used the transferor's portion of partnership property prior to 
the acquisition), notwithstanding the fact that the partnership itself 
has previously used the property. Similarly, for purposes of applying 
section 179(d)(2)(A), (B), and (C), the partner acquiring a partnership 
interest is treated as acquiring a portion of partnership property, and 
the partner who is transferring a partnership interest is treated as 
the person from whom the property is acquired.
    For example, the relationship between the transferor partner and 
the transferee partner must not be a prohibited relationship under 
section 179(d)(2)(A). Also, the transferor partner and transferee 
partner may not be part of the same controlled group under section 
179(d)(2)(B). Finally, the transferee partner's basis in the 
transferred partnership interest may not be determined in whole or in 
part by reference to the transferor's adjusted basis, or under section 
1014.
    The same result will apply regardless of whether the transferee 
partner is a new partner or an existing partner purchasing an 
additional partnership interest from another partner. Assuming that the 
transferor partner's specific

[[Page 39297]]

interest in partnership property that is acquired by the transferee 
partner has not previously been used by the transferee partner or a 
predecessor, the corresponding section 743(b) basis adjustment will be 
eligible for the additional first year depreciation deduction in the 
hands of the transferee partner, provided all other requirements of 
section 168(k) are satisfied (and assuming Sec.  1.743-1(j)(4)(i)(B)(2) 
does not apply). This treatment is appropriate notwithstanding the fact 
that the transferee partner may have an existing interest in the 
underlying partnership property, because the transferee's existing 
interest in the underlying partnership property is distinct from the 
interest being transferred.
    Finally, the proposed regulations provide that a section 743(b) 
basis adjustment in a class of property (not including the property 
class for section 743(b) basis adjustments) may be recovered using the 
additional first year depreciation deduction under section 168(k) 
without regard to whether the partnership elects out of the additional 
first year depreciation deduction under section 168(k)(7) for all other 
qualified property in the same class of property and placed in service 
in the same taxable year. Similarly, a partnership may make the 
election out of the additional first year depreciation deduction under 
section 168(k)(7) for a section 743(b) basis adjustment in a class of 
property (not including the property class for section 743(b) basis 
adjustments), and this election will not bind the partnership to such 
election for all other qualified property of the partnership in the 
same class of property and placed in service in the same taxable year.
D. Syndication Transaction
    The syndication transaction rule in the proposed regulations is 
based on the rules in section 168(k)(2)(E)(iii) for syndication 
transactions. For new or used property, the proposed regulations 
provide that if (1) a lessor has a depreciable interest in the property 
and the lessor and any predecessor did not previously have a 
depreciable interest in the property, (2) the property is sold by the 
lessor or any subsequent purchaser within three months after the date 
the property was originally placed in service by the lessor (or, in the 
case of multiple units of property subject to the same lease, within 
three months after the date the final unit is placed in service, so 
long as the period between the time the first unit is placed in service 
and the time the last unit is placed in service does not exceed 12 
months), and (3) the user (lessee) of the property after the last sale 
during the three-month period remains the same as when the property was 
originally placed in service by the lessor, then the purchaser of the 
property in the last sale during the three-month period is considered 
the taxpayer that acquired the property and the taxpayer that 
originally placed the property in service, but not earlier than the 
date of the last sale. Thus, if a transaction is within the rules 
described above, the purchaser of the property in the last sale during 
the three-month period is eligible to claim the additional first year 
depreciation for the property (assuming all requirements are met), and 
the earlier purchasers of the property are not.

4. Placed-in-Service Date

    The proposed regulations generally retain the placed-in-service 
date rules in Sec.  1.168(k)-1(b)(5). Pursuant to the effective date in 
section 13201(h) of the Act and section 168(k)(2)(A)(iii) and 
(k)(2)(B)(i)(II), 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, in the case of property described 
in section 168(k)(2)(B) or (C), before January 1, 2028. Because section 
13201 of the Act removed the rules regarding sale-leaseback 
transactions, the proposed regulations do not retain the placed-in-
service date rules in Sec.  1.168(k)-1(b)(5)(ii)(A) and (C) regarding 
such transactions, including a sale-leaseback transaction followed by a 
syndication transaction.
    Further, the proposed regulations provide rules for specified 
plants. Pursuant to section 168(k)(5)(A), if the taxpayer has made an 
election to apply section 168(k)(5) for a specified plant, the proposed 
regulations provide that the specified plant must be planted before 
January 1, 2027, or grafted before January 1, 2027, to a plant that has 
already been planted, by the taxpayer in the ordinary course of the 
taxpayer's farming business, as defined in section 263A(e)(4).
    Pursuant to section 168(k)(2)(H), 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 Sec.  1.181-1(a)(7), and a qualified live theatrical 
production is treated as placed in service at the time of the initial 
live staged performance. The proposed regulations also provide that the 
initial live staged performance of a qualified live theatrical 
production is the first commercial exhibition of a production to an 
audience. An initial live staged performance does not include limited 
exhibition, prior to commercial exhibition to general audiences, if the 
limited exhibition is primarily for purposes of publicity, determining 
the need for further production activity, or raising funds for the 
completion of production. For example, the initial live staged 
performance does not include a preview of the production if the preview 
is primarily to determine the need for further production activity.

5. Date of Acquisition

    The proposed regulations provide rules applicable to the 
acquisition requirements of the effective date under section 13201(h) 
of the Act. The proposed regulations provide that these rules apply to 
all property, including self-constructed property or property described 
in section 168(k)(2)(B) or (C).
A. Written Binding Contract
    Pursuant to section 13201(h)(1)(A) of the Act, the proposed 
regulations provide that the property must be acquired by the taxpayer 
after September 27, 2017, or, acquired by the taxpayer pursuant to a 
written binding contract entered into by the taxpayer after September 
27, 2017. Because of the clear language of section 13201(h)(1) of the 
Act regarding written binding contracts, 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 prior to 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. Further, if the written binding contract 
states the date on which the contract was entered into and a closing 
date, delivery date, or other similar date, the date on which the 
contract was entered into is the date the taxpayer acquired the 
property. The proposed regulations retain the rules in Sec.  1.168(k)-
1(b)(4)(ii) defining a binding contract. Additionally, the proposed 
regulations provide that a letter of intent for an acquisition is not a 
binding contract.
B. Self-Constructed Property
    If a taxpayer manufactures, constructs, or produces property for 
its own use, the Treasury Department and the IRS recognize that the 
written binding contract rule in section 13201(h)(1) of the Act does 
not apply. In such case, the proposed regulations provide that the 
acquisition rules in section 13201(h)(1) of the Act are treated as met 
if the taxpayer begins

[[Page 39298]]

manufacturing, constructing, or producing the property after September 
27, 2017. The proposed regulations provide rules similar to those in 
Sec.  1.168(k)-1(b)(4)(iii)(B) for defining when manufacturing, 
construction, or production begins, including the safe harbor, and in 
Sec.  1.168(k)-1(b)(4)(iii)(C) for a contract to acquire, or for the 
manufacture, construction, or production of, a component of the larger 
self-constructed property. As stated in the preceding paragraph, these 
self-constructed rules in the proposed regulations do not apply to 
property that is manufactured, constructed, or produced for the 
taxpayer by another person under a written binding contract that is 
entered into prior to the manufacture, construction, or production of 
the property.
C. Qualified Film, Television, or Live Theatrical Productions
    The proposed regulations also provide rules for qualified film, 
television, or live theatrical productions. For purposes of section 
13201(h)(1)(A) of the Act, the proposed regulations provide that a 
qualified film or television production is treated as acquired on the 
date principal photography commences, and a 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.
D. Specified Plants
    Pursuant to section 13201(h)(2) of the Act, if the taxpayer makes 
an election to apply section 168(k)(5) 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, as defined in section 
263A(e)(4).

6. Longer Production Period Property or Certain Aircraft Property

    The proposed regulations provide rules for determining when longer 
production period property or certain aircraft property described in 
section 168(k)(2)(B) or (C) meets the acquisition requirements of 
section 168(k)(2)(B)(i)(III) or (k)(2)(C)(i), as applicable. Pursuant 
to section 168(k)(2)(B)(i)(III) and (k)(2)(C)(i), the proposed 
regulations provide that property described in section 168(k)(2)(B) or 
(C) must be acquired by the taxpayer before January 1, 2027, or 
acquired by the taxpayer pursuant to a written binding contract that is 
entered into before January 1, 2027. These acquisition requirements are 
in addition to those in section 13201(h)(1) of the Act, which require 
acquisition to occur after September 27, 2017.
    The proposed regulations provide that the written binding contract 
rules for longer production period property and certain aircraft 
property are the same rules that apply for purposes of determining 
whether the acquisition requirements of section 13201(h)(1) of the Act 
are met.
    With respect to self-constructed property described in section 
168(k)(2)(B) or (C), the proposed regulations follow the acquisition 
rule in section 168(k)(2)(E)(i) for self-constructed property and 
provide that the acquisition requirements of section 
168(k)(2)(B)(i)(III) or (k)(2)(C)(i), as applicable, are met if a 
taxpayer manufactures, constructs, or produces the property for its own 
use and such manufacturing, construction, or productions begins before 
January 1, 2027. Further, only for purposes of section 
168(k)(2)(B)(i)(III) and (k)(2)(C)(i), the proposed regulations provide 
that property that is manufactured, constructed, or produced for the 
taxpayer by another person under a written binding contract that is 
entered into prior to 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 considered to be manufactured, constructed, 
or produced by the taxpayer. The proposed regulations also provide 
rules similar to those in Sec.  1.168(k)-1(b)(4)(iii)(B) for defining 
when manufacturing, construction, or production begins, including the 
same safe harbor, and in Sec.  1.168(k)-1(b)(4)(iii)(C) for a contract 
to acquire, or for the manufacture, construction, or production of, a 
component of the larger self-constructed property.

7. Computation of Additional First Year Depreciation Deduction and 
Otherwise Allowable Depreciation

    Pursuant to section 168(k)(1)(A), the proposed regulations provide 
that the allowable additional first year depreciation deduction for 
qualified property is equal to the applicable percentage (as defined in 
section 168(k)(6)) of the unadjusted depreciable basis (as defined in 
Sec.  1.168(b)-1(a)(3)) of the property. For qualified property 
described in section 168(k)(2)(B), the unadjusted depreciable basis (as 
defined in Sec.  1.168(b)-1(a)(3)) of the property is limited to the 
property's basis attributable to manufacture, construction, or 
production of the property before January 1, 2027, as provided in 
section 168(k)(2)(B)(ii).
    Pursuant to section 168(k)(2)(G), the proposed regulations also 
provide that the additional first year depreciation deduction is 
allowed for both regular tax and alternative minimum tax (AMT) 
purposes. However, for AMT purposes, the amount of the additional first 
year depreciation deduction is based on the unadjusted depreciable 
basis of the property for AMT purposes. The amount of the additional 
first year depreciation deduction is not affected by a taxable year of 
less than 12 months for either regular or AMT purposes.
    The proposed regulations provide rules similar to those in Sec.  
1.168(k)-1(d)(2) for determining the amount of depreciation otherwise 
allowable for qualified property. That is, before determining the 
amount of depreciation otherwise allowable for qualified property, the 
proposed regulations require the taxpayer to first reduce the 
unadjusted depreciable basis (as defined in Sec.  1.168(b)-1(a)(3)) of 
the property by the amount of the additional first year depreciation 
deduction allowed or allowable, whichever is greater (the remaining 
adjusted depreciable basis), as provided in section 168(k)(1)(B). Then, 
the remaining adjusted depreciable basis is depreciated using the 
applicable depreciation provisions of the Code for the property (for 
example, section 168 for MACRS property, section 167(f)(1) for computer 
software, and section 167 for film, television, or theatrical 
productions). This amount of depreciation is allowed for both regular 
tax and AMT purposes, and is affected by a taxable year of less than 12 
months. However, for AMT purposes, the amount of depreciation allowed 
is determined by calculating the remaining adjusted depreciable basis 
of the property for AMT purposes and using the same depreciation 
method, recovery period, and convention that applies to the property 
for regular tax purposes. If a taxpayer uses the optional depreciation 
tables in Rev. Proc. 87-57 (1987-2 C.B. 687) to compute depreciation 
for qualified property that is MACRS property, the proposed regulations 
also provide that the remaining adjusted depreciable basis of the 
property is the basis to which the annual depreciation rates in those 
tables apply.

8. Special Rules

    The proposed regulations also provide rules similar to those in 
Sec.  1.168(k)-1(f) for certain situations. However, the

[[Page 39299]]

special rules in Sec.  1.168(k)-1(f)(9) regarding the increase in basis 
due to a section 754 election are addressed in the proposed regulations 
regarding the used property acquisition requirements. Further, the 
special rules in Sec.  1.168(k)-1(f)(1)(iii) regarding property placed 
in service and transferred in a section 168(i)(7) transaction in the 
same taxable year, and in Sec.  1.168(k)-1(f)(5) regarding like-kind 
exchanges or involuntary conversions, are updated to reflect the used 
property acquisition requirements in section 168(k)(2)(E)(ii). The 
special rules in the proposed regulations also are updated to reflect 
the applicable dates under section 168(k), and the changes by the Act 
to technical terminations of partnerships and the rehabilitation 
credit.
    The proposed regulations provide rules for the following 
situations: (1) Qualified property placed in service or planted or 
grafted, as applicable, and disposed of in the same taxable year; (2) 
redetermination of basis of qualified property; (3) recapture of 
additional first year depreciation for purposes of section 1245 and 
section 1250; (4) a certified pollution control facility that is 
qualified property; (5) like-kind exchanges and involuntary conversions 
of qualified property; (6) a change in use of qualified property; (7) 
the computation of earnings and profits; (8) the increase in the 
limitation of the amount of depreciation for passenger automobiles; (9) 
the rehabilitation credit under section 47; and (10) computation of 
depreciation for purposes of section 514(a)(3).
    The proposed regulations provide a special rule for qualified 
property that is placed in service in a taxable year and then 
contributed to a partnership under section 721(a) in the same taxable 
year when one of the other partners previously had a depreciable 
interest in the property. Situation 1 of Rev. Rul. 99-5 (1999-1 C.B. 
434) is an example of such a fact pattern. Under Sec.  1.168(k)-
1(f)(1)(iii) and its cross-reference to Sec.  1.168(d)-1(b)(7)(ii), the 
additional first year depreciation deduction associated with the 
contributed property would be allocated between the contributing 
partner and the partnership based on the proportionate time the 
contributing partner and the partnership held the property throughout 
the taxable year. The partnership could then allocate a portion of the 
deduction to the partner with a previous depreciable interest in the 
property. The Treasury Department and the IRS believe that allocating 
any portion of the deduction to a partner who previously had a 
depreciable interest in the property would be inconsistent with section 
168(k)(2)(E)(ii)(I). Therefore, the proposed regulations provide that, 
in this situation, the additional first year depreciation deduction 
with respect to the contributed property is not allocated under the 
general rules of Sec.  1.168(d)-1(b)(7)(ii). Instead, the additional 
first year depreciation deduction is allocated entirely to the 
contributing partner prior to the section 721(a) transaction and not to 
the partnership.
    With respect to like-kind exchanges and involuntary conversions, 
Sec.  1.168(k)-1(f)(5) provides that the exchanged basis and excess 
basis, if any, of the replacement property is eligible for the 
additional first year depreciation deduction if the replacement 
property is qualified property. The proposed regulations retain this 
rule if the replacement property also meets the original use 
requirement. Pursuant to section 168(k)(2)(E)(ii)(II) and its cross-
reference to section 179(d)(3), the proposed regulations also provide 
that only the excess basis, if any, of the replacement property is 
eligible for the additional first year depreciation deduction if the 
replacement property is qualified property and also meets the used 
property acquisition requirements. These rules also apply when a 
taxpayer makes the election under Sec.  1.168(i)-6(i)(1) to treat, for 
depreciation purposes only, the total of the exchanged basis and excess 
basis, if any, in the replacement MACRS property as property placed in 
service by the taxpayer at the time of replacement and the adjusted 
depreciable basis of the relinquished MACRS property as disposed of by 
the taxpayer at the time of disposition. The proposed regulations also 
retain the other rules in Sec.  1.168(k)-1(f)(5) for like-kind 
exchanges and involuntary conversions, but update the definitions to be 
consistent with the definitions in Sec.  1.168(i)-6, which addresses 
how to compute depreciation of property involved in like-kind exchanges 
or involuntary conversions.

Proposed Applicability Date

    These regulations are proposed to apply to qualified property 
placed in service or planted or grafted, as applicable, by the taxpayer 
during or after the taxpayer's taxable year that includes the date of 
publication of a Treasury decision adopting these rules as final 
regulations in the Federal Register. Pending the issuance of the final 
regulations, a taxpayer may choose to apply these proposed regulations 
to qualified property acquired and placed in service or planted or 
grafted, as applicable, after September 27, 2017, by the taxpayer 
during taxable years ending on or after September 28, 2017.

Special Analyses

    The Administrator of the Office of Information and Regulatory 
Affairs (OIRA), Office of Management and Budget, has waived review of 
this proposed rule in accordance with section 6(a)(3)(A) of Executive 
Order 12866. OIRA will subsequently make a significance determination 
of the final rule, pursuant to section 3(f) of Executive Order (E.O.) 
12866 and the April 11, 2018, Memorandum of Agreement between the 
Department of Treasury and the Office of Management and Budget (OMB).
    The proposed regulations do not impose a collection of information 
on small entities and provide clarifying rules for taxpayers to enjoy 
the tax benefit of 100-percent additional first year depreciation as 
provided by the amendments to section 168 by the Act. Therefore, a 
regulatory flexibility analysis is not required under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6). Pursuant to section 7805(f) of 
the Code, this notice of proposed rulemaking will be submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed rules. All comments will be available at http://www.regulations.gov or upon request. A public hearing will be scheduled 
if requested in writing by any person that timely submits written 
comments. If a public hearing is scheduled, notice of the date, time, 
and place for the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal authors of these proposed regulations are Kathleen 
Reed and Elizabeth R. Binder of the Office of Associate Chief Counsel 
(Income Tax and Accounting). However, other personnel from the Treasury 
Department and the IRS participated in their development.

Statement of Availability

    The IRS Revenue Procedures and Revenue Rulings cited in this 
document are published in the Internal Revenue Bulletin (or Cumulative 
Bulletin) and are available from the Superintendent of Documents, U.S. 
Government

[[Page 39300]]

Publishing Office, Washington, DC 20402, or by visiting the IRS website 
at http://www.irs.gov.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
 Paragraph 1. The authority citation for part 1 is amended by adding an 
entry for Sec.  1.168(k)--2 in numerical order to read in part as 
follows:


     Authority: 26 U.S.C. 7805 * * *
* * * * *
    Section 1.168(k)-2 also issued under 26 U.S.C. 1502.
* * * * *
0
 Par. 2. Section 1.48-12 is amended by:
0
 1. In the last sentence in paragraph (a)(2)(i), removing ``The last 
sentence'' and adding ``The next to last sentence'' in its place;
0
 2. Adding two sentences at the end of paragraph (a)(2)(i); and
0
 3. Adding a sentence to the end of paragraph (c)(8)(i).
    The additions read as follows:


Sec.  1.48-12   Qualified rehabilitated building; expenditures incurred 
after December 31, 1981.

    (a) * * *
    (2) * * *
    (i) * * * The last sentence of paragraph (c)(8)(i) of this section 
applies to qualified rehabilitation expenditures that are qualified 
property under section 168(k)(2) and placed in service by a taxpayer 
during or after the taxpayer's taxable year that includes the date of 
publication of a Treasury decision adopting these rules as final 
regulations in the Federal Register. However, a taxpayer may rely on 
the last sentence in paragraph (c)(8)(i) of this section in these 
proposed regulations for qualified rehabilitation expenditures that are 
qualified property under section 168(k)(2) and acquired and placed in 
service after September 27, 2017, by the taxpayer during taxable years 
ending on or after September 28, 2017, and ending before the taxpayer's 
taxable year that includes the date of publication of a Treasury 
decision adopting these rules as final regulations in the Federal 
Register.
* * * * *
    (c) * * *
    (8) * * *
    (i) * * * Further, see Sec.  1.168(k)-2(f)(9) if the qualified 
rehabilitation expenditures are qualified property under section 
168(k), as amended by the Tax Cuts and Jobs Act, Public Law 115-97 (131 
Stat. 2054 (December 22, 2017)).
* * * * *
0
Par. 3. Section 1.167(a)-14 is amended by:
0
1. In the third sentence in paragraph (b)(1), removing ``under section 
168(k)(2) or Sec.  1.168(k)-1,'' and adding ``under section 168(k)(2) 
and Sec.  1.168(k)-1 or 1.168(k)-2, as applicable,'' in its place;
0
2. In the last sentence in paragraph (e)(3), removing ``and before 
2010''; and
0
3. Adding two sentences at the end of paragraph (e)(3).
    The addition reads as follows:


Sec.  1.167(a)-14  Treatment of certain intangible property excluded 
from section 197.

* * * * *
    (e) * * *
    (3) * * * The language ``or Sec.  1.168(k)-2, as applicable,'' in 
the third sentence in paragraph (b)(1) of this section applies to 
computer software that is qualified property under section 168(k)(2) 
and placed in service by a taxpayer during or after the taxpayer's 
taxable year that includes the date of publication of a Treasury 
decision adopting these rules as final regulations in the Federal 
Register. However, a taxpayer may rely on the language ``or Sec.  
1.168(k)-2, as applicable,'' in the third sentence in paragraph (b)(1) 
of this section in these proposed regulations for computer software 
that is qualified property under section 168(k)(2) and acquired and 
placed in service after September 27, 2017, by the taxpayer during 
taxable years ending on or after September 28, 2017, and ending before 
the taxpayer's taxable year that includes the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register.
0
Par. 4. Section 1.168(b)-1 is amended by adding paragraph (a)(5) and 
revising paragraph (b) to read as follows:


Sec.  1.168(b)-1   Definitions.

    (a) * * *
    (5) Qualified improvement property--(i) Is any improvement that is 
section 1250 property to an interior portion of a building, as defined 
in Sec.  1.48-1(e)(1), that is nonresidential real property, as defined 
in section 168(e)(2)(B), if the improvement is placed in service by the 
taxpayer after the date the building was first placed in service by any 
person and if--
    (A) For purposes of section 168(e)(6), the improvement is placed in 
service by the taxpayer after December 31, 2017;
    (B) For purposes of section 168(k)(3) as in effect on the day 
before amendment by section 13204(a)(4)(B) of the Tax Cuts and Jobs 
Act, Public Law 115-97 (131 Stat. 2054 (December 22, 2017)) (``Act''), 
the improvement is acquired by the taxpayer before September 28, 2017, 
the improvement is placed in service by the taxpayer before January 1, 
2018, and the improvement meets the original use requirement in section 
168(k)(2)(A)(ii) as in effect on the day before amendment by section 
13201(c)(1) of the Act; or
    (C) For purposes of section 168(k)(3) as in effect on the day 
before amendment by section 13204(a)(4)(B) of the Act, the improvement 
is acquired by the taxpayer after September 27, 2017; the improvement 
is placed in service by the taxpayer after September 27, 2017, and 
before January 1, 2018; and the improvement meets the requirements in 
section 168(k)(2)(A)(ii) as amended by section 13201(c)(1) of the Act; 
and
    (ii) Does not include any qualified improvement for which an 
expenditure is attributable to--
    (A) The enlargement, as defined in Sec.  1.48-12(c)(10), of the 
building;
    (B) Any elevator or escalator, as defined in Sec.  1.48-1(m)(2); or
    (C) The internal structural framework, as defined in Sec.  1.48-
12(b)(3)(iii), of the building.
    (b) Effective date--(1) In general. Except as provided in paragraph 
(b)(2) of this section, this section is applicable on or after February 
27, 2004.
    (2) Application of paragraph (a)(5) of this section--(i) In 
general. Except as provided in paragraph (b)(2)(ii) of this section, 
paragraph (a)(5) of this section is applicable on or after the date of 
publication of a Treasury decision adopting these rules as final 
regulations in the Federal Register.
    (ii) Early application of paragraph (a)(5) of this section. A 
taxpayer may rely on the provisions of paragraph (a)(5) of this section 
in these proposed regulations for the taxpayer's taxable years ending 
on or after September 28, 2017, and ending before the taxpayer's 
taxable year that includes the date of publication of a Treasury 
decision adopting these rules as final regulations in the Federal 
Register.
0
Par. 5. Section 1.168(d)-1 is amended by:
0
1. Adding a sentence at the end of paragraph (b)(3)(ii);
0
2. Adding a sentence at the end of paragraph (b)(7)(ii); and
0
3. Adding two sentences at the end of paragraph (d)(2).
    The additions read as follows:

[[Page 39301]]

Sec.  1.168(d)-1  Applicable conventions--half-year and mid-quarter 
conventions.

* * * * *
    (b) * * *
    (3) * * *
    (ii) * * * Further, see Sec.  1.168(k)-2(f)(1) for rules relating 
to qualified property under section 168(k), as amended by the Tax Cuts 
and Jobs Act, Public Law 115-97 (131 Stat. 2054 (December 22, 2017)), 
that is placed in service by the taxpayer in the same taxable year in 
which either a partnership is terminated as a result of a technical 
termination under section 708(b)(1)(B) or the property is transferred 
in a transaction described in section 168(i)(7).
* * * * *
    (7) * * *
    (ii) * * * However, see Sec.  1.168(k)-2(f)(1)(iii) for a special 
rule regarding the allocation of the additional first year depreciation 
deduction in the case of certain contributions of property to a 
partnership under section 721.
* * * * *
    (d) * * *
    (2) * * * The last sentences in paragraphs (b)(3)(ii) and 
(b)(7)(ii) of this section apply to qualified property under section 
168(k)(2) placed in service by a taxpayer during or after the 
taxpayer's taxable year that includes the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register. However, a taxpayer may rely on the last sentences in 
paragraphs (b)(3)(ii) and (b)(7)(ii) of this section in these proposed 
regulations for qualified property under section 168(k)(2) acquired and 
placed in service after September 27, 2017, by the taxpayer during 
taxable years ending on or after September 28, 2017, and ending before 
the taxpayer's taxable year that includes the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register.
* * * * *
0
Par. 6. Section 1.168(i)-4 is amended by:
0
1. In the penultimate sentence in paragraph (b)(1), removing 
``Sec. Sec.  1.168(k)-1T(f)(6)(iii) and 1.1400L(b)-1T(f)(6)'' and 
adding ``Sec.  1.168(k)-1(f)(6)(iii) or 1.168(k)-2(f)(6)(iii), as 
applicable, and Sec.  1.1400L(b)-1(f)(6)'' in its place;
0
2. In the fifth sentence in paragraph (c), removing ``Sec. Sec.  
1.168(k)-1T(f)(6)(ii) and 1.1400L(b)-1T(f)(6)'' and adding ``Sec.  
1.168(k)-1(f)(6)(ii) or 1.168(k)-2(f)(6)(ii), as applicable, and Sec.  
1.1400L(b)-1(f)(6)'' in its place;
0
3. In the second sentence in paragraph (d)(3)(i)(C), removing 
``Sec. Sec.  1.168(k)-1T(f)(6)(iv) and 1.400L(b)-1T(f)(6)'' and adding 
``Sec.  1.168(k)-1(f)(6)(iv) or 1.168(k)-2(f)(6)(iv), as applicable, 
and Sec.  1.400L(b)-1(f)(6)'' in its place;
0
4. In the last sentence in paragraph (d)(4)(i), removing ``Sec. Sec.  
1.168(k)-1T(f)(6)(iv) and 1.1400L(b)-1T(f)(6)'' and adding ``Sec.  
1.168(k)-1(f)(6)(iv) or 1.168(k)-2(f)(6)(iv), as applicable, and Sec.  
1.400L(b)-1(f)(6)'' in its place;
0
5. Revising the first sentence in paragraph (g)(1); and
0
6. Redesignating paragraph (g)(2) as paragraph (g)(3) and adding new 
paragraph (g)(2).
    The addition and revision read as follows:


Sec.  1.168(i)-4  Changes in use.

* * * * *
    (g) * * *
    (1) * * * Except as provided in paragraph (g)(2) of this section, 
this section applies to any change in the use of MACRS property in a 
taxable year ending on or after June 17, 2004. * * *
    (2) Qualified property under section 168(k) acquired and placed in 
service after September 27, 2017. The language ``or Sec.  1.168(k)-
2(f)(6)(iii), as applicable'' in paragraph (b)(1) of this section, the 
language ``or Sec.  1.168(k)-2(f)(6)(ii), as applicable'' in paragraph 
(c) of this section, and the language ``or Sec.  1.168(k)-2(f)(6)(iv), 
as applicable'' in paragraphs (d)(3)(i)(C) and (d)(4)(i) of this 
section applies to any change in use of MACRS property, which is 
qualified property under section 168(k)(2), by a taxpayer during or 
after the taxpayer's taxable year that includes the date of publication 
of a Treasury decision adopting these rules as final regulations in the 
Federal Register. However, a taxpayer may rely on the language ``or 
Sec.  1.168(k)-2(f)(6)(iii), as applicable'' in paragraph (b)(1) of 
this section, the language ``or Sec.  1.168(k)-2(f)(6)(ii), as 
applicable'' in paragraph (c) of this section, and the language ``or 
Sec.  1.168(k)-2(f)(6)(iv), as applicable'' in paragraphs (d)(3)(i)(C) 
and (d)(4)(i) of this section in these proposed regulations for any 
change in use of MACRS property, which is qualified property under 
section 168(k)(2) and acquired and placed in service after September 
27, 2017, by the taxpayer during taxable years ending on or after 
September 28, 2017, and ending before the taxpayer's taxable year that 
includes the date of publication of a Treasury decision adopting these 
rules as final regulations in the Federal Register.
* * * * *
0
Par. 7. Section 1.168(i)-6 is amended by:
0
1. In paragraph (d)(3)(ii)(B), removing ``1.168(k)-1(f)(5) or Sec.  
1.1400L(b)-1(f)(5)'' wherever it appears and adding ``1.168(k)-1(f)(5), 
1.168(k)-2(f)(5), or 1.1400L(b)-1(f)(5)'' in its place;
0
2. In paragraph (d)(3)(ii)(E), removing ``1.168(k)-1(f)(5) or Sec.  
1.1400L(b)-1(f)(5)'' and adding ``1.168(k)-1(f)(5), 1.168(k)-2(f)(5), 
or 1.1400L(b)-1(f)(5)'' in its place;
0
3. Adding a sentence at the end of paragraph (d)(4);
0
4. Adding a sentence at the end of paragraph (h); and
0
5. Adding paragraph (k)(4).
    The additions read as follows:


Sec.  1.168(i)-6  Like-kind exchanges and involuntary conversions.

* * * * *
    (d) * * *
    (4) * * * Further, see Sec.  1.168(k)-2(f)(5)(iv) for replacement 
MACRS property that is qualified property under section 168(k), as 
amended by the Tax Cuts and Jobs Act, Public Law 115-97 (131 Stat. 2054 
(December 22, 2017)).
* * * * *
    (h) * * * Further, see Sec.  1.168(k)-2(f)(5) for qualified 
property under section 168(k), as amended by the Tax Cuts and Jobs Act, 
Public Law 115-97 (131 Stat. 2054 (December 22, 2017)).
* * * * *
    (k) * * *
    (4) Qualified property under section 168(k) acquired and placed in 
service after September 27, 2017. The language ``1.168(k)-2(f)(5),'' in 
paragraphs (d)(3)(ii)(B) and (E) of this section and the last sentences 
in paragraphs (d)(4) and (h) of this section apply to a like-kind 
exchange or an involuntary conversion of MACRS property, which is 
qualified property under section 168(k)(2), for which the time of 
replacement occurs on or after the date of publication of a Treasury 
decision adopting these rules as final regulations in the Federal 
Register. However, a taxpayer may rely on the language ``1.168(k)-
2(f)(5),'' in paragraphs (d)(3)(ii)(B) and (E) of this section and the 
last sentences in paragraphs (d)(4) and (h) of this section in these 
proposed regulations for a like-kind exchange or an involuntary 
conversion of MACRS property, which is qualified property under section 
168(k)(2), for which the time of replacement occurs on or after 
September 28, 2017, and occurs before the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register.
0
Par. 8. Section 1.168(k)-0 is amended by revising the introductory text 
and adding an entry for Sec.  1.168(k)-2 in numerical order to the 
table of contents to read as follows:

[[Page 39302]]

Sec.  1.168(k)-0  Table of contents.

    This section lists the major paragraphs contained in Sec. Sec.  
1.168(k)-1 and 1.168(k)-2.
* * * * *


Sec.  1.168(k)-2  Additional first year depreciation deduction for 
property acquired and placed in service after September 27, 2017.

    (a) Scope and definitions.
    (1) Scope.
    (2) Definitions.
    (b) Qualified property.
    (1) In general.
    (2) Description of qualified property.
    (i) In general.
    (ii) Property not eligible for additional first year depreciation 
deduction.
    (3) Original use or used property acquisition requirements.
    (i) In general.
    (ii) Original use.
    (A) In general.
    (B) Conversion to business or income-producing use.
    (C) Fractional interests in property.
    (iii) Used property acquisition requirements.
    (A) In general.
    (B) Property was not used by the taxpayer at any time prior to 
acquisition.
    (C) Special rules for a series of related transactions.
    (iv) Application to partnerships.
    (A) Section 704(c) remedial allocations.
    (B) Basis determined under section 732.
    (C) Section 734(b) adjustments.
    (D) Section 743(b) adjustments.
    (v) Syndication transaction.
    (vi) Examples.
    (4) Placed-in-service date.
    (i) In general.
    (ii) Specified plant.
    (iii) Qualified film, television, or live theatrical production.
    (iv) Syndication transaction.
    (v) Technical termination of a partnership.
    (vi) Section 168(i)(7) transactions.
    (5) Acquisition of property.
    (i) In general.
    (ii) Acquisition date.
    (iii) Definition of binding contract.
    (A) In general.
    (B) Conditions.
    (C) Options.
    (D) Letter of intent.
    (E) Supply agreements.
    (F) Components.
    (iv) Self-constructed property.
    (A) In general.
    (B) When does manufacture, construction, or production begin.
    (C) Components of self-constructed property.
    (v) Qualified film, television, or live theatrical production.
    (vi) Specified plant.
    (vii) Examples.
    (c) Property described in section 168(k)(2)(B) or (C).
    (1) In general.
    (2) Definition of binding contract.
    (3) Self-constructed property.
    (i) In general.
    (ii) When does manufacture, construction, or production begin.
    (A) In general.
    (B) Safe harbor.
    (iii) Components of self-constructed property.
    (A) Acquired components.
    (B) Self-constructed components.
    (iv) Examples.
    (d) Computation of depreciation deduction for qualified property.
    (1) Additional first year depreciation deduction.
    (i) Allowable taxable year.
    (ii) Computation.
    (iii) Property described in section 168(k)(2)(B).
    (iv) Alternative minimum tax.
    (A) In general.
    (B) Special rules.
    (2) Otherwise allowable depreciation deduction.
    (i) In general.
    (ii) Alternative minimum tax.
    (3) Examples.
    (e) Elections under section 168(k).
    (1) Election not to deduct additional first year depreciation.
    (i) In general.
    (ii) Definition of class of property.
    (iii) Time and manner for making election.
    (A) Time for making election.
    (B) Manner of making election.
    (iv) Failure to make election.
    (2) Election to apply section 168(k)(5) for specified plants.
    (i) In general.
    (ii) Time and manner for making election.
    (A) Time for making election.
    (B) Manner of making election.
    (iii) Failure to make election.
    (3) Election for qualified property placed in service during the 
2017 taxable year.
    (i) In general.
    (ii) Time and manner for making election.
    (A) Time for making election.
    (B) Manner of making election.
    (iii) Failure to make election.
    (4) Alternative minimum tax.
    (5) Revocation of election.
    (i) In general.
    (ii) Automatic 6-month extension.
    (f) Special rules.
    (1) Property placed in service and disposed of in the same taxable 
year.
    (i) In general.
    (ii) Technical termination of a partnership.
    (iii) Section 168(i)(7) transactions.
    (iv) Examples.
    (2) Redetermination of basis.
    (i) Increase in basis.
    (ii) Decrease in basis.
    (iii) Definitions.
    (iv) Examples.
    (3) Sections 1245 and 1250 depreciation recapture.
    (4) Coordination with section 169.
    (5) Like-kind exchanges and involuntary conversions.
    (i) Scope.
    (ii) Definitions.
    (iii) Computation.
    (A) In general.
    (B) Year of disposition and year of replacement.
    (C) Property described in section 168(k)(2)(B).
    (D) Effect of Sec.  1.168(i)-6(i)(1) election.
    (E) Alternative minimum tax.
    (iv) Replacement MACRS property or replacement computer software 
that is acquired and placed in service before disposition of 
relinquished MACRS property or relinquished computer software.
    (v) Examples.
    (6) Change in use.
    (i) Change in use of depreciable property.
    (ii) Conversion to personal use.
    (iii) Conversion to business or income-producing use.
    (A) During the same taxable year.
    (B) Subsequent to the acquisition year.
    (iv) Depreciable property changes use subsequent to the placed-in-
service year.
    (v) Examples.
    (7) Earnings and profits.
    (8) Limitation of amount of depreciation for certain passenger 
automobiles.
    (9) Coordination with section 47.
    (i) In general.
    (ii) Example.
    (10) Coordination with section 514(a)(3).
    (g) Applicability dates.
    (1) In general.
    (2) Early application.
0
Par. 9. Section 1.168(k)-2 is added to read as follows:


Sec.  1.168 (k)-2   Additional first year depreciation deduction for 
property acquired and placed in service after September 27, 2017.

    (a) Scope and definitions--(1) Scope. This section provides rules 
for determining the additional first year depreciation deduction 
allowable under section 168(k) for qualified property

[[Page 39303]]

acquired and placed in service after September 27, 2017.
    (2) Definitions. For purposes of this section--
    (i) Act is the Tax Cuts and Jobs Act, Public Law 115-97 (131 Stat. 
2054 (December 22, 2017)); and
    (ii) Applicable percentage is the percentage provided in section 
168(k)(6).
    (b) Qualified property--(1) In general. Qualified property is 
depreciable property, as defined in Sec.  1.168(b)-1(a)(1), that meets 
all the following requirements in the first taxable year in which the 
property is subject to depreciation by the taxpayer whether or not 
depreciation deductions for the property are allowable:
    (i) The requirements in Sec.  1.168(k)-2(b)(2) (description of 
qualified property);
    (ii) The requirements in Sec.  1.168(k)-2(b)(3) (original use or 
used property acquisition requirements);
    (iii) The requirements in Sec.  1.168(k)-2(b)(4) (placed-in-service 
date); and
    (iv) The requirements in Sec.  1.168(k)-2(b)(5) (acquisition of 
property).
    (2) Description of qualified property--(i) In general. Depreciable 
property will meet the requirements of this paragraph (b)(2) if the 
property is--
    (A) MACRS property, as defined in Sec.  1.168(b)-1(a)(2), that has 
a recovery period of 20 years or less. For purposes of this paragraph 
(b)(2)(i)(A) and section 168(k)(2)(A)(i)(I), the recovery period is 
determined in accordance with section 168(c) regardless of any election 
made by the taxpayer under section 168(g)(7). This paragraph 
(b)(2)(i)(A) includes the following MACRS property that is acquired by 
the taxpayer after September 27, 2017, and placed in service by the 
taxpayer after September 27, 2017, and before January 1, 2018:
    (1) Qualified leasehold improvement property as defined in section 
168(e)(6) as in effect on the day before amendment by section 
13204(a)(1) of the Act;
    (2) Qualified restaurant property, as defined in section 168(e)(7) 
as in effect on the day before amendment by section 13204(a)(1) of the 
Act, that is qualified improvement property as defined in Sec.  
1.168(b)-1(a)(5)(i)(C) and (a)(5)(ii); and
    (3) Qualified retail improvement property as defined in section 
168(e)(8) as in effect on the day before amendment by section 
13204(a)(1) of the Act;
    (B) Computer software as defined in, and depreciated under, section 
167(f)(1) and the regulations under section 167(f)(1);
    (C) Water utility property as defined in section 168(e)(5) and 
depreciated under section 168;
    (D) Qualified improvement property as defined in Sec.  1.168(b)-
1(a)(5)(i)(C) and (a)(5)(ii) and depreciated under section 168;
    (E) Qualified film or television production, as defined in section 
181(d) and Sec.  1.181-3, for which a deduction would have been 
allowable under section 181 without regard to section 181(a)(2) and 
(g), or section 168(k);
    (F) Qualified live theatrical production, as defined in section 
181(e), for which a deduction would have been allowable under section 
181 without regard to section 181(a)(2) and (g), or section 168(k); or
    (G) A specified plant, as defined in section 168(k)(5)(B), for 
which the taxpayer has properly made an election to apply section 
168(k)(5) for the taxable year in which the specified plant is planted, 
or grafted to a plant that has already been planted, by the taxpayer in 
the ordinary course of the taxpayer's farming business, as defined in 
section 263A(e)(4) (for further guidance, see paragraph (e) of this 
section).
    (ii) Property not eligible for additional first year depreciation 
deduction. Depreciable property will not meet the requirements of this 
paragraph (b)(2) if the property is--
    (A) Described in section 168(f) (for example, automobiles for which 
the taxpayer uses the optional business standard mileage rate);
    (B) Required to be depreciated under the alternative depreciation 
system of section 168(g) pursuant to section 168(g)(1)(A), (B), (C), 
(D), (F), or (G), or other provisions of the Internal Revenue Code (for 
example, property described in section 263A(e)(2)(A) if the taxpayer or 
any related person, as defined in section 263A(e)(2)(B), has made an 
election under section 263A(d)(3), or property described in section 
280F(b)(1));
    (C) Included in any class of property for which the taxpayer elects 
not to deduct the additional first year depreciation (for further 
guidance, see paragraph (e) of this section);
    (D) A specified plant that is placed in service by the taxpayer 
during the taxable year and for which the taxpayer made an election to 
apply section 168(k)(5) for a prior taxable year;
    (E) Included in any class of property for which the taxpayer elects 
to apply section 168(k)(4). This paragraph (b)(2)(ii)(E) applies to 
property placed in service in any taxable year beginning before January 
1, 2018;
    (F) Described in section 168(k)(9)(A) and placed in service in any 
taxable year beginning after December 31, 2017; or
    (G) Described in section 168(k)(9)(B) and placed in service in any 
taxable year beginning after December 31, 2017.
    (3) Original use or used property acquisition requirements--(i) In 
general. Depreciable property will meet the requirements of this 
paragraph (b)(3) if the property meets the original use requirements in 
paragraph (b)(3)(ii) of this section or if the property meets the used 
property acquisition requirements in paragraph (b)(3)(iii) of this 
section.
    (ii) Original use--(A) In general. Depreciable property will meet 
the requirements of this paragraph (b)(3)(ii) if the original use of 
the property commences with the taxpayer. Except as provided in 
paragraphs (b)(3)(ii)(B) and (C) of this section, original use means 
the first use to which the property is put, whether or not that use 
corresponds to the use of the property by the taxpayer. Additional 
capital expenditures incurred by a taxpayer to recondition or rebuild 
property acquired or owned by the taxpayer satisfy the original use 
requirement. However, the cost of reconditioned or rebuilt property 
does not satisfy the original use requirement (but may satisfy the used 
property acquisition requirements in paragraph (b)(3)(iii) of this 
section). The question of whether property is reconditioned or rebuilt 
property is a question of fact. For purposes of this paragraph 
(b)(3)(ii)(A), property that contains used parts will not be treated as 
reconditioned or rebuilt if the cost of the used parts is not more than 
20 percent of the total cost of the property, whether acquired or self-
constructed.
    (B) Conversion to business or income-producing use--(1) Personal 
use to business or income-producing use. If a taxpayer initially 
acquires new property for personal use and subsequently uses the 
property in the taxpayer's trade or business or for the taxpayer's 
production of income, the taxpayer is considered the original user of 
the property. If a person initially acquires new property for personal 
use and a taxpayer subsequently acquires the property from the person 
for use in the taxpayer's trade or business or for the taxpayer's 
production of income, the taxpayer is not considered the original user 
of the property.
    (2) Inventory to business or income-producing use. If a taxpayer 
initially acquires new property and holds the property primarily for 
sale to customers in the ordinary course of the taxpayer's business and 
subsequently withdraws the property from inventory and uses the 
property primarily in the taxpayer's trade or business or primarily for 
the

[[Page 39304]]

taxpayer's production of income, the taxpayer is considered the 
original user of the property. If a person initially acquires new 
property and holds the property primarily for sale to customers in the 
ordinary course of the person's business and a taxpayer subsequently 
acquires the property from the person for use primarily in the 
taxpayer's trade or business or primarily for the taxpayer's production 
of income, the taxpayer is considered the original user of the 
property. For purposes of this paragraph (b)(3)(ii)(B)(2), the original 
use of the property by the taxpayer commences on the date on which the 
taxpayer uses the property primarily in the taxpayer's trade or 
business or primarily for the taxpayer's production of income.
    (C) Fractional interests in property. If, in the ordinary course of 
its business, a taxpayer sells fractional interests in new property to 
third parties unrelated to the taxpayer, each first fractional owner of 
the property is considered as the original user of its proportionate 
share of the property. Furthermore, if the taxpayer uses the property 
before all of the fractional interests of the property are sold but the 
property continues to be held primarily for sale by the taxpayer, the 
original use of any fractional interest sold to a third party unrelated 
to the taxpayer subsequent to the taxpayer's use of the property begins 
with the first purchaser of that fractional interest. For purposes of 
this paragraph (b)(3)(ii)(C), persons are not related if they do not 
have a relationship described in section 267(b) or 707(b) and the 
regulations under section 267(b) or 707(b).
    (iii) Used property acquisition requirements--(A) In general. 
Depreciable property will meet the requirements of this paragraph 
(b)(3)(iii) if the acquisition of the used property meets the following 
requirements:
    (1) Such property was not used by the taxpayer or a predecessor at 
any time prior to such acquisition;
    (2) The acquisition of such property meets the requirements of 
section 179(d)(2)(A), (B), and (C), and Sec.  1.179-4(c)(1)(ii), (iii), 
and (iv), or 1.179-4(c)(2) (property is acquired by purchase); and
    (3) The acquisition of such property meets the requirements of 
section 179(d)(3) and Sec.  1.179-4(d) (cost of property) (for further 
guidance regarding like-kind exchanges and involuntary conversions, see 
paragraph (f)(5) of this section).
    (B) Property was not used by the taxpayer at any time prior to 
acquisition--(1) In general. Solely for purposes of paragraph 
(b)(3)(iii)(A)(1) of this section, the property is treated as used by 
the taxpayer or a predecessor at any time prior to acquisition by the 
taxpayer or predecessor if the taxpayer or the predecessor had a 
depreciable interest in the property at any time prior to such 
acquisition, whether or not the taxpayer or the predecessor claimed 
depreciation deductions for the property. If a lessee has a depreciable 
interest in the improvements made to leased property and subsequently 
the lessee acquires the leased property of which the improvements are a 
part, the unadjusted depreciable basis, as defined in Sec.  1.168(b)-
1(a)(3), of the acquired property that is eligible for the additional 
first year depreciation deduction, assuming all other requirements are 
met, must not include the unadjusted depreciable basis attributable to 
the improvements.
    (2) Taxpayer has a depreciable interest in a portion of the 
property. If a taxpayer initially acquires a depreciable interest in a 
portion of the property and subsequently acquires a depreciable 
interest in an additional portion of the same property, such additional 
depreciable interest is not treated as used by the taxpayer at any time 
prior to its acquisition by the taxpayer. This paragraph 
(b)(3)(iii)(B)(2) does not apply if the taxpayer or a predecessor 
previously had a depreciable interest in the subsequently acquired 
additional portion. For purposes of this paragraph (b)(3)(iii)(B)(2), a 
portion of the property is considered to be the percentage interest in 
the property. If a taxpayer holds a depreciable interest in a portion 
of the property, sells that portion or a part of that portion, and 
subsequently acquires a depreciable interest in another portion of the 
same property, the taxpayer will be treated as previously having a 
depreciable interest in the property up to the amount of the portion 
for which the taxpayer held a depreciable interest in the property 
before the sale.
    (3) Application to members of a consolidated group--(i) Same 
consolidated group. Solely for purposes of applying paragraph 
(b)(3)(iii)(A)(1) of this section, if a member of a consolidated group, 
as defined in Sec.  1.1502-1(h), acquires depreciable property in which 
the consolidated group had a depreciable interest at any time prior to 
the member's acquisition of the property, the member will be treated as 
having a depreciable interest in the property prior to the acquisition. 
For purposes of this paragraph (b)(3)(iii)(B)(3)(i), a consolidated 
group will be treated as having a depreciable interest in property 
during the time any current or previous member of the group had a 
depreciable interest in the property while a member of the group.
    (ii) Certain acquisitions pursuant to a series of related 
transactions. Solely for purposes of applying paragraph 
(b)(3)(iii)(A)(1) of this section, if a series of related transactions 
includes one or more transactions in which property is acquired by a 
member of a consolidated group and one or more transactions in which a 
corporation that had a depreciable interest in the property becomes a 
member of the group, the member that acquires the property will be 
treated as having a depreciable interest in the property prior to the 
time of its acquisition.
    (iii) Time for testing membership. Solely for purposes of applying 
paragraph (b)(3)(iii)(B)(3)(i) and (ii) of this section, if a series of 
related transactions includes one or more transactions in which 
property is acquired by a member of a consolidated group and one or 
more transactions in which the transferee of the property ceases to be 
a member of a consolidated group, whether the taxpayer is a member of a 
consolidated group is tested immediately after the last transaction in 
the series.
    (C) Special rules for a series of related transactions. Solely for 
purposes of section 168(k)(2)(E)(ii) and paragraph (b)(3)(iii)(A) of 
this section, in the case of a series of related transactions (for 
example, a series of related transactions including the transfer of a 
partnership interest, the transfer of partnership assets, or the 
disposition of property and the disposition, directly or indirectly, of 
the transferor or transferee of the property)--
    (1) The property is treated as directly transferred from the 
original transferor to the ultimate transferee; and
    (2) The relation between the original transferor and the ultimate 
transferee is tested immediately after the last transaction in the 
series.
    (iv) Application to partnerships--(A) Section 704(c) remedial 
allocations. Remedial allocations under section 704(c) do not satisfy 
the requirements of paragraph (b)(3) of this section. See Sec.  1.704-
3(d)(2).
    (B) Basis determined under section 732. Any basis of distributed 
property determined under section 732 does not satisfy the requirements 
of paragraph (b)(3) of this section.
    (C) Section 734(b) adjustments. Any increase in basis of 
depreciable property under section 734(b) does not satisfy the 
requirements of paragraph (b)(3) of this section.
    (D) Section 743(b) adjustments--(1) In general. For purposes of 
determining whether the transfer of a partnership

[[Page 39305]]

interest meets the requirements of paragraph (b)(3)(iii)(A) of this 
section, each partner is treated as having a depreciable interest in 
the partner's proportionate share of partnership property. Any increase 
in basis of depreciable property under section 743(b) satisfies the 
requirements of paragraph (b)(3)(iii)(A) of this section if--
    (i) At any time prior to the transfer of the partnership interest 
that gave rise to such basis increase, neither the transferee partner 
nor a predecessor of the transferee partner had any depreciable 
interest in the portion of the property deemed acquired to which the 
section 743(b) adjustment is allocated under section 755 and the 
regulations under section 755; and
    (ii) The transfer of the partnership interest that gave rise to 
such basis increase satisfies the requirements of paragraphs 
(b)(3)(iii)(A)(2) and (3) of this section.
    (2) Relatedness tested at partner level. Solely for purposes of 
paragraph (b)(3)(iv)(D)(1)(ii) of this section, whether the parties are 
related or unrelated is determined by comparing the transferor and the 
transferee of the transferred partnership interest.
    (v) Syndication transaction. If a lessor has a depreciable interest 
in the property and the lessor and any predecessor did not previously 
have a depreciable interest in the property, and the property is sold 
by the lessor or any subsequent purchaser within three months after the 
date the property was originally placed in service by the lessor (or, 
in the case of multiple units of property subject to the same lease, 
within three months after the date the final unit is placed in service, 
so long as the period between the time the first unit is placed in 
service and the time the last unit is placed in service does not exceed 
12 months), and the user of the property after the last sale during the 
three-month period remains the same as when the property was originally 
placed in service by the lessor, the purchaser of the property in the 
last sale during the three-month period is considered the taxpayer that 
acquired the property for purposes of applying paragraphs (b)(3)(ii) 
and (iii) of this section.
    (vi) Examples. The application of this paragraph (b)(3) is 
illustrated by the following examples. Unless the facts specifically 
indicate otherwise, assume that the parties are not related within the 
meaning of section 179(d)(2)(A) or (B) and Sec.  1.179-4(c), no 
corporation is a member of a consolidated or controlled group, and the 
parties do not have predecessors:

    Example 1.  (i) On August 1, 2018, A buys a new machine for 
$35,000 from an unrelated party for use in A's trade or business. On 
July 1, 2020, B buys that machine from A for $20,000 for use in B's 
trade or business. On October 1, 2020, B makes a $5,000 capital 
expenditure to recondition the machine. B did not have any 
depreciable interest in the machine before B acquired it on July 1, 
2020.
    (ii) A's purchase price of $35,000 satisfies the original use 
requirement of paragraph (b)(3)(ii) of this section and, assuming 
all other requirements are met, qualifies for the additional first 
year depreciation deduction.
    (iii) B's purchase price of $20,000 does not satisfy the 
original use requirement of paragraph (b)(3)(ii) of this section, 
but it does satisfy the used property acquisition requirements of 
paragraph (b)(3)(iii) of this section. Assuming all other 
requirements are met, the $20,000 purchase price qualifies for the 
additional first year depreciation deduction. Further, B's $5,000 
expenditure satisfies the original use requirement of paragraph 
(b)(3)(ii) of this section and, assuming all other requirements are 
met, qualifies for the additional first year depreciation deduction, 
regardless of whether the $5,000 is added to the basis of the 
machine or is capitalized as a separate asset.
    Example 2.  C, an automobile dealer, uses some of its 
automobiles as demonstrators in order to show them to prospective 
customers. The automobiles that are used as demonstrators by C are 
held by C primarily for sale to customers in the ordinary course of 
its business. On November 1, 2017, D buys from C an automobile that 
was previously used as a demonstrator by C. D will use the 
automobile solely for business purposes. The use of the automobile 
by C as a demonstrator does not constitute a ``use'' for purposes of 
the original use requirement and, therefore, D will be considered 
the original user of the automobile for purposes of paragraph 
(b)(3)(ii) of this section. Assuming all other requirements are met, 
D's purchase price of the automobile qualifies for the additional 
first year depreciation deduction for D, subject to any limitation 
under section 280F.
    Example 3.  On April 1, 2015, E acquires a horse to be used in 
E's thoroughbred racing business. On October 1, 2018, F buys the 
horse from E and will use the horse in F's horse breeding business. 
F did not have any depreciable interest in the horse before F 
acquired it on October 1, 2018. The use of the horse by E in its 
racing business prevents F from satisfying the original use 
requirement of paragraph (b)(3)(ii) of this section. However, F's 
acquisition of the horse satisfies the used property acquisition 
requirements of paragraph (b)(3)(iii) of this section. Assuming all 
other requirements are met, F's purchase price of the horse 
qualifies for the additional first year depreciation deduction for 
F.
    Example 4.  In the ordinary course of its business, G sells 
fractional interests in its aircraft to unrelated parties. G holds 
out for sale eight equal fractional interests in an aircraft. On 
October 1, 2017, G sells five of the eight fractional interests in 
the aircraft to H and H begins to use its proportionate share of the 
aircraft immediately upon purchase. On February 1, 2018, G sells to 
I the remaining unsold \3/8\ fractional interests in the aircraft. H 
is considered the original user as to its \5/8\ fractional interest 
in the aircraft and I is considered the original user as to its \3/
8\ fractional interest in the aircraft. Thus, assuming all other 
requirements are met, H's purchase price for its \5/8\ fractional 
interest in the aircraft qualifies for the additional first year 
depreciation deduction and I's purchase price for its \3/8\ 
fractional interest in the aircraft qualifies for the additional 
first year depreciation deduction.
    Example 5.  On September 1, 2017, J, an equipment dealer, buys 
new tractors that are held by J primarily for sale to customers in 
the ordinary course of its business. On October 15, 2017, J 
withdraws the tractors from inventory and begins to use the tractors 
primarily for producing rental income. The holding of the tractors 
by J as inventory does not constitute a ``use'' for purposes of the 
original use requirement and, therefore, the original use of the 
tractors commences with J on October 15, 2017, for purposes of 
paragraph (b)(3)(ii) of this section. However, the tractors are not 
eligible for the 100-percent additional first year depreciation 
deduction because J acquired the tractors before September 28, 2017.
    Example 6.  K is in the trade or business of leasing equipment 
to others. During 2016, K buys a new machine (Machine #1) and then 
leases it to L for use in L's trade or business. The lease between K 
and L for Machine #1 is a true lease for federal income tax 
purposes. During 2018, L enters into a written binding contract with 
K to buy Machine #1 at its fair market value on May 15, 2018. L did 
not have any depreciable interest in Machine #1 before L acquired it 
on May 15, 2018. As a result, L's acquisition of Machine #1 
satisfies the used property acquisition requirements of paragraph 
(b)(3)(iii) of this section. Assuming all other requirements are 
met, L's purchase price of Machine #1 qualifies for the additional 
first year depreciation deduction for L.
    Example 7.  The facts are the same as in Example 6 of this 
paragraph (b)(3)(vi), except that K and L are related parties within 
the meaning of section 179(d)(2)(A) or (B) and Sec.  1.179-4(c). As 
a result, L's acquisition of Machine #1 does not satisfy the used 
property acquisition requirements of paragraph (b)(3)(iii) of this 
section. Thus, Machine #1 is not eligible for the additional first 
year depreciation deduction for L.
    Example 8.  The facts are the same as in Example 6 of this 
paragraph (b)(3)(vi), except L incurred capital expenditures of 
$5,000 to improve Machine #1 on September 5, 2017, and has a 
depreciable interest in such improvements. L's purchase price of 
$5,000 for the improvements to Machine #1 satisfies the original use 
requirement of Sec.  1.168(k)-1(b)(3)(i) and, assuming all other 
requirements are met, qualifies for the 50-percent additional first 
year depreciation deduction. Because L had a depreciable interest 
only in the improvements to Machine #1, L's acquisition of Machine 
#1, excluding L's improvements to such machine, satisfies the used 
property acquisition requirements of paragraph (b)(3)(iii) of this 
section. Assuming all other requirements are met, L's unadjusted

[[Page 39306]]

depreciable basis of Machine #1, excluding the amount of such 
unadjusted depreciable basis attributable to L's improvements to 
Machine #1, qualifies for the 100-percent additional first year 
depreciation deduction.
    Example 9.  During 2016, M and N purchased used equipment for 
use in their trades or businesses and each own a 50 percent interest 
in such equipment. Prior to this acquisition, M and N did not have 
any depreciable interest in the equipment. Assume this ownership 
arrangement is not a partnership. During 2018, N enters into a 
written binding contract with M to buy M's interest in the 
equipment. Pursuant to paragraph (b)(3)(iii)(B)(2) of this section, 
N is not treated as using M's interest in the equipment prior to N's 
acquisition of M's interest. As a result, N's acquisition of M's 
interest in the equipment satisfies the used property acquisition 
requirements of paragraph (b)(3)(iii) of this section. Assuming all 
other requirements are met, N's purchase price of M's interest in 
the equipment qualifies for the additional first year depreciation 
deduction for N.
    Example 10.  The facts are the same as in Example 9 of this 
paragraph (b)(3)(vi), except N had a 100 percent depreciable 
interest in the equipment prior to 2016 and M purchased from N a 50 
percent interest in the equipment during 2016. As a result, N's 
acquisition of M's interest in the equipment during 2018 does not 
satisfy the used property acquisition requirements of paragraphs 
(b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of this section. Paragraph 
(b)(3)(iii)(B)(2) of this section does not apply because N initially 
acquired a 100 percent depreciable interest in the equipment. 
Accordingly, N's purchase price of M's interest in the equipment 
during 2018 does not qualify for the additional first year 
depreciation deduction for N.
    Example 11.  The facts are the same as in Example 9 of this 
paragraph (b)(3)(vi), except during 2018, M also enters into a 
written binding contract with N to buy N's interest in the 
equipment. Pursuant to paragraph (b)(3)(iii)(B)(2) of this section, 
both M and N are treated as previously having a depreciable interest 
in a 50-percent portion of the equipment. Accordingly, the 
acquisition by M of N's 50-percent interest and the acquisition by N 
of M's 50-percent interest in the equipment during 2018 do not 
qualify for the additional first year depreciation deduction.
    Example 12.  O and P form an equal partnership, OP, in 2018. O 
contributes cash to OP, and P contributes equipment to OP. OP's 
basis in the equipment contributed by P is determined under section 
723. Because OP's basis in such equipment is determined in whole or 
in part by reference to P's adjusted basis in such equipment, OP's 
acquisition of such equipment does not satisfy section 179(d)(2)(C) 
and Sec.  1.179-4(c)(1)(iv) and, thus, does not satisfy the used 
property acquisition requirements of paragraph (b)(3)(iii) of this 
section. Accordingly, OP's acquisition of such equipment is not 
eligible for the additional first year depreciation deduction.
    Example 13.  Q, R, and S form an equal partnership, QRS, in 
2019. Each partner contributes $100, which QRS uses to purchase a 
retail motor fuels outlet for $300. Assume this retail motor fuels 
outlet is QRS' only property and is qualified property under section 
168(k)(2)(A)(i). QRS makes an election not to deduct the additional 
first year depreciation for all qualified property placed in service 
during 2019. QRS has a section 754 election in effect. QRS claimed 
depreciation of $15 for the retail motor fuels outlet for 2019. 
During 2020, when the retail motor fuels outlet's fair market value 
is $600, Q sells all of his partnership interest to T in a fully 
taxable transaction for $200. T never previously had a depreciable 
interest in the retail motor fuels outlet. T takes an outside basis 
of $200 in the partnership interest previously owned by Q. T's share 
of the partnership's previously taxed capital is $95. Accordingly, 
T's section 743(b) adjustment is $105 and is allocated entirely to 
the retail motor fuels outlet under section 755. Assuming all other 
requirements are met, T's section 743(b) adjustment qualifies for 
the additional first year depreciation deduction.
    Example 14.  The facts are the same as in Example 13 of this 
paragraph (b)(3)(vi), except that Q sells his partnership interest 
to U, a related person within the meaning of section 179(d)(2)(A) or 
(B) and Sec.  1.179-4(c). U's section 743(b) adjustment does not 
qualify for the additional first year depreciation deduction.
    Example 15.  The facts are the same as in Example 13 of this 
paragraph (b)(3)(vi), except that Q dies and his partnership 
interest is transferred to V. V takes a basis in Q's partnership 
interest under section 1014. As a result, section 179(d)(2)(C)(ii) 
and Sec.  1.179-4(c)(1)(iv) are not satisfied, and V's section 
743(b) adjustment does not qualify for the additional first year 
depreciation deduction.
    Example 16.  The facts are the same as in Example 13 of this 
paragraph (b)(3)(vi), except that QRS purchased the retail motor 
fuels outlet from T prior to T purchasing Q's partnership interest 
in QRS. T had a depreciable interest in such retail motor fuels 
outlet. Because T had a depreciable interest in the retail motor 
fuels outlet before T acquired its interest in QRS, T's section 
743(b) adjustment does not qualify for the additional first year 
depreciation deduction.
    Example 17.  In November 2017, AA Corporation purchases a used 
drill press costing $10,000 and is granted a trade-in allowance of 
$2,000 on its old drill press. The used drill press is qualified 
property under section 168(k)(2)(A)(i). The old drill press had a 
basis of $1,200. Under sections 1012 and 1031(d), the basis of the 
used drill press is $9,200 ($1,200 basis of old drill press plus 
cash expended of $8,000). Only $8,000 of the basis of the used drill 
press satisfies the requirements of section 179(d)(3) and Sec.  
1.179-4(d) and, thus, satisfies the used property acquisition 
requirement of paragraph (b)(3)(iii) of this section. The remaining 
$1,200 of the basis of the used drill press does not satisfy the 
requirements of section 179(d)(3) and Sec.  1.179-4(d) because it is 
determined by reference to the old drill press. Accordingly, 
assuming all other requirements are met, only $8,000 of the basis of 
the used drill press is eligible for the additional first year 
depreciation deduction.
    Example 18.  In a series of related transactions, a father sells 
a machine to an unrelated party who sells the machine to the 
father's daughter for use in the daughter's trade or business. 
Pursuant to paragraph (b)(3)(iii)(C) of this section, the transfers 
of the machine are treated as a direct transfer from the father to 
his daughter and the time to test whether the parties are related is 
immediately after the last transaction in the series. Because the 
father and the daughter are related parties within the meaning of 
section 179(d)(2)(A) and Sec.  1.179-4(c)(ii), the daughter's 
acquisition of the machine does not satisfy the used property 
acquisition requirements of paragraph (b)(3)(iii) of this section. 
Further, because the transfers of the machine are treated as a 
direct transfer from the father to his daughter, the unrelated 
party's acquisition of the machine is not eligible for the 
additional first year depreciation deduction.
    Example 19.  Parent owns all of the stock of B Corporation and C 
Corporation. Parent, B Corporation, and C Corporation are all 
members of the Parent consolidated group. C Corporation has a 
depreciable interest in Equipment #1. During 2018, C Corporation 
sells Equipment #1 to B Corporation. Prior to this acquisition, B 
Corporation never had a depreciable interest in Equipment #1. B 
Corporation's acquisition of Equipment #1 does not satisfy the used 
property acquisition requirements of paragraph (b)(3)(iii) of this 
section for two reasons. First, B Corporation and C Corporation are 
related parties within the meaning of section 179(d)(2)(B) and Sec.  
1.179-4(c)(2)(iii). Second, pursuant to paragraph 
(b)(3)(iii)(B)(3)(i) of this section, B Corporation is treated as 
previously having a depreciable interest in Equipment #1 because B 
Corporation is a member of the Parent consolidated group and C 
Corporation, while a member of the Parent consolidated group, had a 
depreciable interest in Equipment #1. Accordingly, B Corporation's 
acquisition of Equipment #1 is not eligible for the additional first 
year depreciation deduction.
    Example 20. (i) Parent owns all of the stock of D Corporation 
and E Corporation. Parent, D Corporation, and E Corporation are all 
members of the Parent consolidated group. D Corporation has a 
depreciable interest in Equipment #2. No other members of the Parent 
consolidated group ever had a depreciable interest in Equipment #2. 
During 2018, D Corporation sells Equipment #2 to BA, a person not 
related, within the meaning of section 179(d)(2)(A) or (B) and Sec.  
1.179-4(c), to any member of the Parent consolidated group. In an 
unrelated transaction during 2019, E Corporation acquires Equipment 
#2 from BA or another person not related to any member of the Parent 
consolidated group within the meaning of section 179(d)(2)(A) or (B) 
and Sec.  1.179-4(c).
    (ii) Pursuant to paragraph (b)(3)(iii)(B)(3)(i) of this section, 
E Corporation is treated as previously having a depreciable interest 
in Equipment #2 because E Corporation is a member of the Parent 
consolidated group, and D Corporation, while a member of the Parent 
consolidated group, had a depreciable interest in Equipment #2. As a 
result, E Corporation's acquisition of Equipment #2

[[Page 39307]]

does not satisfy the used property acquisition requirements of 
paragraph (b)(3)(iii) of this section. Thus, E Corporation's 
acquisition of Equipment #2 is not eligible for the additional first 
year depreciation deduction. The results would be the same if D 
Corporation had ceased to be a member of the Parent consolidated 
group prior to E Corporation's acquisition of Equipment #2.
    Example 21. (i) Parent owns all of the stock of F Corporation 
and G Corporation. Parent, F Corporation, and G Corporation are all 
members of the Parent consolidated group. G Corporation has a 
depreciable interest in Equipment #3. No other members of the Parent 
consolidated group ever had a depreciable interest in Equipment #3. 
X Corporation is the common parent of a consolidated group and is 
not related, within the meaning of section 179(d)(2)(A) or (B) and 
Sec.  1.179-4(c), to any member of the Parent consolidated group. No 
member of the X consolidated group ever had a depreciable interest 
in Equipment #3. In a series of related transactions, G Corporation 
sells Equipment #3 to F Corporation, and Parent sells all of the 
stock of F Corporation to X Corporation.
    (ii) F Corporation was a member of the Parent consolidated group 
at the time it acquired Equipment #3 from G Corporation, another 
member of the group. Paragraph (b)(3)(iii)(B)(3)(i) of this section 
generally treats each member of a consolidated group as having a 
depreciable interest in property during the time any member of the 
group had a depreciable interest in such property while a member of 
the group. Nevertheless, because there is a series of related 
transactions that includes the acquisition of Equipment #3 and a 
transaction in which F Corporation, the transferee of the property, 
leaves the Parent consolidated group and joins the X consolidated 
group, the time to test whether F Corporation is a member of the 
Parent consolidated group for purposes of paragraph 
(b)(3)(iii)(B)(3)(i) of this section is met is immediately after the 
last transaction in the series, that is, the sale of the F 
Corporation stock to X Corporation. See paragraph 
(b)(3)(iii)(B)(3)(iii) of this section. Accordingly, because F 
Corporation is not a member of the Parent consolidated group after 
the last transaction of the series, F Corporation is not treated as 
previously having a depreciable interest in Equipment #3 by virtue 
of G Corporation's depreciable interest in Equipment #3 under 
paragraph (b)(3)(iii)(B)(3)(i) of this section.
    (iii) After the sale of the F Corporation stock to X 
Corporation, F Corporation is a member of the X consolidated group. 
Because no member of the X consolidated group previously had a 
depreciable interest in Equipment #3, F Corporation is not treated 
as previously having a depreciable interest in Equipment #3 under 
paragraph (b)(3)(iii)(B)(3)(i) of this section.
    (iv) Because relatedness is tested after F Corporation leaves 
the Parent consolidated group, F Corporation and G Corporation are 
not related within the meaning of section 179(d)(2)(A) or (B) and 
Sec.  1.179-4(c). Accordingly, F Corporation's acquisition of 
Equipment #3 satisfies the used property acquisition requirements of 
paragraph (b)(3)(iii)(A)(1) of this section and, assuming all other 
requirements are met, F Corporation's acquisition of Equipment #3 is 
eligible for the additional first year depreciation deduction.
    Example 22. (i) H Corporation, which is not a member of a 
consolidated group, has a depreciable interest in Equipment #4. 
Parent owns all the stock of I Corporation, and Parent and I 
Corporation are members of the Parent consolidated group. No member 
of the Parent consolidated group ever had a depreciable interest in 
Equipment #4. Neither Parent nor I Corporation is related to H 
Corporation within the meaning of section 179(d)(2)(A) or (B) and 
Sec.  1.179-4(c). During 2018, H Corporation sells Equipment #4 to a 
person not related to H Corporation, Parent, or I Corporation within 
the meaning of section 179(d)(2)(A) or (B) and Sec.  1.179-4(c). In 
a series of related transactions, during 2019, Parent acquires all 
of the stock of H Corporation, and I Corporation purchases Equipment 
#4 from an unrelated person.
    (ii) In a series of related transactions, H Corporation became a 
member of the Parent consolidated group, and I Corporation, also a 
member of the Parent consolidated group, acquired Equipment #4. 
Because H Corporation previously had a depreciable interest in 
Equipment #4, pursuant to paragraph (b)(3)(iii)(B)(3)(ii) of this 
section, I Corporation is treated as having a depreciable interest 
in Equipment #4. As a result, I Corporation's acquisition of 
Equipment #4 does not satisfy the used property acquisition 
requirements of paragraph (b)(3)(iii) of this section. Accordingly, 
I Corporation's acquisition of Equipment #4 is not eligible for the 
additional first year depreciation deduction.
    Example 23. (i) J Corporation, K Corporation, and L Corporation 
are unrelated parties within the meaning of section 179(d)(2)(A) or 
(B) and Sec.  1.179-4(c). None of J Corporation, K Corporation, and 
L Corporation is a member of a consolidated group. J Corporation has 
a depreciable interest in Equipment #5. During 2018, J Corporation 
sells Equipment #5 to K Corporation. During 2020, J Corporation 
merges into L Corporation in a transaction described in section 
368(a)(1)(A). In 2021, L Corporation acquires Equipment #5 from K 
Corporation.
    (ii) Because J Corporation is the predecessor of L Corporation 
and J Corporation previously had a depreciable interest in Equipment 
#5, L Corporation's acquisition of Equipment #5 does not satisfy 
paragraphs (b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of this section 
and, thus, does not satisfy the used property acquisition 
requirements of paragraph (b)(3)(iii) of this section. Accordingly, 
L Corporation's acquisition of Equipment #5 is not eligible for the 
additional first year depreciation deduction.
    Example 24. (i) M Corporation acquires and places in service a 
used airplane on March 26, 2018. Prior to this acquisition, M 
Corporation never had a depreciable interest in this airplane. On 
March 26, 2018, M Corporation also leases the used airplane to N 
Corporation, an airline company. On May 27, 2018, M Corporation 
sells to O Corporation the used airplane subject to the lease with N 
Corporation. M Corporation and O Corporation are related parties 
within the meaning of section 179(d)(2)(A) or (B) and Sec.  1.179-
4(c). As of May 27, 2018, N Corporation is still the lessee of the 
used airplane. Prior to this acquisition, O Corporation never had a 
depreciable interest in the used airplane. O Corporation is a 
calendar-year taxpayer.
    (ii) The sale transaction of May 27, 2018, satisfies the 
requirements of paragraph (b)(3)(v) of this section. As a result, O 
Corporation is considered the taxpayer that acquired the used 
airplane for purposes of applying the used property acquisition 
requirements in paragraph (b)(3)(iii) of this section. In applying 
these rules, the fact that M Corporation and O Corporation are 
related parties is not taken into account because O Corporation, not 
M Corporation, is treated as acquiring the used airplane. Further, 
pursuant to paragraph (b)(4)(iv) of this section, the used airplane 
is treated as originally placed in service by O Corporation on May 
27, 2018. Because O Corporation never had a depreciable interest in 
the used airplane and assuming all other requirements are met, O 
Corporation's purchase price of the used airplane qualifies for the 
100-percent additional first year depreciation deduction for O 
Corporation.
    Example 25. (i) The facts are the same as in Example 24 of this 
paragraph (b)(3)(vi). Additionally, on September 5, 2018, O 
Corporation sells to P Corporation the used airplane subject to the 
lease with N Corporation. Prior to this acquisition, P Corporation 
never had a depreciable interest in the used airplane.
    (ii) Because O Corporation, a calendar-year taxpayer, placed in 
service and disposed of the used airplane during 2018, the used 
airplane is not eligible for the additional first year depreciation 
deduction for O Corporation pursuant to paragraph (f)(1)(i) of this 
section.
    (iii) Because P Corporation never had a depreciable interest in 
the used airplane and assuming all other requirements are met, P 
Corporation's purchase price of the used airplane qualifies for the 
100-percent additional first year depreciation deduction for P 
Corporation.

    (4) Placed-in-service date--(i) In general. Depreciable property 
will meet the requirements of this paragraph (b)(4) if the property is 
placed in service by the taxpayer for use in its trade or business or 
for production of income after September 27, 2017; and, except as 
provided in paragraphs (b)(2)(i)(A) and (D) of this section, before 
January 1, 2027, or, in the case of property described in section 
168(k)(2)(B) or (C), before January 1, 2028.
    (ii) Specified plant. If the taxpayer has properly made an election 
to apply section 168(k)(5) for a specified plant, the requirements of 
this paragraph (b)(4) are satisfied only if the specified plant is 
planted before January 1, 2027, or is grafted before January 1, 2027, 
to a plant that has already been planted, by the

[[Page 39308]]

taxpayer in the ordinary course of the taxpayer's farming business, as 
defined in section 263A(e)(4).
    (iii) Qualified film, television, or live theatrical production--
(A) For purposes of this paragraph (b)(4), a qualified film or 
television production is treated as placed in service at the time of 
initial release or broadcast as defined under Sec.  1.181-1(a)(7).
    (B) For purposes of this paragraph (b)(4), a qualified live 
theatrical production is treated as placed in service at the time of 
the initial live staged performance. Solely for purposes of this 
paragraph, the term initial live staged performance means the first 
commercial exhibition of a production to an audience. However, the term 
initial live staged performance does not include limited exhibition, 
prior to commercial exhibition to general audiences, if the limited 
exhibition is primarily for purposes of publicity, determining the need 
for further production activity, or raising funds for the completion of 
production. For example, an initial live staged performance does not 
include a preview of the production if the preview is primarily to 
determine the need for further production activity.
    (iv) Syndication transaction. If a lessor has a depreciable 
interest in the property and the lessor and any predecessor did not 
previously have a depreciable interest in the property, and the 
property is sold by the lessor or any subsequent purchaser within three 
months after the date the property was originally placed in service by 
the lessor (or, in the case of multiple units of property subject to 
the same lease, within three months after the date the final unit is 
placed in service, so long as the period between the time the first 
unit is placed in service and the time the last unit is placed in 
service does not exceed 12 months), and the user of the property after 
the last sale during this three-month period remains the same as when 
the property was originally placed in service by the lessor, the 
property is treated as originally placed in service by the purchaser of 
the property in the last sale during the three-month period but not 
earlier than the date of the last sale.
    (v) Technical termination of a partnership. For purposes of this 
paragraph (b)(4), in the case of a technical termination of a 
partnership under section 708(b)(1)(B) occurring in a taxable year 
beginning before January 1, 2018, qualified property placed in service 
by the terminated partnership during the taxable year of termination is 
treated as originally placed in service by the new partnership on the 
date the qualified property is contributed by the terminated 
partnership to the new partnership.
    (vi) Section 168(i)(7) transactions. For purposes of this paragraph 
(b)(4), if qualified property is transferred in a transaction described 
in section 168(i)(7) in the same taxable year that the qualified 
property is placed in service by the transferor, the transferred 
property is treated as originally placed in service on the date the 
transferor placed in service the qualified property. In the case of 
multiple transfers of qualified property in multiple transactions 
described in section 168(i)(7) in the same taxable year, the placed-in-
service date of the transferred property is deemed to be the date on 
which the first transferor placed in service the qualified property.
    (5) Acquisition of property--(i) In general. This paragraph (b)(5) 
provides rules for the acquisition requirements in section 13201(h) of 
the Act. These rules apply to all property, including self-constructed 
property or property described in section 168(k)(2)(B) or (C).
    (ii) Acquisition date. Except as provided in paragraph (b)(5)(vi) 
of this section, depreciable property will meet the requirements of 
this paragraph (b)(5) if the property is acquired by the taxpayer after 
September 27, 2017, or is acquired by the taxpayer pursuant to a 
written binding contract entered into by the taxpayer after September 
27, 2017. Property that is manufactured, constructed, or produced for 
the taxpayer by another person under a written binding contract that is 
entered into prior to 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. If a taxpayer acquired the property pursuant to a written 
binding contract and such contract states the date on which the 
contract was entered into and a closing date, delivery date, or other 
similar date, the date on which the contract was entered into is the 
date the taxpayer acquired the property. See paragraph (b)(5)(v) of 
this section for when a qualified film, television, or live theatrical 
production is treated as acquired for purposes of this paragraph 
(b)(5).
    (iii) Definition of binding contract--(A) In general. 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 (for 
example, by use of a liquidated damages provision). For this purpose, a 
contractual provision that limits damages to an amount equal to at 
least 5 percent of the total contract price will not be treated as 
limiting damages to a specified amount. In determining whether a 
contract limits damages, the fact that there may be little or no 
damages because the contract price does not significantly differ from 
fair market value will not be taken into account. For example, if a 
taxpayer entered into an irrevocable written contract to purchase an 
asset for $100 and the contract did not contain a provision for 
liquidated damages, the contract is considered binding notwithstanding 
the fact that the asset had a fair market value of $99 and under local 
law the seller would only recover the difference in the event the 
purchaser failed to perform. If the contract provided for a full refund 
of the purchase price in lieu of any damages allowable by law in the 
event of breach or cancellation, the contract is not considered 
binding.
    (B) Conditions. A contract is binding even if subject to a 
condition, as long as the condition is not within the control of either 
party or a predecessor. A contract will continue to be binding if the 
parties make insubstantial changes in its terms and conditions or if 
any term is to be determined by a standard beyond the control of either 
party. A contract that imposes significant obligations on the taxpayer 
or a predecessor will be treated as binding notwithstanding the fact 
that certain terms remain to be negotiated by the parties to the 
contract.
    (C) Options. An option to either acquire or sell property is not a 
binding contract.
    (D) Letter of intent. A letter of intent for an acquisition is not 
a binding contract.
    (E) Supply agreements. A binding contract does not include a supply 
or similar agreement if the amount and design specifications of the 
property to be purchased have not been specified. The contract will not 
be a binding contract for the property to be purchased until both the 
amount and the design specifications are specified. For example, if the 
provisions of a supply or similar agreement state the design 
specifications of the property to be purchased, a purchase order under 
the agreement for a specific number of assets is treated as a binding 
contract.
    (F) Components. A binding contract to acquire one or more 
components of a larger property will not be treated as a binding 
contract to acquire the larger property. If a binding contract to 
acquire the component does not satisfy the requirements of this 
paragraph (b)(5), the component does not qualify for the additional 
first year depreciation deduction.

[[Page 39309]]

    (iv) Self-constructed property--(A) In general. If a taxpayer 
manufactures, constructs, or produces property for use by the taxpayer 
in its trade or business or for its production of income, the 
acquisition rules in paragraph (b)(5)(ii) of this section are treated 
as met for the property if the taxpayer begins manufacturing, 
constructing, or producing the property after September 27, 2017. This 
paragraph (b)(5)(iv) does not apply to property that is manufactured, 
constructed, or produced for the taxpayer by another person under a 
written binding contract that is entered into prior to the manufacture, 
construction, or production of the property for use by the taxpayer in 
its trade or business or for its production of income (for further 
guidance, see paragraphs (b)(5)(ii) and (iii) of this section).
    (B) When does manufacture, construction, or production begin--(1) 
In general. For purposes of paragraph (b)(5)(iv)(A) of this section, 
manufacture, construction, or production of property begins when 
physical work of a significant nature begins. Physical work does not 
include preliminary activities such as planning or designing, securing 
financing, exploring, or researching. The determination of when 
physical work of a significant nature begins depends on the facts and 
circumstances. For example, if the taxpayer constructs a retail motor 
fuels outlet on-site for use by the taxpayer in its trade or business, 
construction begins when physical work of a significant nature 
commences at the site by the taxpayer; that is, when work begins on the 
excavation for footings, pouring the pads for the outlet, or the 
driving of foundation pilings into the ground. Preliminary work, such 
as clearing a site, test drilling to determine soil condition, or 
excavation to change the contour of the land (as distinguished from 
excavation for footings) does not constitute the beginning of 
construction. However, if the taxpayer assembles a retail motor fuels 
outlet on-site from modular units manufactured off-site by the taxpayer 
and delivered to the site where the outlet will be used, manufacturing 
begins when physical work of a significant nature commences at the off-
site location by the taxpayer.
    (2) Safe harbor. For purposes of paragraph (b)(5)(iv)(B)(1) of this 
section, a taxpayer may choose to determine when physical work of a 
significant nature begins in accordance with this paragraph 
(b)(5)(iv)(B)(2). Physical work of a significant nature will be 
considered to begin at the time the taxpayer incurs (in the case of an 
accrual basis taxpayer) or pays (in the case of a cash basis taxpayer) 
more than 10 percent of the total cost of the property (excluding the 
cost of any land and preliminary activities such as planning or 
designing, securing financing, exploring, or researching). A taxpayer 
chooses to apply this paragraph (b)(5)(iv)(B)(2) by filing a federal 
income tax return for the placed-in-service year of the property that 
determines when physical work of a significant nature begins consistent 
with this paragraph (b)(5)(iv)(B)(2).
    (C) Components of self-constructed property--(1) Acquired 
components. If a binding contract, as defined in paragraph (b)(5)(iii) 
of this section, to acquire a component does not satisfy the 
requirements of paragraph (b)(5)(ii) of this section, the component 
does not qualify for the additional first year depreciation deduction. 
A binding contract described in the preceding sentence to acquire one 
or more components of a larger self-constructed property will not 
preclude the larger self-constructed property from satisfying the 
acquisition rules in paragraph (b)(5)(iv)(A) of this section. 
Accordingly, the unadjusted depreciable basis of the larger self-
constructed property that is eligible for the additional first year 
depreciation deduction, assuming all other requirements are met, must 
not include the unadjusted depreciable basis of any component that does 
not satisfy the requirements of paragraph (b)(5)(ii) of this section. 
If the manufacture, construction, or production of the larger self-
constructed property begins before September 28, 2017, the larger self-
constructed property and any acquired components related to the larger 
self-constructed property do not qualify for the additional first year 
depreciation deduction under this section.
    (2) Self-constructed components. If the manufacture, construction, 
or production of a component by the taxpayer does not satisfy the 
requirements of this paragraph (b)(5)(iv), the component does not 
qualify for the additional first year depreciation deduction. However, 
if the manufacture, construction, or production of a component does not 
satisfy the requirements of this paragraph (b)(5)(iv), but the 
manufacture, construction, or production of the larger self-constructed 
property satisfies the requirements of this paragraph (b)(5)(iv), the 
larger self-constructed property qualifies for the additional first 
year depreciation deduction, assuming all other requirements are met, 
even though the component does not qualify for the additional first 
year depreciation deduction. Accordingly, the unadjusted depreciable 
basis of the larger self-constructed property that is eligible for the 
additional first year depreciation deduction, assuming all other 
requirements are met, must not include the unadjusted depreciable basis 
of any component that does not qualify for the additional first year 
depreciation deduction. If the manufacture, construction, or production 
of the larger self-constructed property began before September 28, 
2017, the larger self-constructed property and any self-constructed 
components related to the larger self-constructed property do not 
qualify for the additional first year depreciation deduction under this 
section.
    (v) Qualified film, television, or live theatrical production--(A) 
For purposes of section 13201(h)(1)(A) of the Act, a qualified film or 
television production is treated as acquired on the date principal 
photography commences.
    (B) For purposes of section 13201(h)(1)(A) of the Act, a 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.
    (vi) Specified plant. If the taxpayer has properly made an election 
to apply section 168(k)(5) for a specified plant, the requirements of 
this paragraph (b)(5) are satisfied if the specified plant is planted 
after September 27, 2017, or is 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, as defined in section 
263A(e)(4).
    (vii) Examples. The application of this paragraph (b)(5) is 
illustrated by the following examples. Unless the facts specifically 
indicate otherwise, assume that the parties are not related within the 
meaning of section 179(d)(2)(A) or (B) and Sec.  1.179-4(c), and the 
parties do not have predecessors:

    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 
paragraph (b)(5)(iii)(E) of this section.
    Example 2. The facts are the same as in Example 1 of this 
paragraph (b)(5)(vii). 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

[[Page 39310]]

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 paragraph (b)(5)(iii)(E) of this 
section. Accordingly, assuming all other requirements are met, the 
cost of the 20 lamps qualifies for the 100-percent additional first 
year depreciation deduction.
    Example 3. The facts are the same as in Example 1 of this 
paragraph (b)(5)(vii), 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 paragraph (b)(5)(iii)(E) of this section. 
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.
    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.
    Example 5. The facts are the same as in Example 4 of this 
paragraph (b)(5)(vii) 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.
    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.
    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.
    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.
    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 II acquired the 
equipment prior to September 28, 2017. However, JJ acquired 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.
    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.

    (c) Property described in section 168(k)(2)(B) or (C)--(1) In 
general. Property described in section 168(k)(2)(B) or (C) will meet 
the acquisition requirements of section 168(k)(2)(B)(i)(III) or 
(k)(2)(C)(i) if the property is acquired by the taxpayer before January 
1, 2027, or acquired by the taxpayer pursuant to a written binding 
contract that is entered into before January 1, 2027. Property 
described in section 168(k)(2)(B) or (C) also must meet the acquisition 
requirement in section 13201(h)(1)(A) of the Act (for further guidance, 
see paragraph (b)(5) of this section).
    (2) Definition of binding contract. For purposes of this paragraph 
(c), the rules in paragraph (b)(5)(iii) of this section for a binding 
contract apply.
    (3) Self-constructed property--(i) In general. If a taxpayer 
manufactures, constructs, or produces property for use by the taxpayer 
in its trade or business or for its production of income, the 
acquisition rules in paragraph (c)(1) of this section are treated as 
met for the property if the taxpayer begins manufacturing, 
constructing, or producing the property before January 1, 2027. 
Property that is manufactured, constructed, or produced for the 
taxpayer by another person under a written binding contract, as defined 
in paragraph (b)(5)(iii) of this section, that is entered into prior to 
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 considered to be manufactured, constructed, or produced by the 
taxpayer. If a taxpayer enters into a written binding contract, as 
defined in paragraph (b)(5)(iii) of this section, before January 1, 
2027, with another person to manufacture, construct, or produce 
property described in section 168(k)(2)(B) or (C) and the manufacture, 
construction, or production of this property begins after December 31, 
2026, the acquisition rule in paragraph (c)(1) of this section is met.
    (ii) When does manufacture, construction, or production begin--(A) 
In general. For purposes of this paragraph (c)(3), manufacture, 
construction, or production of property begins when physical work of a 
significant nature begins. Physical work does not include preliminary 
activities such as planning or designing, securing financing, 
exploring, or researching. The determination of when physical work of a 
significant nature begins depends on the facts and circumstances. For 
example, if a retail motor fuels outlet is to be constructed on-site, 
construction begins when physical work of a significant nature 
commences at the

[[Page 39311]]

site; that is, when work begins on the excavation for footings, pouring 
the pads for the outlet, or the driving of foundation pilings into the 
ground. Preliminary work, such as clearing a site, test drilling to 
determine soil condition, or excavation to change the contour of the 
land (as distinguished from excavation for footings) does not 
constitute the beginning of construction. However, if a retail motor 
fuels outlet is to be assembled on-site from modular units manufactured 
off-site and delivered to the site where the outlet will be used, 
manufacturing begins when physical work of a significant nature 
commences at the off-site location.
    (B) Safe harbor. For purposes of paragraph (c)(3)(ii)(A) of this 
section, a taxpayer may choose to determine when physical work of a 
significant nature begins in accordance with this paragraph 
(c)(3)(ii)(B). Physical work of a significant nature will be considered 
to begin at the time the taxpayer incurs (in the case of an accrual 
basis taxpayer) or pays (in the case of a cash basis taxpayer) more 
than 10 percent of the total cost of the property (excluding the cost 
of any land and preliminary activities such as planning or designing, 
securing financing, exploring, or researching). When property is 
manufactured, constructed, or produced for the taxpayer by another 
person, this safe harbor test must be satisfied by the taxpayer. For 
example, if a retail motor fuels outlet is to be constructed for an 
accrual basis taxpayer by another person for the total cost of $200,000 
(excluding the cost of any land and preliminary activities such as 
planning or designing, securing financing, exploring, or researching), 
construction is deemed to begin for purposes of this paragraph 
(c)(3)(ii)(B) when the taxpayer has incurred more than 10 percent (more 
than $20,000) of the total cost of the property. A taxpayer chooses to 
apply this paragraph (c)(3)(ii)(B) by filing a federal income tax 
return for the placed-in-service year of the property that determines 
when physical work of a significant nature begins consistent with this 
paragraph (c)(3)(ii)(B).
    (iii) Components of self-constructed property--(A) Acquired 
components. If a binding contract, as defined in paragraph (b)(5)(iii) 
of this section, to acquire a component does not satisfy the 
requirements of paragraph (c)(1) of this section, the component does 
not qualify for the additional first year depreciation deduction. A 
binding contract described in the preceding sentence to acquire one or 
more components of a larger self-constructed property will not preclude 
the larger self-constructed property from satisfying the acquisition 
rules in paragraph (c)(3)(i) of this section. Accordingly, the 
unadjusted depreciable basis of the larger self-constructed property 
that is eligible for the additional first year depreciation deduction, 
assuming all other requirements are met, must not include the 
unadjusted depreciable basis of any component that does not satisfy the 
requirements of paragraph (c)(1) of this section. If a binding contract 
to acquire the component is entered into before January 1, 2027, but 
the manufacture, construction, or production of the larger self-
constructed property does not begin before January 1, 2027, the 
component qualifies for the additional first year depreciation 
deduction, assuming all other requirements are met, but the larger 
self-constructed property does not.
    (B) Self-constructed components. If the manufacture, construction, 
or production of a component by the taxpayer does not satisfy the 
requirements of paragraph (c)(3)(i) of this section, the component does 
not qualify for the additional first year depreciation deduction. 
However, if the manufacture, construction, or production of a component 
does not satisfy the requirements of paragraph (c)(3)(i) of this 
section, but the manufacture, construction, or production of the larger 
self-constructed property satisfies the requirements of paragraph 
(c)(3)(i) of this section, the larger self-constructed property 
qualifies for the additional first year depreciation deduction, 
assuming all other requirements are met, even though the component does 
not qualify for the additional first year depreciation deduction. 
Accordingly, the unadjusted depreciable basis of the larger self-
constructed property that is eligible for the additional first year 
depreciation deduction, assuming all other requirements are met, must 
not include the unadjusted depreciable basis of any component that does 
not qualify for the additional first year depreciation deduction. If 
the manufacture, construction, or production of a component begins 
before January 1, 2027, but the manufacture, construction, or 
production of the larger self-constructed property does not begin 
before January 1, 2027, the component qualifies for the additional 
first year depreciation deduction, assuming all other requirements are 
met, but the larger self-constructed property does not.
    (iv) Examples. The application of this paragraph (c) is illustrated 
by the following examples:

    Example 1. On June 1, 2017, MM decided to construct property 
described in section 168(k)(2)(B) for its own use. However, one of 
the component parts of the property had to be manufactured by 
another person for MM. On August 15, 2017, MM entered into a written 
binding contract with NN to acquire this component part of the 
property for $100,000. The manufacture of the component part 
commenced on September 1, 2018, and MM received the completed 
component part on February 1, 2020. The cost of this component part 
is 9 percent of the total cost of the property to be constructed by 
MM. MM began constructing the property described in section 
168(k)(2)(B) on January 15, 2020, and placed this property, 
including all component parts, in service on November 1, 2021. 
Pursuant to paragraphs (b)(5)(iv)(C)(1) and (c)(1) of this section, 
the component part of $100,000 manufactured by NN for MM is not 
eligible for the 100-percent additional first year depreciation 
deduction because the written binding contract to acquire such 
component part was entered into before September 28, 2017. However, 
pursuant to paragraph (c)(3)(i) of this section, the cost of the 
property described in section 168(k)(2)(B), excluding the cost of 
the component part of $100,000 manufactured by NN for MM, is 
eligible for the 100-percent additional first year depreciation 
deduction, assuming all other requirements are met, because 
construction of the property began after September 27, 2017, and 
before January 1, 2027, and the property described in section 
168(k)(2)(B) was placed in service by MM before January 1, 2028.
    Example 2. On June 1, 2026, OO decided to construct property 
described in section 168(k)(2)(B) for its own use. However, one of 
the component parts of the property had to be manufactured by 
another person for OO. On August 15, 2026, OO entered into a written 
binding contract with PP to acquire this component part of the 
property for $100,000. The manufacture of the component part 
commenced on September 1, 2026, and OO received the completed 
component part on February 1, 2027. The cost of this component part 
is 9 percent of the total cost of the property to be constructed by 
OO. OO began constructing the property described in section 
168(k)(2)(B) on January 15, 2027, and placed this property, 
including all component parts, in service on November 1, 2027. 
Pursuant to paragraph (c)(3)(iii)(B) of this section, the self-
constructed component part of $100,000 manufactured by PP for OO is 
eligible for the additional first year depreciation deduction, 
assuming all other requirements are met, because the manufacturing 
of the component part began before January 1, 2027, and the property 
described in section 168(k)(2)(B), the larger self-constructed 
property, was placed in service by OO before January 1, 2028. 
However, pursuant to paragraph (c)(3)(i) of this section, the cost 
of the property described in section 168(k)(2)(B), excluding the 
cost of the self-constructed component part of $100,000 manufactured 
by PP for OO, is not eligible for the additional first year 
depreciation deduction because construction of the property began 
after December 31, 2026.

[[Page 39312]]

    Example 3. On December 1, 2026, QQ entered into a written 
binding contract, as defined in paragraph (b)(5)(iii) of this 
section, with RR to manufacture an aircraft described in section 
168(k)(2)(C) for use in QQ's trade or business. RR begins to 
manufacture the aircraft on February 1, 2027. QQ places the aircraft 
in service on August 1, 2027. Pursuant to paragraph (c)(3)(i) of 
this section, the aircraft meets the requirements of paragraph 
(c)(1) of this section because the aircraft was acquired by QQ 
pursuant to a written binding contract entered into before January 
1, 2027. Further, the aircraft was placed in service by QQ before 
January 1, 2028. Thus, assuming all other requirements are met, QQ's 
cost of the aircraft is eligible for the additional first year 
depreciation deduction.

    (d) Computation of depreciation deduction for qualified property--
(1) Additional first year depreciation deduction--(i) Allowable taxable 
year. The additional first year depreciation deduction is allowable--
    (A) Except as provided in paragraph (d)(1)(i)(B) or (f) of this 
section, in the taxable year in which the qualified property is placed 
in service by the taxpayer for use in its trade or business or for the 
production of income; or
    (B) In the taxable year in which the specified plant is planted, or 
grafted to a plant that has already been planted, by the taxpayer in 
the ordinary course of the taxpayer's farming business, as defined in 
section 263A(e)(4), if the taxpayer properly made the election to apply 
section 168(k)(5) (for further guidance, see paragraph (e) of this 
section).
    (ii) Computation. Except as provided in paragraph (f)(5) of this 
section, the allowable additional first year depreciation deduction for 
qualified property is determined by multiplying the unadjusted 
depreciable basis, as defined in Sec.  1.168(b)-1(a)(3), of the 
qualified property by the applicable percentage. Except as provided in 
paragraph (f)(1) of this section, the additional first year 
depreciation deduction is not affected by a taxable year of less than 
12 months. See paragraph (f)(1) of this section for qualified property 
placed in service or planted or grafted, as applicable, and disposed of 
during the same taxable year. See paragraph (f)(5) of this section for 
qualified property acquired in a like-kind exchange or as a result of 
an involuntary conversion.
    (iii) Property described in section 168(k)(2)(B). For purposes of 
paragraph (d)(1)(ii) of this section, the unadjusted depreciable basis, 
as defined in Sec.  1.168(b)-1(a)(3), of qualified property described 
in section 168(k)(2)(B) is limited to the property's unadjusted 
depreciable basis attributable to the property's manufacture, 
construction, or production before January 1, 2027.
    (iv) Alternative minimum tax--(A) In general. The additional first 
year depreciation deduction is allowable for alternative minimum tax 
purposes--
    (1) Except as provided in paragraph (d)(1)(iv)(A)(2) of this 
section, in the taxable year in which the qualified property is placed 
in service by the taxpayer; or
    (2) In the taxable year in which a specified plant is planted by 
the taxpayer, or grafted by the taxpayer to a plant that was previously 
planted, if the taxpayer properly made the election to apply section 
168(k)(5) (for further guidance, see paragraph (e) of this section).
    (B) Special rules. In general, the additional first year 
depreciation deduction for alternative minimum tax purposes is based on 
the unadjusted depreciable basis of the property for alternative 
minimum tax purposes. However, see paragraph (f)(5)(iii)(E) of this 
section for qualified property acquired in a like-kind exchange or as a 
result of an involuntary conversion.
    (2) Otherwise allowable depreciation deduction--(i) In general. 
Before determining the amount otherwise allowable as a depreciation 
deduction for the qualified property for the placed-in-service year and 
any subsequent taxable year, the taxpayer must determine the remaining 
adjusted depreciable basis of the qualified property. This remaining 
adjusted depreciable basis is equal to the unadjusted depreciable 
basis, as defined in Sec.  1.168(b)-1(a)(3), of the qualified property 
reduced by the amount of the additional first year depreciation allowed 
or allowable, whichever is greater. The remaining adjusted depreciable 
basis of the qualified property is then depreciated using the 
applicable depreciation provisions under the Internal Revenue Code for 
the qualified property. The remaining adjusted depreciable basis of the 
qualified property that is MACRS property is also the basis to which 
the annual depreciation rates in the optional depreciation tables apply 
(for further guidance, see section 8 of Rev. Proc. 87-57 (1987-2 C.B. 
687) and Sec.  601.601(d)(2)(ii)(b) of this chapter). The depreciation 
deduction allowable for the remaining adjusted depreciable basis of the 
qualified property is affected by a taxable year of less than 12 
months.
    (ii) Alternative minimum tax. For alternative minimum tax purposes, 
the depreciation deduction allowable for the remaining adjusted 
depreciable basis of the qualified property is based on the remaining 
adjusted depreciable basis for alternative minimum tax purposes. The 
remaining adjusted depreciable basis of the qualified property for 
alternative minimum tax purposes is depreciated using the same 
depreciation method, recovery period (or useful life in the case of 
computer software), and convention that apply to the qualified property 
for regular tax purposes.
    (3) Examples. This paragraph (d) is illustrated by the following 
examples:

     Example 1.  On March 1, 2023, SS, a calendar-year taxpayer, 
purchased and placed in service qualified property that costs $1 
million and is 5-year property under section 168(e). SS depreciates 
its 5-year property placed in service in 2023 using the optional 
depreciation table that corresponds with the general depreciation 
system, the 200-percent declining balance method, a 5-year recovery 
period, and the half-year convention. For 2023, SS is allowed an 80-
percent additional first year depreciation deduction of $800,000 
(the unadjusted depreciable basis of $1 million multiplied by 0.80). 
Next, SS must reduce the unadjusted depreciable basis of $1 million 
by the additional first year depreciation deduction of $800,000 to 
determine the remaining adjusted depreciable basis of $200,000. 
Then, SS' depreciation deduction allowable in 2023 for the remaining 
adjusted depreciable basis of $200,000 is $40,000 (the remaining 
adjusted depreciable basis of $200,000 multiplied by the annual 
depreciation rate of 0.20 for recovery year 1).
    Example 2.  On June 1, 2023, TT, a calendar-year taxpayer, 
purchased and placed in service qualified property that costs 
$1,500,000. The property qualifies for the expensing election under 
section 179 and is 5-year property under section 168(e). TT did not 
purchase any other section 179 property in 2023. TT makes the 
election under section 179 for the property and depreciates its 5-
year property placed in service in 2023 using the optional 
depreciation table that corresponds with the general depreciation 
system, the 200-percent declining balance method, a 5-year recovery 
period, and the half-year convention. Assume the maximum section 179 
deduction for 2023 is $1,000,000. For 2023, TT is first allowed a 
$1,000,000 deduction under section 179. Next, TT must reduce the 
cost of $1,500,000 by the section 179 deduction of $1,000,000 to 
determine the unadjusted depreciable basis of $500,000. Then, for 
2023, TT is allowed an 80-percent additional first year depreciation 
deduction of $400,000 (the unadjusted depreciable basis of $500,000 
multiplied by 0.80). Next, TT must reduce the unadjusted depreciable 
basis of $500,000 by the additional first year depreciation 
deduction of $400,000 to determine the remaining adjusted 
depreciable basis of $100,000. Then, TT's depreciation deduction 
allowable in 2023 for the remaining adjusted depreciable basis of 
$100,000 is $20,000 (the remaining adjusted depreciable basis of 
$100,000 multiplied by the annual depreciation rate of 0.20 for 
recovery year 1).


[[Page 39313]]


    (e) Elections under section 168(k)--(1) Election not to deduct 
additional first year depreciation--(i) In general. A taxpayer may make 
an election not to deduct the additional first year depreciation for 
any class of property that is qualified property placed in service 
during the taxable year. If this election is made, the election applies 
to all qualified property that is in the same class of property and 
placed in service in the same taxable year, and no additional first 
year depreciation deduction is allowable for the property placed in 
service during the taxable year in the class of property, except as 
provided in Sec.  1.743-1(j)(4)(i)(B)(1).
    (ii) Definition of class of property. For purposes of this 
paragraph (e)(1), the term class of property means:
    (A) Except for the property described in paragraphs (e)(1)(ii)(B) 
and (D), and (e)(2) of this section, each class of property described 
in section 168(e) (for example, 5-year property);
    (B) Water utility property as defined in section 168(e)(5) and 
depreciated under section 168;
    (C) Computer software as defined in, and depreciated under, section 
167(f)(1) and the regulations under section 167(f)(1);
    (D) Qualified improvement property as defined in Sec.  1.168(b)-
1(a)(5)(i)(C) and (a)(5)(ii), and depreciated under section 168;
    (E) Each separate production, as defined in Sec.  1.181-3(b), of a 
qualified film or television production;
    (F) Each separate production, as defined in section 181(e)(2), of a 
qualified live theatrical production; or
    (G) A partner's basis adjustment in partnership assets under 
section 743(b) for each class of property described in paragraphs 
(e)(1)(ii)(A) through (F), and (e)(2) of this section (for further 
guidance, see Sec.  1.743-1(j)(4)(i)(B)(1)).
    (iii) Time and manner for making election--(A) Time for making 
election. Any election specified in paragraph (e)(1)(i) of this section 
must be made by the due date, including extensions, of the Federal tax 
return for the taxable year in which the qualified property is placed 
in service by the taxpayer.
    (B) Manner of making election. Any election specified in paragraph 
(e)(1)(i) of this section must be made in the manner prescribed on Form 
4562, ``Depreciation and Amortization,'' and its instructions. The 
election is made separately by each person owning qualified property 
(for example, for each member of a consolidated group by the common 
parent of the group, by the partnership (including basis adjustments in 
the partnership assets under section 743(b)), or by the S corporation). 
If Form 4562 is revised or renumbered, any reference in this section to 
that form shall be treated as a reference to the revised or renumbered 
form.
    (iv) Failure to make election. If a taxpayer does not make the 
election specified in paragraph (e)(1)(i) of this section within the 
time and in the manner prescribed in paragraph (e)(1)(iii) of this 
section, the amount of depreciation allowable for that property under 
section 167(f)(1) or 168, as applicable, must be determined for the 
placed-in-service year and for all subsequent taxable years by taking 
into account the additional first year depreciation deduction. Thus, 
any election specified in paragraph (e)(1)(i) of this section shall not 
be made by the taxpayer in any other manner (for example, the election 
cannot be made through a request under section 446(e) to change the 
taxpayer's method of accounting).
    (2) Election to apply section 168(k)(5) for specified plants--(i) 
In general. A taxpayer may make an election to apply section 168(k)(5) 
to one or more specified plants that are planted, or grafted to a plant 
that has already been planted, by the taxpayer in the ordinary course 
of the taxpayer's farming business, as defined in section 263A(e)(4). 
If this election is made for a specified plant, such plant is not 
treated as qualified property under section 168(k) and this section in 
its placed-in-service year.
    (ii) Time and manner for making election--(A) Time for making 
election. Any election specified in paragraph (e)(2)(i) of this section 
must be made by the due date, including extensions, of the Federal tax 
return for the taxable year in which the taxpayer planted or grafted 
the specified plant to which the election applies.
    (B) Manner of making election. Any election specified in paragraph 
(e)(2)(i) of this section must be made in the manner prescribed on Form 
4562, ``Depreciation and Amortization,'' and its instructions. The 
election is made separately by each person owning specified plants (for 
example, for each member of a consolidated group by the common parent 
of the group, by the partnership, or by the S corporation). If Form 
4562 is revised or renumbered, any reference in this section to that 
form shall be treated as a reference to the revised or renumbered form.
    (iii) Failure to make election. If a taxpayer does not make the 
election specified in paragraph (e)(2)(i) of this section for a 
specified plant within the time and in the manner prescribed in 
paragraph (e)(2)(ii) of this section, the specified plant is treated as 
qualified property under section 168(k), assuming all requirements are 
met, in the taxable year in which such plant is placed in service by 
the taxpayer. Thus, any election specified in paragraph (e)(2)(i) of 
this section shall not be made by the taxpayer in any other manner (for 
example, the election cannot be made through a request under section 
446(e) to change the taxpayer's method of accounting).
    (3) Election for qualified property placed in service during the 
2017 taxable year--(i) In general. A taxpayer may make an election to 
deduct 50 percent, instead of 100 percent, additional first year 
depreciation for all qualified property acquired after September 27, 
2017, by the taxpayer and placed in service by the taxpayer during its 
taxable year that includes September 28, 2017. If a taxpayer makes an 
election to apply section 168(k)(5) for its taxable year that includes 
September 28, 2017, the taxpayer also may make an election to deduct 50 
percent, instead of 100 percent, additional first year depreciation for 
all specified plants that are planted, or grafted to a plant that has 
already been planted, after September 27, 2017, by the taxpayer in the 
ordinary course of the taxpayer's farming business during such taxable 
year.
    (ii) Time and manner for making election--(A) Time for making 
election. Any election specified in paragraph (e)(3)(i) of this section 
must be made by the due date, including extensions, of the Federal tax 
return for the taxpayer's taxable year that includes September 28, 
2017.
    (B) Manner of making election. Any election specified in paragraph 
(e)(3)(i) of this section must be made in the manner prescribed on the 
2017 Form 4562, ``Depreciation and Amortization,'' and its 
instructions. The election is made separately by each person owning 
qualified property (for example, for each member of a consolidated 
group by the common parent of the group, by the partnership, or by the 
S corporation).
    (iii) Failure to make election. If a taxpayer does not make the 
election specified in paragraph (e)(3)(i) of this section within the 
time and in the manner prescribed in paragraph (e)(3)(ii) of this 
section, the amount of depreciation allowable for qualified property 
under section 167(f)(1) or 168, as applicable, acquired and placed in 
service, or planted or grafted, as applicable, by the taxpayer after 
September 27, 2017, must be determined for the taxable year that 
includes September 28, 2017, and for all subsequent taxable years by 
taking into account the 100-percent additional first

[[Page 39314]]

year depreciation deduction, unless the taxpayer makes the election 
specified in paragraph (e)(1)(i) of this section within the time and in 
the manner prescribed in paragraph (e)(1)(iii) of this section for the 
class of property in which the qualified property is included. Thus, 
any election specified in paragraph (e)(3)(i) of this section shall not 
be made by the taxpayer in any other manner (for example, the election 
cannot be made through a request under section 446(e) to change the 
taxpayer's method of accounting).
    (4) Alternative minimum tax. If a taxpayer makes an election 
specified in paragraph (e)(1) of this section for a class of property 
or in paragraph (e)(2) of this section for a specified plant, the 
depreciation adjustments under section 56 and the regulations under 
section 56 do not apply to the property or specified plant, as 
applicable, to which that election applies for purposes of computing 
the taxpayer's alternative minimum taxable income. If a taxpayer makes 
an election specified in paragraph (e)(3) of this section for all 
qualified property, see paragraphs (d)(1)(iv) and (d)(2)(ii) of this 
section.
    (5) Revocation of election--(i) In general. Except as provided in 
paragraph (e)(5)(ii) of this section, an election specified in this 
paragraph (e), once made, may be revoked only by filing a request for a 
private letter ruling and obtaining the Commissioner of Internal 
Revenue's written consent to revoke the election. The Commissioner may 
grant a request to revoke the election if the taxpayer acted reasonably 
and in good faith, and the revocation will not prejudice the interests 
of the Government. See generally Sec.  301.9100-3 of this chapter. An 
election specified in this paragraph (e) may not be revoked through a 
request under section 446(e) to change the taxpayer's method of 
accounting.
    (ii) Automatic 6-month extension. If a taxpayer made an election 
specified in this paragraph (e), an automatic extension of 6 months 
from the due date of the taxpayer's Federal tax return, excluding 
extensions, for the placed-in-service year or the taxable year in which 
the specified plant is planted or grafted, as applicable, is granted to 
revoke that election, provided the taxpayer timely filed the taxpayer's 
Federal tax return for the placed-in-service year or the taxable year 
in which the specified plant is planted or grafted, as applicable, and, 
within this 6-month extension period, the taxpayer, and all taxpayers 
whose tax liability would be affected by the election, file an amended 
Federal tax return for the placed-in-service year or the taxable year 
in which the specified plant is planted or grafted, as applicable, in a 
manner that is consistent with the revocation of the election.
    (f) Special rules--(1) Property placed in service and disposed of 
in the same taxable year--(i) In general. Except as provided in 
paragraphs (f)(1)(ii) and (iii) of this section, the additional first 
year depreciation deduction is not allowed for qualified property 
placed in service or planted or grafted, as applicable, and disposed of 
during the same taxable year. Also if qualified property is placed in 
service and disposed of during the same taxable year and then 
reacquired and again placed in service in a subsequent taxable year, 
the additional first year depreciation deduction is not allowable for 
the property in the subsequent taxable year.
    (ii) Technical termination of a partnership. In the case of a 
technical termination of a partnership under section 708(b)(1)(B) in a 
taxable year beginning before January 1, 2018, the additional first 
year depreciation deduction is allowable for any qualified property 
placed in service or planted or grafted, as applicable, by the 
terminated partnership during the taxable year of termination and 
contributed by the terminated partnership to the new partnership. The 
allowable additional first year depreciation deduction for the 
qualified property shall not be claimed by the terminated partnership 
but instead shall be claimed by the new partnership for the new 
partnership's taxable year in which the qualified property was 
contributed by the terminated partnership to the new partnership. 
However, if qualified property is both placed in service or planted or 
grafted, as applicable, and contributed to a new partnership in a 
transaction described in section 708(b)(1)(B) by the terminated 
partnership during the taxable year of termination, and if such 
property is disposed of by the new partnership in the same taxable year 
the new partnership received such property from the terminated 
partnership, then no additional first year depreciation deduction is 
allowable to either partnership.
    (iii) Section 168(i)(7) transactions. If any qualified property is 
transferred in a transaction described in section 168(i)(7) in the same 
taxable year that the qualified property is placed in service or 
planted or grafted, as applicable, by the transferor, the additional 
first year depreciation deduction is allowable for the qualified 
property. The allowable additional first year depreciation deduction 
for the qualified property for the transferor's taxable year in which 
the property is placed in service or planted or grafted, as applicable, 
is allocated between the transferor and the transferee on a monthly 
basis. This allocation shall be made in accordance with the rules in 
Sec.  1.168(d)-1(b)(7)(ii) for allocating the depreciation deduction 
between the transferor and the transferee. However, solely for purposes 
of this section, if the qualified property is transferred in a section 
721(a) transaction to a partnership that has as a partner a person, 
other than the transferor, who previously had a depreciable interest in 
the qualified property, in the same taxable year that the qualified 
property is placed in service or planted or grafted, as applicable, by 
the transferor, the allowable additional first year depreciation 
deduction is allocated entirely to the transferor, and not to the 
partnership. Additionally, if qualified property is both placed in 
service or planted or grafted, as applicable, and transferred in a 
transaction described in section 168(i)(7) by the transferor during the 
same taxable year, and if such property is disposed of by the 
transferee, other than by a transaction described in section 168(i)(7), 
during the same taxable year the transferee received such property from 
the transferor, then no additional first year depreciation deduction is 
allowable to either party.
    (iv) Examples. The application of this paragraph (f)(1) is 
illustrated by the following examples:

    Example 1.  UU and VV are equal partners in Partnership JL, a 
general partnership. Partnership JL is a calendar-year taxpayer. On 
October 1, 2017, Partnership JL purchased and placed in service 
qualified property at a cost of $30,000. On November 1, 2017, UU 
sells its entire 50 percent interest to WW in a transfer that 
terminates the partnership under section 708(b)(1)(B). As a result, 
terminated Partnership JL is deemed to have contributed the 
qualified property to new Partnership JL. Pursuant to paragraph 
(f)(1)(ii) of this section, new Partnership JL, not terminated 
Partnership JL, is eligible to claim the 100-percent additional 
first year depreciation deduction allowable for the qualified 
property for the taxable year 2017, assuming all other requirements 
are met.
    Example 2. On January 5, 2018, XX purchased and placed in 
service qualified property for a total amount of $9,000. On August 
20, 2018, XX transferred this qualified property to Partnership BC 
in a transaction described in section 721(a). No other partner of 
Partnership BC has ever had a depreciable interest in the qualified 
property. XX and Partnership BC are calendar-year taxpayers. Because 
the transaction between XX and Partnership BC is a transaction 
described in section 168(i)(7), pursuant to paragraph (f)(1)(iii) of 
this section, the 100-percent additional first year

[[Page 39315]]

depreciation deduction allowable for the qualified property is 
allocated between XX and Partnership BC in accordance with the rules 
in Sec.  1.168(d)-1(b)(7)(ii) for allocating the depreciation 
deduction between the transferor and the transferee. Accordingly, 
the 100-percent additional first year depreciation deduction 
allowable of $9,000 for the qualified property for 2018 is allocated 
between XX and Partnership BC based on the number of months that XX 
and Partnership BC held the qualified property in service during 
2018. Thus, because the qualified property was held in service by XX 
for 7 of 12 months, which includes the month in which XX placed the 
qualified property in service but does not include the month in 
which the qualified property was transferred, XX is allocated $5,250 
(\7/12\ x $9,000 additional first year depreciation deduction). 
Partnership BC is allocated $3,750, the remaining \5/12\ of the 
$9,000 additional first year depreciation deduction allowable for 
the qualified property.

    (2) Redetermination of basis. If the unadjusted depreciable basis, 
as defined in Sec.  1.168(b)-1(a)(3), of qualified property is 
redetermined (for example, due to contingent purchase price or 
discharge of indebtedness) before January 1, 2027, or in the case of 
property described in section 168(k)(2)(B) or (C), is redetermined 
before January 1, 2028, the additional first year depreciation 
deduction allowable for the qualified property is redetermined as 
follows:
    (i) Increase in basis. For the taxable year in which an increase in 
basis of qualified property occurs, the taxpayer shall claim an 
additional first year depreciation deduction for qualified property by 
multiplying the amount of the increase in basis for this property by 
the applicable percentage for the taxable year in which the underlying 
property was placed in service by the taxpayer. For purposes of this 
paragraph (f)(2)(i), the additional first year depreciation deduction 
applies to the increase in basis only if the underlying property is 
qualified property. To determine the amount otherwise allowable as a 
depreciation deduction for the increase in basis of qualified property, 
the amount of the increase in basis of the qualified property must be 
reduced by the additional first year depreciation deduction allowed or 
allowable, whichever is greater, for the increase in basis and the 
remaining increase in basis of--
    (A) Qualified property, except for computer software described in 
paragraph (b)(2)(i)(B) of this section, is depreciated over the 
recovery period of the qualified property remaining as of the beginning 
of the taxable year in which the increase in basis occurs, and using 
the same depreciation method and convention applicable to the qualified 
property that applies for the taxable year in which the increase in 
basis occurs; and
    (B) Computer software, as defined in paragraph (b)(2)(i)(B) of this 
section, that is qualified property is depreciated ratably over the 
remainder of the 36-month period, the useful life under section 
167(f)(1), as of the beginning of the first day of the month in which 
the increase in basis occurs.
    (ii) Decrease in basis. For the taxable year in which a decrease in 
basis of qualified property occurs, the taxpayer shall reduce the total 
amount otherwise allowable as a depreciation deduction for all of the 
taxpayer's depreciable property by the excess additional first year 
depreciation deduction previously claimed for the qualified property. 
If, for such taxable year, the excess additional first year 
depreciation deduction exceeds the total amount otherwise allowable as 
a depreciation deduction for all of the taxpayer's depreciable 
property, the taxpayer shall take into account a negative depreciation 
deduction in computing taxable income. The excess additional first year 
depreciation deduction for qualified property is determined by 
multiplying the amount of the decrease in basis for this property by 
the applicable percentage for the taxable year in which the underlying 
property was placed in service by the taxpayer. For purposes of this 
paragraph (f)(2)(ii), the additional first year depreciation deduction 
applies to the decrease in basis only if the underlying property is 
qualified property. Also, if the taxpayer establishes by adequate 
records or other sufficient evidence that the taxpayer claimed less 
than the additional first year depreciation deduction allowable for the 
qualified property before the decrease in basis, or if the taxpayer 
claimed more than the additional first year depreciation deduction 
allowable for the qualified property before the decrease in basis, the 
excess additional first year depreciation deduction is determined by 
multiplying the amount of the decrease in basis by the additional first 
year depreciation deduction percentage actually claimed by the taxpayer 
for the qualified property before the decrease in basis. To determine 
the amount to reduce the total amount otherwise allowable as a 
depreciation deduction for all of the taxpayer's depreciable property 
for the excess depreciation previously claimed, other than the 
additional first year depreciation deduction, resulting from the 
decrease in basis of the qualified property, the amount of the decrease 
in basis of the qualified property must be adjusted by the excess 
additional first year depreciation deduction that reduced the total 
amount otherwise allowable as a depreciation deduction, as determined 
under this paragraph (f)(2)(ii), and the remaining decrease in basis 
of--
    (A) Qualified property, except for computer software described in 
paragraph (b)(2)(i)(B) of this section, reduces the amount otherwise 
allowable as a depreciation deduction over the recovery period of the 
qualified property remaining as of the beginning of the taxable year in 
which the decrease in basis occurs, and using the same depreciation 
method and convention of the qualified property that applies in the 
taxable year in which the decrease in basis occurs. If, for any taxable 
year, the reduction to the amount otherwise allowable as a depreciation 
deduction, as determined under this paragraph (f)(2)(ii)(A), exceeds 
the total amount otherwise allowable as a depreciation deduction for 
all of the taxpayer's depreciable property, the taxpayer shall take 
into account a negative depreciation deduction in computing taxable 
income; and
    (B) Computer software, as defined in paragraph (b)(2)(i)(B) of this 
section, that is qualified property reduces the amount otherwise 
allowable as a depreciation deduction over the remainder of the 36-
month period, the useful life under section 167(f)(1), as of the 
beginning of the first day of the month in which the decrease in basis 
occurs. If, for any taxable year, the reduction to the amount otherwise 
allowable as a depreciation deduction, as determined under this 
paragraph (f)(2)(ii)(B), exceeds the total amount otherwise allowable 
as a depreciation deduction for all of the taxpayer's depreciable 
property, the taxpayer shall take into account a negative depreciation 
deduction in computing taxable income.
    (iii) Definitions. Except as otherwise expressly provided by the 
Internal Revenue Code (for example, section 1017(a)), the regulations 
under the Internal Revenue Code, or other guidance published in the 
Internal Revenue Bulletin for purposes of this paragraph (f)(2)--
    (A) An increase in basis occurs in the taxable year an amount is 
taken into account under section 461; and
    (B) A decrease in basis occurs in the taxable year an amount would 
be taken into account under section 451.
    (iv) Examples. The application of this paragraph (f)(2) is 
illustrated by the following examples:

     Example 1. (i) On May 15, 2023, YY, a cash-basis taxpayer, 
purchased and placed in

[[Page 39316]]

service qualified property that is 5-year property at a cost of 
$200,000. In addition to the $200,000, YY agrees to pay the seller 
25 percent of the gross profits from the operation of the property 
in 2023. On May 15, 2024, YY paid to the seller an additional 
$10,000. YY depreciates the 5-year property placed in service in 
2023 using the optional depreciation table that corresponds with the 
general depreciation system, the 200-percent declining balance 
method, a 5-year recovery period, and the half-year convention.
    (ii) For 2023, YY is allowed an 80-percent additional first year 
depreciation deduction of $160,000 (the unadjusted depreciable basis 
of $200,000 multiplied by 0.80). In addition, YY's depreciation 
deduction for 2023 for the remaining adjusted depreciable basis of 
$40,000 (the unadjusted depreciable basis of $200,000 reduced by the 
additional first year depreciation deduction of $160,000) is $8,000 
(the remaining adjusted depreciable basis of $40,000 multiplied by 
the annual depreciation rate of 0.20 for recovery year 1).
    (iii) For 2024, YY's depreciation deduction for the remaining 
adjusted depreciable basis of $40,000 is $12,800 (the remaining 
adjusted depreciable basis of $40,000 multiplied by the annual 
depreciation rate of 0.32 for recovery year 2). In addition, 
pursuant to paragraph (f)(2)(i) of this section, YY is allowed an 
additional first year depreciation deduction for 2024 for the 
$10,000 increase in basis of the qualified property. Consequently, 
YY is allowed an additional first year depreciation deduction of 
$8,000 (the increase in basis of $10,000 multiplied by 0.80, the 
applicable percentage for 2023). Also, YY is allowed a depreciation 
deduction for 2024 attributable to the remaining increase in basis 
of $2,000 (the increase in basis of $10,000 reduced by the 
additional first year depreciation deduction of $8,000). The 
depreciation deduction allowable for 2024 attributable to the 
remaining increase in basis of $2,000 is $889 (the remaining 
increase in basis of $2,000 multiplied by 0.4444, which is equal to 
1/remaining recovery period of 4.5 years at January 1, 2024, 
multiplied by 2). Accordingly, for 2024, YY's total depreciation 
deduction allowable for the qualified property is $21,689 ($12,800 
plus $8,000 plus $889).
     Example 2.  (i) On May 15, 2023, ZZ, a calendar-year taxpayer, 
purchased and placed in service qualified property that is 5-year 
property at a cost of $400,000. To purchase the property, ZZ 
borrowed $250,000 from Bank1. On May 15, 2024, Bank1 forgives 
$50,000 of the indebtedness. ZZ makes the election provided in 
section 108(b)(5) to apply any portion of the reduction under 
section 1017 to the basis of the depreciable property of the 
taxpayer. ZZ depreciates the 5-year property placed in service in 
2023 using the optional depreciation table that corresponds with the 
general depreciation system, the 200-percent declining balance 
method, a 5-year recovery period, and the half-year convention.
    (ii) For 2023, ZZ is allowed an 80-percent additional first year 
depreciation deduction of $320,000 (the unadjusted depreciable basis 
of $400,000 multiplied by 0.80). In addition, ZZ's depreciation 
deduction allowable for 2023 for the remaining adjusted depreciable 
basis of $80,000 (the unadjusted depreciable basis of $400,000 
reduced by the additional first year depreciation deduction of 
$320,000) is $16,000 (the remaining adjusted depreciable basis of 
$80,000 multiplied by the annual depreciation rate of 0.20 for 
recovery year 1).
    (iii) For 2024, ZZ's deduction for the remaining adjusted 
depreciable basis of $80,000 is $25,600 (the remaining adjusted 
depreciable basis of $80,000 multiplied by the annual depreciation 
rate 0.32 for recovery year 2). Although Bank1 forgave the 
indebtedness in 2024, the basis of the property is reduced on 
January 1, 2025, pursuant to sections 108(b)(5) and 1017(a) under 
which basis is reduced at the beginning of the taxable year 
following the taxable year in which the discharge of indebtedness 
occurs.
    (iv) For 2025, ZZ's deduction for the remaining adjusted 
depreciable basis of $80,000 is $15,360 (the remaining adjusted 
depreciable basis of $80,000 multiplied by the annual depreciation 
rate 0.192 for recovery year 3). However, pursuant to paragraph 
(f)(2)(ii) of this section, ZZ must reduce the amount otherwise 
allowable as a depreciation deduction for 2025 by the excess 
depreciation previously claimed for the $50,000 decrease in basis of 
the qualified property. Consequently, ZZ must reduce the amount of 
depreciation otherwise allowable for 2025 by the excess additional 
first year depreciation of $40,000 (the decrease in basis of $50,000 
multiplied by 0.80, the applicable percentage for 2023). Also, ZZ 
must reduce the amount of depreciation otherwise allowable for 2025 
by the excess depreciation attributable to the remaining decrease in 
basis of $10,000 (the decrease in basis of $50,000 reduced by the 
excess additional first year depreciation of $40,000). The reduction 
in the amount of depreciation otherwise allowable for 2025 for the 
remaining decrease in basis of $10,000 is $5,714 (the remaining 
decrease in basis of $10,000 multiplied by 0.5714, which is equal to 
(1/remaining recovery period of 3.5 years at January 1, 2025) 
multiplied by 2). Accordingly, assuming the qualified property is 
the only depreciable property owned by ZZ, for 2025, ZZ has a 
negative depreciation deduction for the qualified property of 
$30,354 ($15,360 minus $40,000 minus $5,714).

    (3) Sections 1245 and 1250 depreciation recapture. For purposes of 
section 1245 and the regulations under section 1245, the additional 
first year depreciation deduction is an amount allowed or allowable for 
depreciation. Further, for purposes of section 1250(b) and the 
regulations under section 1250(b), the additional first year 
depreciation deduction is not a straight line method.
    (4) Coordination with section 169. The additional first year 
depreciation deduction is allowable in the placed-in-service year of a 
certified pollution control facility, as defined in Sec.  1.169-2(a), 
that is qualified property even if the taxpayer makes the election to 
amortize the certified pollution control facility under section 169 and 
the regulations under section 169 in the certified pollution control 
facility's placed-in-service year.
    (5) Like-kind exchanges and involuntary conversions--(i) Scope. The 
rules of this paragraph (f)(5) apply to replacement MACRS property or 
replacement computer software that is qualified property at the time of 
replacement provided the time of replacement is after September 27, 
2017, and before January 1, 2027; or, in the case of replacement MACRS 
property or replacement computer software that is qualified property 
described in section 168(k)(2)(B) or (C), the time of replacement is 
after September 27, 2017, and before January 1, 2028.
    (ii) Definitions. For purposes of this paragraph (f)(5), the 
following definitions apply:
    (A) Replacement MACRS property has the same meaning as that term is 
defined in Sec.  1.168(i)-6(b)(1).
    (B) Relinquished MACRS property has the same meaning as that term 
is defined in Sec.  1.168(i)-6(b)(2).
    (C) Replacement computer software is computer software, as defined 
in paragraph (b)(2)(i)(B) of this section, in the hands of the 
acquiring taxpayer that is acquired for other computer software in a 
like-kind exchange or in an involuntary conversion.
    (D) Relinquished computer software is computer software that is 
transferred by the taxpayer in a like-kind exchange or in an 
involuntary conversion.
    (E) Time of disposition has the same meaning as that term is 
defined in Sec.  1.168(i)-6(b)(3) for relinquished MACRS property. For 
relinquished computer software, time of disposition is when the 
disposition of the relinquished computer software takes place under the 
convention determined under Sec.  1.167(a)-14(b).
    (F) Except as provided in paragraph (f)(5)(iv) of this section, the 
time of replacement has the same meaning as that term is defined in 
Sec.  1.168(i)-6(b)(4) for replacement MACRS property. For replacement 
computer software, the time of replacement is, except as provided in 
paragraph (f)(5)(iv) of this section, the later of--
    (1) When the replacement computer software is placed in service 
under the convention determined under Sec.  1.167(a)-14(b); or
    (2) The time of disposition of the relinquished property.
    (G) Exchanged basis has the same meaning as that term is defined in 
Sec.  1.168(i)-6(b)(7) for MACRS property, as defined in Sec.  
1.168(b)-1(a)(2). For computer software, the exchanged basis

[[Page 39317]]

is determined after the amortization deductions for the year of 
disposition are determined under Sec.  1.167(a)-14(b) and is the lesser 
of--
    (1) The basis in the replacement computer software, as determined 
under section 1031(d) and the regulations under section 1031(d), or 
section 1033(b) and the regulations under section 1033(b); or
    (2) The adjusted depreciable basis of the relinquished computer 
software.
    (H) Excess basis has the same meaning as that term is defined in 
Sec.  1.168(i)-6(b)(8) for replacement MACRS property. For replacement 
computer software, the excess basis is any excess of the basis in the 
replacement computer software, as determined under section 1031(d) and 
the regulations under section 1031(d), or section 1033(b) and the 
regulations under section 1033(b), over the exchanged basis as 
determined under paragraph (f)(5)(ii)(G) of this section.
    (I) Remaining exchanged basis is the exchanged basis as determined 
under paragraph (f)(5)(ii)(G) of this section reduced by--
    (1) The percentage of such basis attributable to the taxpayer's use 
of property for the taxable year other than in the taxpayer's trade or 
business or for the production of income; and
    (2) Any adjustments to basis provided by other provisions of the 
Code and the regulations under the Code (including section 1016(a)(2) 
and (3)) for periods prior to the disposition of the relinquished 
property.
    (J) Remaining excess basis is the excess basis as determined under 
paragraph (f)(5)(ii)(H) of this section reduced by--
    (1) The percentage of such basis attributable to the taxpayer's use 
of property for the taxable year other than in the taxpayer's trade or 
business or for the production of income;
    (2) Any portion of the basis the taxpayer properly elects to treat 
as an expense under section 179 or 179C; and
    (3) Any adjustments to basis provided by other provisions of the 
Code and the regulations under the Code.
    (K) Year of disposition has the same meaning as that term is 
defined in Sec.  1.168(i)-6(b)(5).
    (L) Year of replacement has the same meaning as that term is 
defined in Sec.  1.168(i)-6(b)(6).
    (M) Like-kind exchange has the same meaning as that term is defined 
in Sec.  1.168(i)-6(b)(11).
    (N) Involuntary conversion has the same meaning as that term is 
defined in Sec.  1.168(i)-6(b)(12).
    (iii) Computation--(A) In general. If the replacement MACRS 
property or the replacement computer software, as applicable, meets the 
original use requirement in paragraph (b)(3)(ii) of this section and 
all other requirements of section 168(k) and this section, the 
remaining exchanged basis for the year of replacement and the remaining 
excess basis, if any, for the year of replacement for the replacement 
MACRS property or the replacement computer software, as applicable, are 
eligible for the additional first year depreciation deduction. If the 
replacement MACRS property or the replacement computer software, as 
applicable, meets the used property acquisition requirements in 
paragraph (b)(3)(iii) of this section and all other requirements of 
section 168(k) and this section, only the remaining excess basis for 
the year of replacement for the replacement MACRS property or the 
replacement computer software, as applicable, is eligible for the 
additional first year depreciation deduction. See paragraph 
(b)(3)(iii)(A)(3) of this section. The additional first year 
depreciation deduction applies to the remaining exchanged basis and any 
remaining excess basis, as applicable, of the replacement MACRS 
property or the replacement computer software, as applicable, if the 
time of replacement is after September 27, 2017, and before January 1, 
2027; or, in the case of replacement MACRS property or replacement 
computer software, as applicable, described in section 168(k)(2)(B) or 
(C), the time of replacement is after September 27, 2017, and before 
January 1, 2028. The additional first year depreciation deduction is 
computed separately for the remaining exchanged basis and any remaining 
excess basis, as applicable.
    (B) Year of disposition and year of replacement. The additional 
first year depreciation deduction is allowable for the replacement 
MACRS property or replacement computer software in the year of 
replacement. However, the additional first year depreciation deduction 
is not allowable for the relinquished MACRS property or the 
relinquished computer software, as applicable, if the relinquished 
MACRS property or the relinquished computer software, as applicable, is 
placed in service and disposed of in a like-kind exchange or in an 
involuntary conversion in the same taxable year.
    (C) Property described in section 168(k)(2)(B). For purposes of 
paragraph (f)(5)(iii)(A) of this section, the total of the remaining 
exchanged basis and the remaining excess basis, if any, of the 
replacement MACRS property that is qualified property described in 
section 168(k)(2)(B) and meets the original use requirement in 
paragraph (b)(3)(ii) of this section is limited to the total of the 
property's remaining exchanged basis and remaining excess basis, if 
any, attributable to the property's manufacture, construction, or 
production after September 27, 2017, and before January 1, 2027. For 
purposes of paragraph (f)(5)(iii)(A) of this section, the remaining 
excess basis, if any, of the replacement MACRS property that is 
qualified property described in section 168(k)(2)(B) and meets the used 
property acquisition requirements in paragraph (b)(3)(iii) of this 
section is limited to the property's remaining excess basis, if any, 
attributable to the property's manufacture, construction, or production 
after September 27, 2017, and before January 1, 2027.
    (D) Effect of Sec.  1.168(i)-6(i)(1) election. If a taxpayer 
properly makes the election under Sec.  1.168(i)-6(i)(1) not to apply 
Sec.  1.168(i)-6 for any MACRS property, as defined in Sec.  1.168(b)-
1(a)(2), involved in a like-kind exchange or involuntary conversion and 
either of the following:
    (1) The replacement MACRS property meets the original use 
requirement in paragraph (b)(3)(ii) of this section and all other 
requirements of section 168(k) and this section, the total of the 
exchanged basis, as defined in Sec.  1.168(i)-6(b)(7), and the excess 
basis, as defined in Sec.  1.168(i)-6(b)(8), if any, in the replacement 
MACRS property is eligible for the additional first year depreciation 
deduction; or
    (2) The replacement MACRS property meets the used property 
acquisition requirements in paragraph (b)(3)(iii) of this section and 
all other requirements of section 168(k) and this section, only the 
excess basis, as defined in Sec.  1.168(i)-6(b)(8), if any, in the 
replacement MACRS property is eligible for the additional first year 
depreciation deduction.
    (E) Alternative minimum tax. The additional first year depreciation 
deduction is allowed for alternative minimum tax purposes for the year 
of replacement of replacement MACRS property or replacement computer 
software, as applicable, that is qualified property. If the replacement 
MACRS property or the replacement computer software, as applicable, 
meets the original use requirement in paragraph (b)(3)(ii) of this 
section and all other requirements of section 168(k) and this section, 
the additional first year depreciation deduction for alternative 
minimum tax purposes is based on the remaining exchanged basis and the 
remaining excess basis, if any, of the replacement MACRS property or 
the

[[Page 39318]]

replacement computer software, as applicable, for alternative minimum 
tax purposes. If the replacement MACRS property or the replacement 
computer software, as applicable, meets the used property acquisition 
requirements in paragraph (b)(3)(iii) of this section and all other 
requirements of section 168(k) and this section, the additional first 
year depreciation deduction for alternative minimum tax purposes is 
based on the remaining excess basis, if any, of the replacement MACRS 
property or the replacement computer software, as applicable, for 
alternative minimum tax purposes.
    (iv) Replacement MACRS property or replacement computer software 
that is acquired and placed in service before disposition of 
relinquished MACRS property or relinquished computer software. If, in 
an involuntary conversion, a taxpayer acquires and places in service 
the replacement MACRS property or the replacement computer software, as 
applicable, before the time of disposition of the involuntarily 
converted MACRS property or the involuntarily converted computer 
software, as applicable; and the time of disposition of the 
involuntarily converted MACRS property or the involuntarily converted 
computer software, as applicable, is after December 31, 2026, or, in 
the case of property described in service 168(k)(2)(B) or (C), after 
December 31, 2027, then--
    (A) The time of replacement for purposes of this paragraph (f)(5) 
is when the replacement MACRS property or replacement computer 
software, as applicable, is placed in service by the taxpayer, provided 
the threat or imminence of requisition or condemnation of the 
involuntarily converted MACRS property or involuntarily converted 
computer software, as applicable, existed before January 1, 2027, or, 
in the case of property described in section 168(k)(2)(B) or (C), 
existed before January 1, 2028; and
    (B) The taxpayer depreciates the replacement MACRS property or 
replacement computer software, as applicable, in accordance with 
paragraph (d) of this section. However, at the time of disposition of 
the involuntarily converted MACRS property, the taxpayer determines the 
exchanged basis, as defined in Sec.  1.168(i)-6(b)(7), and the excess 
basis, as defined in Sec.  1.168(i)-6(b)(8), of the replacement MACRS 
property and begins to depreciate the depreciable exchanged basis, as 
defined in Sec.  1.168(i)-6(b)(9), of the replacement MACRS property in 
accordance with Sec.  1.168(i)-6(c). The depreciable excess basis, as 
defined in Sec.  1.168(i)-6(b)(10), of the replacement MACRS property 
continues to be depreciated by the taxpayer in accordance with the 
first sentence of this paragraph (f)(5)(iv)(B). Further, in the year of 
disposition of the involuntarily converted MACRS property, the taxpayer 
must include in taxable income the excess of the depreciation 
deductions allowable, including the additional first year depreciation 
deduction allowable, on the unadjusted depreciable basis of the 
replacement MACRS property over the additional first year depreciation 
deduction that would have been allowable to the taxpayer on the 
remaining exchanged basis of the replacement MACRS property at the time 
of replacement, as defined in paragraph (f)(5)(v)(A) of this section, 
plus the depreciation deductions that would have been allowable, 
including the additional first year depreciation deduction allowable, 
to the taxpayer on the depreciable excess basis of the replacement 
MACRS property from the date the replacement MACRS property was placed 
in service by the taxpayer, taking into account the applicable 
convention, to the time of disposition of the involuntarily converted 
MACRS property. Similar rules apply to replacement computer software.
    (v) Examples. The application of this paragraph (f)(5) is 
illustrated by the following examples:

    Example 1. (i) In April 2016, CSK, a calendar-year corporation, 
acquired for $200,000 and placed in service Canopy V1, a gas station 
canopy. Canopy V1 is qualified property under section 168(k)(2), as 
in effect on the day before amendment by the Act, and is 5-year 
property under section 168(e). CSK depreciated Canopy V1 under the 
general depreciation system of section 168(a) by using the 200-
percent declining balance method of depreciation, a 5-year recovery 
period, and the half-year convention. CSK elected to use the 
optional depreciation tables to compute the depreciation allowance 
for Canopy V1. In November 2017, Canopy V1 was destroyed in a fire 
and was no longer usable in CSK's business. In December 2017, in an 
involuntary conversion, CSK acquired and placed in service Canopy W1 
with all of the $160,000 of insurance proceeds CSK received due to 
the loss of Canopy V1. Canopy W1 is qualified property under section 
168(k)(2) and this section, and is 5-year property under section 
168(e). Canopy W1 also meets the original use requirement in 
paragraph (b)(3)(ii) of this section. CSK did not make the election 
under Sec.  1.168(i)-6(i)(1).
    (ii) For 2016, CSK is allowed a 50-percent additional first year 
depreciation deduction of $100,000 for Canopy V1 (the unadjusted 
depreciable basis of $200,000 multiplied by 0.50), and a regular 
MACRS depreciation deduction of $20,000 for Canopy V1 (the remaining 
adjusted depreciable basis of $100,000 multiplied by the annual 
depreciation rate of 0.20 for recovery year 1).
    (iii) For 2017, CSK is allowed a regular MACRS depreciation 
deduction of $16,000 for Canopy V1 (the remaining adjusted 
depreciable basis of $100,000 multiplied by the annual depreciation 
rate of 0.32 for recovery year 2 x \1/2\ year).
    (iv) Pursuant to paragraph (f)(5)(iii)(A) of this section, the 
additional first year depreciation deduction allowable for Canopy W1 
for 2017 equals $64,000 (100 percent of Canopy W1's remaining 
exchanged basis at the time of replacement of $64,000 (Canopy V1's 
remaining adjusted depreciable basis of $100,000 minus 2016 regular 
MACRS depreciation deduction of $20,000 minus 2017 regular MACRS 
depreciation deduction of $16,000)).
    Example 2. (i) The facts are the same as in Example 1 of this 
paragraph (f)(5)(v), except CSK elected not to deduct the additional 
first year depreciation for 5-year property placed in service in 
2016. CSK deducted the additional first year depreciation for 5-year 
property placed in service in 2017.
    (ii) For 2016, CSK is allowed a regular MACRS depreciation 
deduction of $40,000 for Canopy V1 (the unadjusted depreciable basis 
of $200,000 multiplied by the annual depreciation rate of 0.20 for 
recovery year 1).
    (iii) For 2017, CSK is allowed a regular MACRS depreciation 
deduction of $32,000 for Canopy V1 (the unadjusted depreciable basis 
of $200,000 multiplied by the annual depreciation rate of 0.32 for 
recovery year 2 x \1/2\ year).
    (iv) Pursuant to paragraph (f)(5)(iii)(A) of this section, the 
additional first year depreciation deduction allowable for Canopy W1 
for 2017 equals $128,000 (100 percent of Canopy W1's remaining 
exchanged basis at the time of replacement of $128,000 (Canopy V1's 
unadjusted depreciable basis of $200,000 minus 2016 regular MACRS 
depreciation deduction of $40,000 minus 2017 regular MACRS 
depreciation deduction of $32,000)).
    Example 3. The facts are the same as in Example 1 of this 
paragraph (f)(5)(v), except Canopy W1 meets the used property 
acquisition requirements in paragraph (b)(3)(iii) of this section. 
Because the remaining excess basis of Canopy W1 is zero, CSK is not 
allowed any additional first year depreciation for Canopy W1 
pursuant to paragraph (f)(5)(iii)(A) of this section.
    Example 4. (i) In December 2016, AB, a calendar-year 
corporation, acquired for $10,000 and placed in service Computer X2. 
Computer X2 is qualified property under section 168(k)(2), as in 
effect on the day before amendment by the Act, and is 5-year 
property under section 168(e). AB depreciated Computer X2 under the 
general depreciation system of section 168(a) by using the 200-
percent declining balance method of depreciation, a 5-year recovery 
period, and the half-year convention. AB elected to use the optional 
depreciation tables to compute the depreciation allowance for 
Computer X2. In November 2017, AB acquired Computer Y2 by exchanging 
Computer X2 and $1,000 cash in a like-kind exchange. Computer Y2 is 
qualified property under section 168(k)(2) and this section, and

[[Page 39319]]

is 5-year property under section 168(e). Computer Y2 also meets the 
original use requirement in paragraph (b)(3)(ii) of this section. AB 
did not make the election under Sec.  1.168(i)-6(i)(1).
    (ii) For 2016, AB is allowed a 50-percent additional first year 
depreciation deduction of $5,000 for Computer X2 (unadjusted basis 
of $10,000 multiplied by 0.50), and a regular MACRS depreciation 
deduction of $1,000 for Computer X2 (the remaining adjusted 
depreciable basis of $5,000 multiplied by the annual depreciation 
rate of 0.20 for recovery year 1).
    (iii) For 2017, AB is allowed a regular MACRS depreciation 
deduction of $800 for Computer X2 (the remaining adjusted 
depreciable basis of $5,000 multiplied by the annual depreciation 
rate of 0.32 for recovery year 2 x \1/2\ year).
    (iv) Pursuant to paragraph (f)(5)(iii)(A) of this section, the 
100-percent additional first year depreciation deduction for 
Computer Y2 for 2017 is allowable for the remaining exchanged basis 
at the time of replacement of $3,200 (Computer X2's unadjusted 
depreciable basis of $10,000 minus additional first year 
depreciation deduction allowable of $5,000 minus the 2016 regular 
MACRS depreciation deduction of $1,000 minus the 2017 regular MACRS 
depreciation deduction of $800) and for the remaining excess basis 
at the time of replacement of $1,000 (cash paid for Computer Y2). 
Thus, the 100-percent additional first year depreciation deduction 
allowable for Computer Y2 totals $4,200 for 2017.
    Example 5. (i) In July 2017, BC, a calendar-year corporation, 
acquired for $20,000 and placed in service Equipment X3. Equipment 
X3 is qualified property under section 168(k)(2), as in effect on 
the day before amendment by the Act, and is 5-year property under 
section 168(e). BC depreciated Equipment X3 under the general 
depreciation system of section 168(a) by using the 200-percent 
declining balance method of depreciation, a 5-year recovery period, 
and the half-year convention. BC elected to use the optional 
depreciation tables to compute the depreciation allowance for 
Equipment X3. In December 2017, BC acquired Equipment Y3 by 
exchanging Equipment X3 and $5,000 cash in a like-kind exchange. 
Equipment Y3 is qualified property under section 168(k)(2) and this 
section, and is 5-year property under section 168(e). Equipment Y3 
also meets the used property acquisition requirements in paragraph 
(b)(3)(iii) of this section. BC did not make the election under 
Sec.  1.168(i)-6(i)(1).
    (ii) Pursuant to Sec.  1.168(k)-1(f)(5)(iii)(B), no additional 
first year depreciation deduction is allowable for Equipment X3 and, 
pursuant to Sec.  1.168(d)-1(b)(3)(ii), no regular depreciation 
deduction is allowable for Equipment X3, for 2017.
    (iii) Pursuant to paragraph (f)(5)(iii)(A) of this section, no 
additional first year depreciation deduction is allowable for 
Equipment Y3's remaining exchanged basis at the time of replacement 
of $20,000 (Equipment X3's unadjusted depreciable basis of $20,000). 
However, pursuant to paragraph (f)(5)(iii)(A) of this section, the 
100-percent additional first year depreciation deduction is 
allowable for Equipment Y3's remaining excess basis at the time of 
replacement of $5,000 (cash paid for Equipment Y3). Thus, the 100-
percent additional first year depreciation deduction allowable for 
Equipment Y3 is $5,000 for 2017.
    Example 6. (i) The facts are the same as in Example 5 of this 
paragraph (f)(5)(v), except BC properly makes the election under 
Sec.  1.168(i)-6(i)(1) not to apply Sec.  1.168(i)-6 to Equipment X3 
and Equipment Y3.
    (ii) Pursuant to Sec.  1.168(k)-1(f)(5)(iii)(B), no additional 
first year depreciation deduction is allowable for Equipment X3 and, 
pursuant to Sec.  1.168(d)-1(b)(3)(ii), no regular depreciation 
deduction is allowable for Equipment X3, for 2017.
    (iii) Pursuant to Sec.  1.168(i)-6(i)(1), BC is treated as 
placing Equipment Y3 in service in December 2017 with a basis of 
$25,000 (the total of the exchanged basis of $20,000 and the excess 
basis of $5,000). However, pursuant to paragraph (f)(5)(iii)(D)(2) 
of this section, the 100-percent additional first year depreciation 
deduction is allowable only for Equipment Y3's excess basis at the 
time of replacement of $5,000 (cash paid for Equipment Y3). Thus, 
the 100-percent additional first year depreciation deduction 
allowable for Equipment Y3 is $5,000 for 2017.

    (6) Change in use--(i) Change in use of depreciable property. The 
determination of whether the use of depreciable property changes is 
made in accordance with section 168(i)(5) and Sec.  1.168(i)-4.
    (ii) Conversion to personal use. If qualified property is converted 
from business or income-producing use to personal use in the same 
taxable year in which the property is placed in service by a taxpayer, 
the additional first year depreciation deduction is not allowable for 
the property.
    (iii) Conversion to business or income-producing use--(A) During 
the same taxable year. If, during the same taxable year, property is 
acquired by a taxpayer for personal use and is converted by the 
taxpayer from personal use to business or income-producing use, the 
additional first year depreciation deduction is allowable for the 
property in the taxable year the property is converted to business or 
income-producing use, assuming all of the requirements in paragraph (b) 
of this section are met. See paragraph (b)(3)(ii) of this section 
relating to the original use rules for a conversion of property to 
business or income-producing use.
    (B) Subsequent to the acquisition year. If property is acquired by 
a taxpayer for personal use and, during a subsequent taxable year, is 
converted by the taxpayer from personal use to business or income-
producing use, the additional first year depreciation deduction is 
allowable for the property in the taxable year the property is 
converted to business or income-producing use, assuming all of the 
requirements in paragraph (b) of this section are met. For purposes of 
paragraphs (b)(4) and (5) of this section, the property must be 
acquired by the taxpayer for personal use after September 27, 2017, and 
converted by the taxpayer from personal use to business or income-
producing use by January 1, 2027. See paragraph (b)(3)(ii) of this 
section relating to the original use rules for a conversion of property 
to business or income-producing use.
    (iv) Depreciable property changes use subsequent to the placed-in-
service year--(A) If the use of qualified property changes in the hands 
of the same taxpayer subsequent to the taxable year the qualified 
property is placed in service and, as a result of the change in use, 
the property is no longer qualified property, the additional first year 
depreciation deduction allowable for the qualified property is not 
redetermined.
    (B) If depreciable property is not qualified property in the 
taxable year the property is placed in service by the taxpayer, the 
additional first year depreciation deduction is not allowable for the 
property even if a change in the use of the property subsequent to the 
taxable year the property is placed in service results in the property 
being qualified property in the taxable year of the change in use.
    (v) Examples. The application of this paragraph (f)(6) is 
illustrated by the following examples:

    Example 1. (i) On January 1, 2019, FFF, a calendar year 
corporation, purchased and placed in service several new computers 
at a total cost of $100,000. FFF used these computers within the 
United States for 3 months in 2019 and then moved and used the 
computers outside the United States for the remainder of 2019. On 
January 1, 2020, FFF permanently returns the computers to the United 
States for use in its business.
    (ii) For 2019, the computers are considered as used 
predominantly outside the United States in 2019 pursuant to Sec.  
1.48-1(g)(1)(i). As a result, the computers are required to be 
depreciated under the alternative depreciation system of section 
168(g). Pursuant to paragraph (b)(2)(ii)(B) of this section, the 
computers are not qualified property in 2019, the placed-in-service 
year. Thus, pursuant to paragraph (f)(6)(iv)(B) of this section, no 
additional first year depreciation deduction is allowed for these 
computers, regardless of the fact that the computers are permanently 
returned to the United States in 2020.
    Example 2. (i) On February 8, 2023, GGG, a calendar year 
corporation, purchased and placed in service new equipment at a cost 
of $1,000,000 for use in its California plant. The equipment is 5-
year property under section

[[Page 39320]]

168(e) and is qualified property under section 168(k). GGG 
depreciates its 5-year property placed in service in 2023 using the 
optional depreciation table that corresponds with the general 
depreciation system, the 200-percent declining balance method, a 5-
year recovery period, and the half-year convention. On June 4, 2024, 
due to changes in GGG's business circumstances, GGG permanently 
moves the equipment to its plant in Mexico.
    (ii) For 2023, GGG is allowed an 80-percent additional first 
year depreciation deduction of $800,000 (the adjusted depreciable 
basis of $1,000,000 multiplied by 0.80). In addition, GGG's 
depreciation deduction allowable in 2023 for the remaining adjusted 
depreciable basis of $200,000 (the unadjusted depreciable basis of 
$1,000,000 reduced by the additional first year depreciation 
deduction of $800,000) is $40,000 (the remaining adjusted 
depreciable basis of $200,000 multiplied by the annual depreciation 
rate of 0.20 for recovery year 1).
    (iii) For 2024, the equipment is considered as used 
predominantly outside the United States pursuant to Sec.  1.48-
1(g)(1)(i). As a result of this change in use, the adjusted 
depreciable basis of $160,000 for the equipment is required to be 
depreciated under the alternative depreciation system of section 
168(g) beginning in 2024. However, the additional first year 
depreciation deduction of $800,000 allowed for the equipment in 2023 
is not redetermined.

    (7) Earnings and profits. The additional first year depreciation 
deduction is not allowable for purposes of computing earnings and 
profits.
    (8) Limitation of amount of depreciation for certain passenger 
automobiles. For a passenger automobile as defined in section 
280F(d)(5), the limitation under section 280F(a)(1)(A)(i) is increased 
by $8,000 for qualified property acquired and placed in service by a 
taxpayer after September 27, 2017.
    (9) Coordination with section 47--(i) In general. If qualified 
rehabilitation expenditures, as defined in section 47(c)(2) and Sec.  
1.48-12(c), incurred by a taxpayer with respect to a qualified 
rehabilitated building, as defined in section 47(c)(1) and Sec.  1.48-
12(b), are qualified property, the taxpayer may claim the 
rehabilitation credit provided by section 47(a), provided the 
requirements of section 47 are met--
    (A) With respect to the portion of the basis of the qualified 
rehabilitated building that is attributable to the qualified 
rehabilitation expenditures if the taxpayer makes the applicable 
election under paragraph (e)(1)(i) of this section not to deduct any 
additional first year depreciation for the class of property that 
includes the qualified rehabilitation expenditures; or
    (B) With respect to the portion of the remaining rehabilitated 
basis of the qualified rehabilitated building that is attributable to 
the qualified rehabilitation expenditures if the taxpayer claims the 
additional first year depreciation deduction on the unadjusted 
depreciable basis, as defined in Sec.  1.168(b)-1(a)(3) but before the 
reduction in basis for the amount of the rehabilitation credit, of the 
qualified rehabilitation expenditures; and the taxpayer depreciates the 
remaining adjusted depreciable basis, as defined in paragraph (d)(2)(i) 
of this section, of such expenditures using straight line cost recovery 
in accordance with section 47(c)(2)(B)(i) and Sec.  1.48-12(c)(7)(i). 
For purposes of this paragraph (f)(9)(i)(B), the remaining 
rehabilitated basis is equal to the unadjusted depreciable basis, as 
defined in Sec.  1.168(b)-1(a)(3) but before the reduction in basis for 
the amount of the rehabilitation credit, of the qualified 
rehabilitation expenditures that are qualified property reduced by the 
additional first year depreciation allowed or allowable, whichever is 
greater.
    (ii) Example. The application of this paragraph (f)(9) is 
illustrated by the following example:

    Example. (i) Between February 8, 2023, and June 4, 2023, JM, a 
calendar-year taxpayer, incurred qualified rehabilitation 
expenditures of $200,000 with respect to a qualified rehabilitated 
building that is nonresidential real property under section 168(e). 
These qualified rehabilitation expenditures are qualified property 
and qualify for the 20-percent rehabilitation credit under section 
47(a)(1). JM's basis in the qualified rehabilitated building is zero 
before incurring the qualified rehabilitation expenditures and JM 
placed the qualified rehabilitated building in service in July 2023. 
JM depreciates its nonresidential real property placed in service in 
2023 under the general depreciation system of section 168(a) by 
using the straight line method of depreciation, a 39-year recovery 
period, and the mid-month convention. JM elected to use the optional 
depreciation tables to compute the depreciation allowance for its 
depreciable property placed in service in 2023. Further, for 2023, 
JM did not make any election under paragraph (e) of this section.
    (ii) Because JM did not make any election under paragraph (e) of 
this section, JM is allowed an 80-percent additional first year 
depreciation deduction of $160,000 for the qualified rehabilitation 
expenditures for 2023 (the unadjusted depreciable basis of $200,000 
(before reduction in basis for the rehabilitation credit) multiplied 
by 0.80). JM also is allowed to claim a rehabilitation credit of 
$8,000 for the remaining rehabilitated basis of $40,000 (the 
unadjusted depreciable basis (before reduction in basis for the 
rehabilitation credit) of $200,000 less the additional first year 
depreciation deduction of $160,000, multiplied by 0.20 to calculate 
the rehabilitation credit). For 2023, the ratable share of the 
rehabilitation credit of $8,000 is $1,600. Further, JM's 
depreciation deduction for 2023 for the remaining adjusted 
depreciable basis of $32,000 (the unadjusted depreciable basis 
(before reduction in basis for the rehabilitation credit) of 
$200,000 less the additional first year depreciation deduction of 
$160,000 less the rehabilitation credit of $8,000) is $376.64 (the 
remaining adjusted depreciable basis of $32,000 multiplied by the 
depreciation rate of 0.01177 for recovery year 1, placed in service 
in month 7).

    (10) Coordination with section 514(a)(3). The additional first year 
depreciation deduction is not allowable for purposes of section 
514(a)(3).
    (g) Applicability dates--(1) In general. Except as provided in 
paragraph (g)(2) of this section, the rules of this section apply to--
    (i) Qualified property under section 168(k)(2) that is placed in 
service by the taxpayer during or after the taxpayer's taxable year 
that includes the date of publication of a Treasury decision adopting 
these rules as final regulations in the Federal Register; and
    (ii) A specified plant for which the taxpayer properly made an 
election to apply section 168(k)(5) and that is planted, or grafted to 
a plant that was previously planted, by the taxpayer during or after 
the taxpayer's taxable year that includes the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register.
    (2) Early application. A taxpayer may rely on the provisions of 
this section in these proposed regulations for--
    (i) Qualified property under section 168(k)(2) acquired and placed 
in service after September 27, 2017, by the taxpayer during taxable 
years ending on or after September 28, 2017, and ending before the 
taxpayer's taxable year that includes the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register; and
    (ii) A specified plant for which the taxpayer properly made an 
election to apply section 168(k)(5) and that is planted, or grafted to 
a plant that was previously planted, after September 27, 2017, by the 
taxpayer during taxable years ending on or after September 28, 2017, 
and ending before the taxpayer's taxable year that includes the date of 
publication of a Treasury decision adopting these rules as final 
regulations in the Federal Register.
0
Par. 10. Section 1.169-3 is amended by adding a sentence at the end of 
paragraph (a) and adding two sentences at the end of paragraph (g) to 
read as follows:


Sec.  1.169-3  Amortizable basis.

    (a) * * * Further, before computing the amortization deduction 
allowable

[[Page 39321]]

under section 169, the adjusted basis for purposes of determining gain 
for a facility that is acquired and placed in service after September 
27, 2017, and that is qualified property under section 168(k), as 
amended by the Tax Cuts and Jobs Act, Public Law 115-97 (131 Stat. 2054 
(December 22, 2017)) (the ``Act''), or Sec.  1.168(k)-2, must be 
reduced by the amount of the additional first year depreciation 
deduction allowed or allowable, whichever is greater, under section 
168(k), as amended by the Act.
* * * * *
    (g) * * * The last sentence of paragraph (a) of this section 
applies to a certified pollution control facility that is qualified 
property under section 168(k)(2) and placed in service by a taxpayer 
during or after the taxpayer's taxable year that includes the date of 
publication of a Treasury decision adopting these rules as final 
regulations in the Federal Register. However, a taxpayer may rely on 
the last sentence in paragraph (a) of this section in these proposed 
regulations for a certified pollution control facility that is 
qualified property under section 168(k)(2) and acquired and placed in 
service after September 27, 2017, by the taxpayer during taxable years 
ending on or after September 28, 2017, and ending before the taxpayer's 
taxable year that includes the date of publication of a Treasury 
decision adopting these rules as final regulations in the Federal 
Register.
0
Par. 11. Section 1.179-4 is amended by revising paragraph (c)(2) to 
read as follows:


Sec.  1.179-4  Definitions.

* * * * *
    (c) * * *
    (2) Property deemed to have been acquired by a new target 
corporation as a result of a section 338 election (relating to certain 
stock purchases treated as asset acquisitions) or a section 336(e) 
election (relating to certain stock dispositions treated as asset 
transfers) will be considered acquired by purchase.
* * * * *
0
Par. 12. Section 1.179-6 is amended by revising the first sentence in 
paragraph (a) and adding paragraph (e) to read as follows:


Sec.  1.179-6  Effective/applicability dates.

    (a) * * * Except as provided in paragraphs (b), (c), (d), and (e) 
of this section, the provisions of Sec. Sec.  1.179-1 through 1.179-5 
apply for property placed in service by the taxpayer in taxable years 
ending after January 25, 1993. * * *
* * * * *
    (e) Application of Sec.  1.179-4(c)(2)--(1) In general. Except as 
provided in paragraph (e)(2) of this section, the provisions of Sec.  
1.179-4(c)(2) relating to section 336(e) are applicable on or after the 
date of publication of a Treasury decision adopting these rules as 
final regulations in the Federal Register.
    (2) Early application. A taxpayer may rely on the provisions of 
Sec.  1.179-4(c)(2) relating to section 336(e) in these proposed 
regulations for the taxpayer's taxable years ending on or after 
September 28, 2017, and ending before the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register.
0
Par. 13. Section 1.312-15 is amended by adding a sentence at the end of 
paragraph (a)(1) and adding paragraph (e) to read as follows:


Sec.  1.312-15   Effect of depreciation on earnings and profits.

    (a) * * *
    (1) * * * Further, see Sec.  1.168(k)-2(f)(7) with respect to the 
treatment of the additional first year depreciation deduction allowable 
under section 168(k), as amended by the Tax Cuts and Jobs Act, Public 
Law 115-97 (131 Stat. 2054 (December 22, 2017)), for purposes of 
computing the earnings and profits of a corporation.
* * * * *
    (e) Applicability date of qualified property. The last sentence of 
paragraph (a) of this section applies to the taxpayer's taxable years 
ending on or after the date of publication of a Treasury decision 
adopting these rules as final regulations in the Federal Register. 
However, a taxpayer may rely on the last sentence in paragraph (a) of 
this section in these proposed regulations for the taxpayer's taxable 
years ending on or after September 28, 2017, and ending before the 
taxpayer's taxable year that includes the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register.
0
Par. 14. Section 1.704-1 is amended by adding two sentences at the end 
of paragraph (b)(1)(ii)(a) and adding a sentence at the end of 
paragraph (b)(2)(iv)(g)(3) to read as follows:


Sec.  1.704-1   Partner's distributive share.

* * * * *
    (b) * * *
    (1) * * *
    (ii) * * *
    (a) * * * The last sentence of paragraph (b)(2)(iv)(g)(3) of this 
section is applicable for partnership taxable years ending on or after 
the date of publication of a Treasury decision adopting these rules as 
final regulations in the Federal Register. However, a partnership may 
rely on the last sentence in paragraph (b)(2)(iv)(g)(3) of this section 
in these proposed regulations for the partnership's taxable years 
ending on or after September 28, 2017, and ending before the 
partnership's taxable year that includes the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register.
* * * * *
    (2) * * *
    (iv) * * *
    (g) * * *
    (3) * * * For purposes of the preceding sentence, additional first 
year depreciation deduction under section 168(k) is not a reasonable 
method.
* * * * *
0
Par. 15. Section 1.704-3 is amended by:
0
1. Adding a sentence at the end of paragraph (d)(2);
0
2. Revising the first sentence in paragraph (f); and
0
3. Adding two sentences at the end of paragraph (f).
    The additions and revision read as follows:


Sec.  1.704-3  Contributed property.

* * * * *
    (d) * * *
    (2) * * * However, the additional first year depreciation deduction 
under section 168(k) is not a permissible method for purposes of the 
preceding sentence and, if a partnership has acquired property in a 
taxable year for which the additional first year depreciation deduction 
under section 168(k) has been used of the same type as the contributed 
property, the portion of the contributed property's book basis that 
exceeds its adjusted tax basis must be recovered under a reasonable 
method. See Sec.  1.168(k)-2(b)(3)(iv)(B).
* * * * *
    (f) * * * With the exception of paragraphs (a)(1), (a)(8)(ii) and 
(iii), and (a)(10) and (11) of this section, and of the last sentence 
in paragraph (d)(2) of this section, this section applies to properties 
contributed to a partnership and to restatements pursuant to Sec.  
1.704-1(b)(2)(iv)(f) on or after December 21, 1993. * * * The last 
sentence of paragraph (d)(2) of this section applies to property 
contributed to a partnership on or after the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register. However, a taxpayer may rely on the last sentence in 
paragraph (d)(2) of this section in these proposed regulations for 
property contributed to a partnership on or after September 28,

[[Page 39322]]

2017, and ending before the date of publication of a Treasury decision 
adopting these rules as final regulations in the Federal Register.
* * * * *
0
Par. 16. Section 1.743-1 is amended by:
0
1. Adding three sentences to the end of paragraph (j)(4)(i)(B)(1) and 
adding two sentences at the end of paragraph (l) to read as follows:


Sec.  1.743-1  Optional adjustment to basis of partnership property.

* * * * *
    (j) * * *
    (4) * * *
    (i) * * *
    (B) * * *
    (1) * * * Notwithstanding the above, the partnership is allowed to 
deduct the additional first year depreciation under section 168(k) and 
Sec.  1.168(k)-2 for an increase in the basis of qualified property, as 
defined in section 168(k) and Sec.  1.168(k)-2, under section 743(b) in 
a class of property, as defined in Sec.  1.168(k)-2(e)(1)(ii)(A) 
through (F), even if the partnership made the election under section 
168(k)(7) and Sec.  1.168(k)-2(e)(1) not to deduct the additional first 
year depreciation for all other qualified property of the partnership 
in the same class of property, as defined in Sec.  1.168(k)-
2(e)(1)(ii)(A) through (F), and placed in service in the same taxable 
year, provided the section 743(b) basis adjustment meets all 
requirements of section 168(k) and Sec.  1.168(k)-2. Further, the 
partnership may make an election under section 168(k)(7) and Sec.  
1.168(k)-2(e)(1) not to deduct the additional first year depreciation 
for an increase in the basis of qualified property, as defined in 
section 168(k) and Sec.  1.168(k)-2, under section 743(b) in a class of 
property, as defined in Sec.  1.168(k)-2(e)(1)(ii)(A) through (F), and 
placed in service in the same taxable year, even if the partnership 
does not make that election for all other qualified property of the 
partnership in the same class of property, as defined in Sec.  
1.168(k)-2(e)(1)(ii)(A) through (F), and placed in service in the same 
taxable year. In this case, the section 743(b) basis adjustment must be 
recovered under a reasonable method.
* * * * *
    (l) * * * The last three sentences of paragraph (j)(4)(i)(B)(1) of 
this section apply to transfers of partnership interests that occur on 
or after the date of publication of a Treasury decision adopting these 
rules as final regulations in the Federal Register. However, a 
partnership may rely on the last three sentences in paragraph 
(j)(4)(i)(B)(1) of this section in these proposed regulations for 
transfers of partnership interests that occur on or after September 28, 
2017, and ending before the date of publication of a Treasury decision 
adopting these rules as final regulations in the Federal Register.

Kirsten Wielobob,
 Deputy Commissioner for Services and Enforcement.
[FR Doc. 2018-16716 Filed 8-3-18; 4:15 pm]
 BILLING CODE 4830-01-P



                                                39292                Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules

                                                DEPARTMENT OF THE TREASURY                              deduction from 30 percent to 50 percent               and is not an amortizable section 197
                                                                                                        (to 100 percent for property acquired                 intangible, is determined under section
                                                Internal Revenue Service                                and placed in service after September 8,              167(f)(1).
                                                                                                        2010, and generally before January 1,                    Section 168(k), prior to amendment
                                                26 CFR Part 1                                           2012), extended the placed-in-service                 by the Act, allowed an additional first
                                                                                                        date generally through December 31,                   year depreciation deduction for the
                                                [REG–104397–18]
                                                                                                        2019, and made other changes. See                     placed-in-service year equal to 50
                                                RIN 1545–BO74                                           section 201 of the Jobs and Growth Tax                percent of the adjusted basis of qualified
                                                                                                        Relief Reconciliation Act of 2003, Public             property. Qualified property was
                                                Additional First Year Depreciation                      Law 108–27 (117 Stat. 752), sections 403              defined in part as property the original
                                                Deduction                                               and 408 of the Working Families Tax                   use of which begins with the taxpayer.
                                                                                                        Relief Act of 2004, Public Law 108–311                   Section 13201 of the Act made several
                                                AGENCY: Internal Revenue Service (IRS),                                                                       amendments to the allowance for
                                                                                                        (118 Stat. 1166), sections 336 and 337 of
                                                Treasury.                                                                                                     additional first year depreciation
                                                                                                        the American Jobs Creation Act of 2004,
                                                ACTION: Notice of proposed rulemaking.                  Public Law 108–357 (118 Stat. 1418),                  deduction in section 168(k). For
                                                                                                        sections 403 and 405 of the Gulf                      example, the additional first year
                                                SUMMARY:   This document contains                                                                             depreciation deduction percentage is
                                                                                                        Opportunity Zone Act of 2005, Public
                                                proposed regulations that provide                                                                             increased from 50 to 100 percent; the
                                                                                                        Law 109–135 (119 Stat. 2577), section
                                                guidance regarding the additional first                                                                       property eligible for the additional first
                                                                                                        103 of the Economic Stimulus Act of
                                                year depreciation deduction under                                                                             year depreciation deduction is
                                                                                                        2008, Public Law 110–185 (122 Stat.
                                                section 168(k) of the Internal Revenue                                                                        expanded to include certain used
                                                                                                        613), section 3081 of the Housing
                                                Code (Code). These proposed                                                                                   depreciable property and certain film,
                                                                                                        Assistance Tax Act of 2008, Public Law
                                                regulations reflect changes made by the                                                                       television, or live theatrical
                                                                                                        110–289 (122 Stat. 2654), section 1201
                                                Tax Cuts and Jobs Act. These proposed                                                                         productions; the placed-in-service date
                                                                                                        of the American Recovery and
                                                regulations affect taxpayers who deduct                                                                       is extended from before January 1, 2020,
                                                                                                        Reinvestment Tax Act of 2009, Public
                                                depreciation for qualified property                                                                           to before January 1, 2027 (from before
                                                                                                        Law 111–5 (123 Stat. 115), section 2022
                                                acquired and placed in service after                    of the Small Business Jobs Act of 2010,               January 1, 2021, to before January 1,
                                                September 27, 2017.                                     Public Law 111–240 (124 Stat. 2504),                  2028, for longer production period
                                                DATES: Written or electronic comments                   section 401 of the Tax Relief,                        property or certain aircraft property
                                                and requests for a public hearing must                  Unemployment Insurance                                described in section 168(k)(2)(B) or (C));
                                                be received by October 9, 2018.                         Reauthorization, and Job Creation Act of              and the date on which a specified plant
                                                ADDRESSES: Send submissions to:                         2010, Public Law 111–312 (124 Stat.                   is planted or grafted by the taxpayer is
                                                CC:PA:LPD:PR (REG–104397–18), Room                      3296), section 331 of the American                    extended from before January 1, 2020, to
                                                5203, Internal Revenue Service, P.O.                    Taxpayer Relief Act of 2012, Public Law               before January 1, 2027.
                                                Box 7604, Ben Franklin Station,                         112–240 (126 Stat. 2313), sections 125,                  Section 168(k) allows a 100-percent
                                                Washington, DC 20044. Submissions                       202, 210, 212, and 214 of the Tax                     additional first year depreciation
                                                may be hand-delivered Monday through                    Increase Prevention Act of 2014, Public               deduction for qualified property
                                                Friday between the hours of 8 a.m. and                  Law 113–295 (128 Stat. 4010), and                     acquired and placed in service after
                                                4 p.m. to CC:PA:LPD:PR (REG–104397–                     section 143 of the Protecting Americans               September 27, 2017, and placed in
                                                18), Courier’s Desk, Internal Revenue                   from Tax Hikes Act of 2015, enacted as                service before January 1, 2023 (before
                                                Service, 1111 Constitution Avenue NW,                   Division Q of the Consolidated                        January 1, 2024, for longer production
                                                Washington, DC 20224, or sent                           Appropriations Act, 2016, Public Law                  period property or certain aircraft
                                                electronically via the Federal                          114–113 (129 Stat. 2242).                             property described in section
                                                eRulemaking Portal at http://                              On December 22, 2017, section 168(k)               168(k)(2)(B) or (C)). If a taxpayer elects
                                                www.regulations.gov (IRS REG–104397–                    and related provisions were amended by                to apply section 168(k)(5), the 100-
                                                18).                                                    sections 12001(b)(13), 13201, and 13204               percent additional first year
                                                                                                        of the Tax Cuts and Jobs Act, Public                  depreciation deduction also is allowed
                                                FOR FURTHER INFORMATION CONTACT:
                                                                                                        Law 115–97 (131 Stat. 2054) (the ‘‘Act’’)             for a specified plant planted or grafted
                                                Concerning the proposed regulations,                                                                          after September 27, 2017, and before
                                                                                                        to provide further changes to the
                                                Elizabeth R. Binder, (202) 317–7005;                                                                          January 1, 2023. The 100-percent
                                                                                                        additional first year depreciation
                                                concerning submissions of comments or                                                                         additional first year depreciation
                                                                                                        deduction. Unless otherwise indicated,
                                                requests for a public hearing, Regina L.                                                                      deduction is decreased by 20 percent
                                                                                                        all references to section 168(k)
                                                Johnson, (202) 317–6901 (not toll-free                                                                        annually for qualified property placed
                                                                                                        hereinafter are references to section
                                                numbers).                                                                                                     in service, or a specified plant planted
                                                                                                        168(k) as amended.
                                                SUPPLEMENTARY INFORMATION:                                 Section 167(a) allows as a                         or grafted, after December 31, 2022 (after
                                                                                                        depreciation deduction a reasonable                   December 31, 2023, for longer
                                                Background
                                                                                                        allowance for the exhaustion, wear and                production period property or certain
                                                   This document contains proposed                      tear, and obsolescence of property used               aircraft property described in section
                                                amendments to 26 CFR part 1 under                       in a trade or business or of property                 168(k)(2)(B) or (C)).
                                                section 168(k). Section 168(k) was                      held for the production of income. The                   Section 168(k)(2)(A), as amended by
                                                added to the Code by section 101 of the                 depreciation deduction allowable for                  the Act, defines ‘‘qualified property’’ as
amozie on DSK3GDR082PROD with PROPOSALS2




                                                Job Creation and Worker Assistance Act                  tangible depreciable property placed in               meaning, in general, property (1) to
                                                of 2002, Public Law 107–147 (116 Stat.                  service after 1986 generally is                       which section 168 applies that has a
                                                21). Section 168(k) allows an additional                determined under the Modified                         recovery period of 20 years or less,
                                                first year depreciation deduction in the                Accelerated Cost Recovery System                      which is computer software as defined
                                                placed-in-service year of qualified                     provided by section 168 (MACRS                        in section 167(f)(1)(B) for which a
                                                property. Subsequent amendments to                      property). The depreciation deduction                 deduction is allowable under section
                                                section 168(k) increased the percentage                 allowable for computer software that is               167(a) without regard to section 168(k),
                                                of the additional first year depreciation               placed in service after August 10, 1993,              which is water utility property, which is


                                           VerDate Sep<11>2014   21:08 Aug 07, 2018   Jkt 244001   PO 00000   Frm 00002   Fmt 4701   Sfmt 4702   E:\FR\FM\08AUP2.SGM   08AUP2


                                                                     Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules                                            39293

                                                a qualified film or television production               proposed regulations instruct taxpayers               placed in service after September 27,
                                                as defined in section 181(d) for which                  how to determine the additional first                 2017, and before January 1, 2018, also
                                                a deduction would have been allowable                   year depreciation deduction and the                   is qualified property.
                                                without regard to section 181(a)(2) or (g)              amount of depreciation otherwise                         For property placed in service after
                                                or section 168(k), or which is a qualified              allowable for this property. Because the              December 31, 2017, section 13204 of the
                                                live theatrical production as defined in                Act made substantial amendments to                    Act amended section 168(e) to eliminate
                                                section 181(e) for which a deduction                    section 168(k), the proposed regulations              the 15-year MACRS property
                                                would have been allowable without                       update existing regulations in                        classification for qualified leasehold
                                                regard to section 181(a)(2) or (g) or                   § 1.168(k)–1 by providing a new section               improvement property, qualified
                                                section 168(k); (2) the original use of                 at § 1.168(k)–2 for property acquired                 restaurant property, and qualified retail
                                                which begins with the taxpayer or the                   and placed in service after September                 improvement property, and amended
                                                acquisition of which by the taxpayer                    27, 2017, and make conforming                         section 168(k) to eliminate qualified
                                                meets the requirements of section                       amendments to the existing regulations.               improvement property as a specific
                                                168(k)(2)(E)(ii); and (3) which is placed                                                                     category of qualified property. Because
                                                in service by the taxpayer before January               1. Eligibility Requirements for                       of the effective date of section 13204 of
                                                1, 2027. Section 168(k)(2)(E)(ii) requires              Additional First Year Depreciation                    the Act (property placed in service after
                                                that the acquired property was not used                 Deduction                                             December 31, 2017), the proposed
                                                by the taxpayer at any time prior to such                  The proposed regulations follow                    regulations provide that MACRS
                                                acquisition and the acquisition of such                 section 168(k)(2), as amended by the                  property with a recovery period of 20
                                                property meets the requirements of                      Act, and section 13201(h) of the Act to               years or less includes the following
                                                section 179(d)(2)(A), (B), and (C) and                  provide that depreciable property must                MACRS property that is acquired by the
                                                section 179(d)(3).                                      meet four requirements to be qualified                taxpayer after September 27, 2017, and
                                                   However, section 168(k)(2)(D)                        property. These requirements are (1) the              placed in service by the taxpayer after
                                                provides that qualified property does                   depreciable property must be of a                     September 27, 2017, and before January
                                                not include any property to which the                   specified type; (2) the original use of the           1, 2018: (1) Qualified leasehold
                                                alternative depreciation system under                   depreciable property must commence                    improvement property; (2) qualified
                                                section 168(g) applies, determined                      with the taxpayer or used depreciable                 restaurant property that is qualified
                                                without regard to section 168(g)(7)                     property must meet the acquisition                    improvement property; and (3) qualified
                                                (relating to election to have the                       requirements of section 168(k)(2)(E)(ii);             retail improvement property. For the
                                                alternative depreciation system apply),                 (3) the depreciable property must be                  same reason, the proposed regulations
                                                and after application of section 280F(b)                placed in service by the taxpayer within              provide that qualified property includes
                                                (relating to listed property with limited               a specified time period or must be                    qualified improvement property that is
                                                business use).                                          planted or grafted by the taxpayer before             acquired by the taxpayer after
                                                   Section 13201(h) of the Act provides                 a specified date; and (4) the depreciable             September 27, 2017, and placed in
                                                the effective dates of the amendments to                property must be acquired by the                      service by the taxpayer after September
                                                section 168(k) made by section 13201 of                 taxpayer after September 27, 2017.                    27, 2017, and before January 1, 2018.
                                                the Act. Except as provided in section                                                                        Further, to account for the statutory
                                                13201(h)(2) of the Act, section                         2. Property of a Specified Type                       amendments to the definition of
                                                13201(h)(1) of the Act provides that                    A. Property Eligible for the Additional               qualified improvement property made
                                                these amendments apply to property                      First Year Depreciation Deduction                     by the Act, the proposed regulations
                                                acquired and placed in service after                                                                          define qualified improvement property
                                                September 27, 2017. However, property                      The proposed regulations follow the                for purposes of section 168(k)(3) (before
                                                is not treated as acquired after the date               definition of qualified property in                   amendment by section 13204 of the Act)
                                                on which a written binding contract is                  section 168(k)(2)(A)(i) and (k)(5) and                and section 168(e)(6) (as amended by
                                                entered into for such acquisition.                      provide that qualified property must be               section 13204 of the Act).
                                                Section 13201(h)(2) provides that the                   one of the following: (1) MACRS                          For purposes of determining the
                                                amendments apply to specified plants                    property that has a recovery period of 20             eligibility of MACRS property as
                                                planted or grafted after September 27,                  years or less; (2) computer software as               qualified property, the proposed
                                                2017.                                                   defined in, and depreciated under,                    regulations retain the rule in § 1.168(k)–
                                                   Additionally, section 12001(b)(13) of                section 167(f)(1); (3) water utility                  1(b)(2)(i)(A) that the recovery period
                                                the Act repealed section 168(k)(4)                      property as defined in section 168(e)(5)              applicable for the MACRS property
                                                (relating to the election to accelerate                 and depreciated under section 168; (4)                under section 168(c) of the general
                                                alternative minimum tax credits in lieu                 a qualified film or television production             depreciation system (GDS) is used,
                                                of the additional first year depreciation               as defined in section 181(d) and for                  regardless of any election made by the
                                                deduction) for taxable years beginning                  which a deduction would have been                     taxpayer to depreciate the class of
                                                after December 31, 2017. Further,                       allowable under section 181 without                   property under the alternative
                                                section 13204(a)(4)(B)(ii) repealed                     regard to section 181(a)(2) and (g) or                depreciation system of section 168(g)
                                                section 168(k)(3) (relating to qualified                section 168(k); (5) a qualified live                  (ADS).
                                                improvement property) for property                      theatrical production as defined in
                                                                                                        section 181(e) and for which a                        B. Property Not Eligible for the
                                                placed in service after December 31,
                                                                                                        deduction would have been allowable                   Additional First Year Depreciation
                                                2017.
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                                                                                                        under section 181 without regard to                   Deduction
                                                Explanation of Provisions                               section 181(a)(2) and (g) or section                    The proposed regulations provide that
                                                   The proposed regulations describe                    168(k); or (6) a specified plant as                   qualified property does not include (1)
                                                and clarify the statutory requirements                  defined in section 168(k)(5)(B) and for               property excluded from the application
                                                that must be met for depreciable                        which the taxpayer has made an                        of section 168 as a result of section
                                                property to qualify for the additional                  election to apply section 168(k)(5).                  168(f); (2) property that is required to be
                                                first year depreciation deduction                       Qualified improvement property                        depreciated under the ADS (as
                                                provided by section 168(k). Further, the                acquired after September 27, 2017, and                described below); (3) any class of


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                                                39294                Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules

                                                property for which the taxpayer elects                  and for making the election to apply                  which addresses the treatment of a
                                                not to deduct the additional first year                 section 168(k)(5) to a specified plant.               section 338 election, to include property
                                                depreciation under section 168(k)(7); (4)               Additionally, the proposed regulations                deemed to have been acquired by a new
                                                a specified plant placed in service by                  provide rules for making the election                 target corporation as a result of a section
                                                the taxpayer in the taxable year and for                under section 168(k)(10) to deduct 50                 336(e) election. Section 1.336–1(a)(1)
                                                which the taxpayer made an election to                  percent, instead of 100 percent,                      provides that to the extent not
                                                apply section 168(k)(5) for a prior year                additional first year depreciation for                inconsistent with section 336(e) or the
                                                under section 168(k)(5)(D); (5) any class               qualified property acquired after                     regulations under section 336(e), the
                                                of property for which the taxpayer elects               September 27, 2017, by the taxpayer and               principles of section 338 and the
                                                to apply section 168(k)(4) (this                        placed in service or planted or grafted,              regulations under section 338 apply for
                                                exclusion applies to property placed in                 as applicable, by the taxpayer during its             purposes of the regulations under
                                                service in any taxable year beginning                   taxable year that includes September 28,              section 336. To the extent that property
                                                before January 1, 2018, because section                 2017. Because section 168(k)(10) does                 is deemed to have been acquired by a
                                                12001(b)(13) of the Act repealed section                not state that the election may be made               ‘‘new target corporation,’’ the Treasury
                                                168(k)(4) for taxable years beginning                   ‘‘with respect to any class of property’’             Department and the IRS read § 1.179–
                                                after December 31, 2017); or (6) property               as stated in section 168(k)(7) for making             4(c)(2), without modification, as
                                                described in section 168(k)(9)(A) or (B).               the election out of the additional first              applying to the deemed acquisition of
                                                Section 168(k)(9) provides that qualified               year depreciation deduction, the                      property by a new target corporation as
                                                property does not include (A) any                       proposed regulations provide that the                 a result of a section 336(e) election, just
                                                property that is primarily used in a                    election under section 168(k)(10)                     as it applies as the result of a section
                                                trade or business described in section                  applies to all qualified property.                    338 election. However, to remove any
                                                163(j)(7)(A)(iv), or (B) any property used                                                                    doubt, the proposed regulations modify
                                                in a trade or business that has had floor               3. New and Used Property                              § 1.179–4(c)(2) to provide that property
                                                plan financing indebtedness (as defined                 A. New Property                                       deemed to have been acquired by a new
                                                in section 163(j)(9)) if the floor plan                                                                       target corporation as a result of a section
                                                financing interest related to such                         The proposed regulations generally                 338 or a section 336(e) election will be
                                                indebtedness was taken into account                     retain the original use rules in                      considered acquired by purchase for
                                                under section 163(j)(1)(C). Section 163(j)              § 1.168(k)–1(b)(3). Pursuant to section               purposes of section 179.
                                                applies to taxable years beginning after                168(k)(2)(A)(ii), the proposed
                                                                                                        regulations do not provide any date by                ii. Property Not Previously Used by the
                                                December 31, 2017. Accordingly, the
                                                                                                        which the original use of the property                Taxpayer
                                                exclusion of property described in
                                                section 168(k)(9) from the additional                   must commence with the taxpayer.                         The proposed regulations provide that
                                                first year depreciation deduction applies               Because section 13201 of the Act                      the property is treated as used by the
                                                to property placed in service in any                    removed the rules regarding sale-                     taxpayer or a predecessor at any time
                                                taxable year beginning after December                   leaseback transactions, the proposed                  before its acquisition of the property
                                                31, 2017.                                               regulations also do not retain the                    only if the taxpayer or the predecessor
                                                   Property is required to be depreciated               original use rules in § 1.168(k)–                     had a depreciable interest in the
                                                under the ADS if the property is                        1(b)(3)(iii)(A) and (C) regarding such                property at any time before the
                                                described under section 168(g)(1)(A),                   transactions, including a sale-leaseback              acquisition, whether or not the taxpayer
                                                (B), (C), (D), (F), or (G) or if other                  transaction followed by a syndication                 or the predecessor claimed depreciation
                                                provisions of the Code require                          transaction. The rule in the proposed                 deductions for the property. If a lessee
                                                depreciation for the property to be                     regulations for syndication transactions              has a depreciable interest in the
                                                determined under the ADS.                               involving new or used property is                     improvements made to leased property
                                                Accordingly, MACRS property that is                     explained later in the preamble.                      and subsequently the lessee acquires the
                                                nonresidential real property, residential                                                                     leased property of which the
                                                                                                        B. Used Property
                                                rental property, and qualified                                                                                improvements are a part, the proposed
                                                improvement property held by an                           Pursuant to section 168(k)(2)(A)(ii)                regulations provide that the unadjusted
                                                electing real property trade or business                and (k)(2)(E)(ii), the proposed                       depreciable basis, as defined in
                                                (as defined in section 163(j)(7)(B)), and               regulations provide that the acquisition              § 1.168(b)–1(a)(3), of the acquired
                                                property with a recovery period of 10                   of used property is eligible for the                  property that is eligible for the
                                                years or more that is held by an electing               additional first year depreciation                    additional first year depreciation
                                                farming business (as defined in section                 deduction if such acquisition meets the               deduction, assuming all other
                                                163(j)(7)(C)), are not eligible for the                 following requirements: (1) The                       requirements are met, does not include
                                                additional first year depreciation                      property was not used by the taxpayer                 the unadjusted depreciable basis
                                                deduction for taxable years beginning                   or a predecessor at any time prior to the             attributable to the improvements.
                                                after December 31, 2017. Pursuant to                    acquisition; (2) the acquisition of the                  Further, if a taxpayer initially
                                                section 168(k)(2)(D), MACRS property                    property meets the related party and                  acquires a depreciable interest in a
                                                for which the taxpayer makes an                         carryover basis requirements of section               portion of the property and
                                                election under section 168(g)(7) to                     179(d)(2)(A), (B), and (C) and § 1.179–               subsequently acquires an additional
                                                depreciate the property under the ADS                   4(c)(1)(ii), (iii), and (iv), or (c)(2); and (3)      depreciable interest in the same
                                                is eligible for the additional first year               the acquisition of the property meets the             property, the proposed regulations also
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                                                depreciation deduction (assuming all                    cost requirements of section 179(d)(3)                provide that such additional depreciable
                                                other requirements are met).                            and § 1.179–4(d).                                     interest is not treated as being
                                                                                                                                                              previously used by the taxpayer.
                                                C. Elections                                            i. Section 336(e) Election                            However, if a taxpayer holds a
                                                  The proposed regulations provide                        A section 338 election and a section                depreciable interest in a portion of the
                                                rules for making the election out of the                336(e) election share many of the same                property, sells that portion or a part of
                                                additional first year depreciation                      characteristics. Therefore, the proposed              that portion, and subsequently acquires
                                                deduction pursuant to section 168(k)(7)                 regulations modify § 1.179–4(c)(2),                   a depreciable interest in another portion


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                                                                     Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules                                           39295

                                                of the same property, the proposed                      corporation) has a depreciable interest               C. Application to Partnerships
                                                regulations provide that the taxpayer                   in property and sells it to an unrelated                 On September 8, 2003, the Treasury
                                                will be treated as previously having a                  party. Subsequently, as part of a series              Department and the IRS published
                                                depreciable interest in the property up                 of related transactions, a member of a                temporary regulations (T.D. 9091, 2003–
                                                to the amount of the portion for which                  consolidated group, unrelated to the                  2 C.B. 939) in the Federal Register (68
                                                the taxpayer held a depreciable interest                selling corporation, acquires the                     FR 52986) relating to the additional first
                                                in the property before the sale.                        property and either that member or a                  year depreciation deduction provisions
                                                  The Treasury Department and the IRS                   different member of the group acquires                of sections 168(k) and 1400L(b) (before
                                                request comments on whether a safe                      the stock of the selling corporation. In              amendment by sections 403 and 408 of
                                                harbor should be provided on how                        substance, the series of transactions is              the Working Families Tax Relief Act of
                                                many taxable years a taxpayer or a                      the same as if the selling corporation
                                                                                                                                                              2004). Those regulations provided that
                                                predecessor should look back to                         reacquired the property and then
                                                                                                                                                              any increase in the basis of qualified
                                                determine if the taxpayer or the                        transferred it to another member of the
                                                predecessor previously had a                                                                                  property due to a section 754 election
                                                                                                        group, in which case the additional first
                                                depreciable interest in the property.                                                                         generally is not eligible for the
                                                                                                        year depreciation deduction would not
                                                Such comments should provide the                                                                              additional first year depreciation
                                                                                                        be allowed. Accordingly, these
                                                number of taxable years recommended                                                                           deduction. The preamble to those
                                                                                                        proposed regulations deny the
                                                for the look-back period and the                                                                              regulations explained that any increase
                                                                                                        deduction in such circumstances.
                                                reasoning for such number.                                 Additionally, if the acquisition of                in basis due to a section 754 election
                                                                                                        property is part of a series of related               does not satisfy the original use
                                                iii. Rules Applying to Consolidated                                                                           requirement. The final regulations (T.D.
                                                                                                        transactions that also includes one or
                                                Groups                                                                                                        9283, 2006–2 C.B. 633, 642–43)
                                                                                                        more transactions in which the
                                                   Members of a consolidated group                      transferee of the property ceases to be a             published in the Federal Register on
                                                generally are treated as separate                       member of a consolidated group, then                  August 31, 2006 (71 FR 51738) retained
                                                taxpayers. See Woolford Realty Co. v.                   whether the taxpayer is a member of a                 the rule for increases in basis due to
                                                Rose, 286 U.S. 319, 328 (1932) (‘‘[a]                   consolidated group is tested                          section 754 elections at § 1.168(k)–
                                                corporation does not cease to be [a                     immediately after the last transaction in             1(f)(9). Because the Act amended
                                                taxpayer] by affiliating with another’’).               the series.                                           section 168(k) to allow the additional
                                                However, the Treasury Department and                                                                          first year depreciation deduction for
                                                the IRS believe that the additional first               iv. Series of Related Transactions                    certain used property in addition to new
                                                year depreciation deduction should not                     In determining whether property                    property, the Treasury Department and
                                                be permitted to members of a                            meets the requirements of section                     the IRS have reconsidered whether basis
                                                consolidated group when property is                     168(k)(2)(E)(ii), the Treasury                        adjustments under sections 734(b) and
                                                disposed of by one member of a                          Department and the IRS believe that the               743(b) now qualify for the additional
                                                consolidated group outside the group                    ordering of steps, or the use of an                   first year depreciation deduction. The
                                                and subsequently acquired by another                    unrelated intermediary, in a series of                Treasury Department and the IRS also
                                                member of the same group because                        related transactions should not control.              have considered whether certain section
                                                permitting such a deduction would not                   For example, if a father buys and places              704(c) adjustments as well as the basis
                                                clearly reflect the group’s income tax                  equipment in service for use in the                   of distributed property determined
                                                liability. See section 1502 (permitting                 father’s trade or business and                        under section 732 should qualify for the
                                                consolidated group regulations different                subsequently the father sells the                     additional first year depreciation
                                                from the rules of chapter 1 of subtitle A               equipment to his daughter for use in her              deduction.
                                                of the Code otherwise applicable to                     trade or business, the father and
                                                                                                                                                              i. Section 704(c) Remedial Allocations
                                                separate corporations to clearly reflect                daughter are related parties under
                                                the income tax liability of a                           section 179(d)(2)(A) and § 1.179–                        Section 1.704–3(d)(2) provides, in
                                                consolidated group or each member of                    4(c)(1)(ii) and therefore, the daughter’s             part, that under the remedial allocation
                                                the group). To implement this position,                 acquisition of the equipment is not                   method, the portion of a partnership’s
                                                these proposed regulations treat a                      eligible for the additional first year                book basis in contributed property that
                                                member of a consolidated group as                       depreciation deduction. However, if in                exceeds its adjusted tax basis is
                                                previously having a depreciable interest                a series of related transactions, the                 recovered using any recovery period
                                                in all property in which the                            father sells the equipment to an                      and depreciation (or other cost recovery)
                                                consolidated group is treated as                        unrelated party and then the unrelated                method available to the partnership for
                                                previously having a depreciable interest.               party sells the equipment to the father’s             newly purchased property (of the same
                                                For purposes of this rule, a consolidated               daughter, the daughter’s acquisition of               type as the contributed property) that is
                                                group will be treated as having a                       the equipment from the unrelated party,               placed in service at the time of
                                                depreciable interest in property if any                 absent the rule in the proposed                       contribution. The proposed regulations
                                                current or previous member of the group                 regulations, is eligible for the additional           provide that remedial allocations under
                                                had a depreciable interest in the                       first year depreciation deduction                     section 704(c) do not qualify for the
                                                property while a member of the group.                   (assuming all other requirements are                  additional first year depreciation
                                                   The Treasury Department and the IRS                  met). Thus, the proposed regulations                  deduction under section 168(k).
                                                also believe that the additional first year             provide that in the case of a series of                  Notwithstanding the language of
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                                                depreciation deduction should not be                    related transactions, the transfer of the             § 1.704–3(d)(2) that any method
                                                allowed when, as part of a series of                    property will be treated as directly                  available to the partnership for newly
                                                related transactions, one or more                       transferred from the original transferor              purchased property may be used to
                                                members of a consolidated group                         to the ultimate transferee, and the                   recover the portion of the partnership’s
                                                acquire both the stock of a corporation                 relation between the original transferor              book basis in contributed property that
                                                that previously had a depreciable                       and the ultimate transferee is tested                 exceeds its adjusted tax basis, remedial
                                                interest in the property and the property               immediately after the last transaction in             allocations do not meet the
                                                itself. Assume a corporation (the selling               the series.                                           requirements of section 168(k)(2)(E)(ii).


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                                                39296                Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules

                                                Because the underlying property is                      property. Similarly, any portion of basis             always fail the original use requirement
                                                contributed to the partnership in a                     determined by section 732(a)(2) or (b)                in section 168(k)(2)(A)(ii) because
                                                section 721 transaction, the                            fails to satisfy section 179(d)(3) because            partnership property to which a section
                                                partnership’s basis in the property is                  it is determined by reference to the                  743(b) basis adjustment relates would
                                                determined by reference to the                          distributee partner’s basis in its                    have been previously used by the
                                                contributing partner’s basis in the                     partnership interest (reduced by any                  partnership and its partners prior to the
                                                property, which violates sections                       money distributed in the same                         transfer that gave rise to the section
                                                179(d)(2)(C) and 168(k)(2)(E)(ii)(II). In               transaction).                                         743(b) adjustment. After the Act, while
                                                addition, the partnership has already                                                                         a section 743(b) basis adjustment still
                                                                                                        iv. Section 734(b) Adjustments
                                                had a depreciable interest in the                                                                             fails the original use clause in section
                                                contributed property at the time the                       Section 734(b)(1) provides that, in the            168(k)(2)(A)(ii), a transaction giving rise
                                                remedial allocation is made, which is in                case of a distribution of property to a               to a section 743(b) basis adjustment may
                                                violation of section 168(k)(2)(E)(ii)(I) as             partner with respect to which a section               satisfy the used property clause in
                                                well as the original use requirement.                   754 election is in effect (or when there              section 168(k)(2)(A)(ii) because of the
                                                   The same rule applies in the case of                 is a substantial basis reduction under                used property acquisition requirements
                                                revaluations of partnership property                    section 734(d)), the partnership will                 of section 168(k)(2)(E)(ii), depending on
                                                (reverse section 704(c) allocations).                   increase the adjusted basis of                        the facts and circumstances.
                                                                                                        partnership property by the sum of (A)                   Because a section 743(b) basis
                                                ii. Zero Basis Property                                 the amount of any gain recognized to                  adjustment is a partner specific basis
                                                   Section 1.704–1(b)(2)(iv)(g)(3)                      the distributee partner under section                 adjustment to partnership property, the
                                                provides that, if partnership property                  731(a)(1), and (B) in the case of                     proposed regulations take an aggregate
                                                has a zero adjusted tax basis, any                      distributed property to which section                 view and provide that, in determining
                                                reasonable method may be used to                        732(a)(2) or (b) applies, the excess of the           whether a section 743(b) basis
                                                determine the book depreciation,                        adjusted basis of the distributed                     adjustment meets the used property
                                                depletion, or amortization of the                       property to the partnership immediately               acquisition requirements of section
                                                property. The proposed regulations                      before the distribution (as adjusted by               168(k)(2)(E)(ii), each partner is treated
                                                provide that the additional first year                  section 732(d)) over the basis of the                 as having owned and used the partner’s
                                                depreciation deduction under section                    distributed property to the distributee,              proportionate share of partnership
                                                168(k) will not be allowed on property                  as determined under section 732.                      property. In the case of a transfer of a
                                                contributed to the partnership with a                      Because a section 734(b) basis                     partnership interest, section
                                                zero adjusted tax basis because, with the               adjustment is made to the basis of                    168(k)(2)(E)(ii)(I) will be satisfied if the
                                                additional first year depreciation                      partnership property (i.e., non-partner               partner acquiring the interest, or a
                                                deduction, the partners have the                        specific basis) and the partnership used              predecessor of such partner, has not
                                                potential to shift built-in gain among                  the property prior to the partnership                 used the portion of the partnership
                                                partners.                                               distribution giving rise to the basis                 property to which the section 743(b)
                                                                                                        adjustment, a section 734(b) basis                    basis adjustment relates at any time
                                                iii. Basis Determined Under Section 732                 adjustment fails the original use clause              prior to the acquisition (that is, the
                                                   Section 732(a)(1) provides that the                  in section 168(k)(2)(A)(ii) and also fails            transferee has not used the transferor’s
                                                basis of property (other than money)                    the used property requirement in                      portion of partnership property prior to
                                                distributed by a partnership to a partner               section 168(k)(2)(E)(ii)(I). The proposed             the acquisition), notwithstanding the
                                                other than in liquidation of the partner’s              regulations therefore provide that                    fact that the partnership itself has
                                                interest is its adjusted basis to the                   section 734(b) basis adjustments are not              previously used the property. Similarly,
                                                partnership immediately before the                      eligible for the additional first year                for purposes of applying section
                                                distribution. Section 732(a)(2) provides                depreciation deduction.                               179(d)(2)(A), (B), and (C), the partner
                                                that the basis determined under section                                                                       acquiring a partnership interest is
                                                732(a)(1) shall not exceed the adjusted                 v. Section 743(b) Adjustments
                                                                                                                                                              treated as acquiring a portion of
                                                basis of the partner’s interest in the                     Section 743(b)(1) provides that, in the            partnership property, and the partner
                                                partnership reduced by any money                        case of a transfer of a partnership                   who is transferring a partnership
                                                distributed in the same transaction.                    interest, either by sale or exchange or as            interest is treated as the person from
                                                Section 732(b) provides that the basis of               a result of the death of a partner, a                 whom the property is acquired.
                                                property (other than money) distributed                 partnership that has a section 754                       For example, the relationship between
                                                by a partnership to a partner in                        election in effect (or if there is a                  the transferor partner and the transferee
                                                liquidation of the partner’s interest is                substantial built-in loss immediately                 partner must not be a prohibited
                                                equal to the adjusted basis of the                      after such partnership interest transfer              relationship under section 179(d)(2)(A).
                                                partner’s interest in the partnership                   under section 743(d)), will increase the              Also, the transferor partner and
                                                reduced by any money distributed in                     adjusted basis of partnership property                transferee partner may not be part of the
                                                the same transaction.                                   by the excess of the transferee’s basis in            same controlled group under section
                                                   Property distributed by a partnership                the transferred partnership interest over             179(d)(2)(B). Finally, the transferee
                                                to a partner fails to satisfy the original              the transferee’s share of the adjusted                partner’s basis in the transferred
                                                use requirement because the partnership                 basis of partnership’s property. This                 partnership interest may not be
                                                used the property prior to the                          increase is an adjustment to the basis of             determined in whole or in part by
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                                                distribution. Distributed property also                 partnership property with respect to the              reference to the transferor’s adjusted
                                                fails to satisfy the acquisition                        transferee partner only and, therefore, is            basis, or under section 1014.
                                                requirements of section                                 a partner specific basis adjustment to                   The same result will apply regardless
                                                168(k)(2)(E)(ii)(II). Any portion of basis              partnership property. The section 743(b)              of whether the transferee partner is a
                                                determined by section 732(a)(1) fails to                basis adjustment is allocated among                   new partner or an existing partner
                                                satisfy section 179(d)(2)(C) because it is              partnership properties under section                  purchasing an additional partnership
                                                determined by reference to the                          755. As stated above, prior to the Act,               interest from another partner. Assuming
                                                partnership’s basis in the distributed                  a section 743(b) basis adjustment would               that the transferor partner’s specific


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                                                                     Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules                                            39297

                                                interest in partnership property that is                property after the last sale during the               include limited exhibition, prior to
                                                acquired by the transferee partner has                  three-month period remains the same as                commercial exhibition to general
                                                not previously been used by the                         when the property was originally placed               audiences, if the limited exhibition is
                                                transferee partner or a predecessor, the                in service by the lessor, then the                    primarily for purposes of publicity,
                                                corresponding section 743(b) basis                      purchaser of the property in the last sale            determining the need for further
                                                adjustment will be eligible for the                     during the three-month period is                      production activity, or raising funds for
                                                additional first year depreciation                      considered the taxpayer that acquired                 the completion of production. For
                                                deduction in the hands of the transferee                the property and the taxpayer that                    example, the initial live staged
                                                partner, provided all other requirements                originally placed the property in                     performance does not include a preview
                                                of section 168(k) are satisfied (and                    service, but not earlier than the date of             of the production if the preview is
                                                assuming § 1.743–1(j)(4)(i)(B)(2) does                  the last sale. Thus, if a transaction is              primarily to determine the need for
                                                not apply). This treatment is appropriate               within the rules described above, the                 further production activity.
                                                notwithstanding the fact that the                       purchaser of the property in the last sale
                                                                                                                                                              5. Date of Acquisition
                                                transferee partner may have an existing                 during the three-month period is
                                                interest in the underlying partnership                  eligible to claim the additional first year              The proposed regulations provide
                                                property, because the transferee’s                      depreciation for the property (assuming               rules applicable to the acquisition
                                                existing interest in the underlying                     all requirements are met), and the                    requirements of the effective date under
                                                partnership property is distinct from the               earlier purchasers of the property are                section 13201(h) of the Act. The
                                                interest being transferred.                             not.                                                  proposed regulations provide that these
                                                   Finally, the proposed regulations                                                                          rules apply to all property, including
                                                provide that a section 743(b) basis                     4. Placed-in-Service Date                             self-constructed property or property
                                                adjustment in a class of property (not                     The proposed regulations generally                 described in section 168(k)(2)(B) or (C).
                                                including the property class for section                retain the placed-in-service date rules in
                                                                                                                                                              A. Written Binding Contract
                                                743(b) basis adjustments) may be                        § 1.168(k)–1(b)(5). Pursuant to the
                                                recovered using the additional first year               effective date in section 13201(h) of the                Pursuant to section 13201(h)(1)(A) of
                                                depreciation deduction under section                    Act and section 168(k)(2)(A)(iii) and                 the Act, the proposed regulations
                                                168(k) without regard to whether the                    (k)(2)(B)(i)(II), the proposed regulations            provide that the property must be
                                                partnership elects out of the additional                provide that qualified property must be               acquired by the taxpayer after
                                                first year depreciation deduction under                 placed in service by the taxpayer after               September 27, 2017, or, acquired by the
                                                section 168(k)(7) for all other qualified               September 27, 2017, and before January                taxpayer pursuant to a written binding
                                                property in the same class of property                  1, 2027, or, in the case of property                  contract entered into by the taxpayer
                                                and placed in service in the same                       described in section 168(k)(2)(B) or (C),             after September 27, 2017. Because of the
                                                taxable year. Similarly, a partnership                  before January 1, 2028. Because section               clear language of section 13201(h)(1) of
                                                may make the election out of the                        13201 of the Act removed the rules                    the Act regarding written binding
                                                additional first year depreciation                      regarding sale-leaseback transactions,                contracts, the proposed regulations also
                                                deduction under section 168(k)(7) for a                 the proposed regulations do not retain                provide that property that is
                                                section 743(b) basis adjustment in a                    the placed-in-service date rules in                   manufactured, constructed, or produced
                                                class of property (not including the                    § 1.168(k)–1(b)(5)(ii)(A) and (C)                     for the taxpayer by another person
                                                property class for section 743(b) basis                 regarding such transactions, including a              under a written binding contract that is
                                                adjustments), and this election will not                sale-leaseback transaction followed by a              entered into prior to the manufacture,
                                                bind the partnership to such election for               syndication transaction.                              construction, or production of the
                                                all other qualified property of the                        Further, the proposed regulations                  property for use by the taxpayer in its
                                                partnership in the same class of                        provide rules for specified plants.                   trade or business or for its production of
                                                property and placed in service in the                   Pursuant to section 168(k)(5)(A), if the              income is acquired pursuant to a written
                                                same taxable year.                                      taxpayer has made an election to apply                binding contract. Further, if the written
                                                                                                        section 168(k)(5) for a specified plant,              binding contract states the date on
                                                D. Syndication Transaction                              the proposed regulations provide that                 which the contract was entered into and
                                                  The syndication transaction rule in                   the specified plant must be planted                   a closing date, delivery date, or other
                                                the proposed regulations is based on the                before January 1, 2027, or grafted before             similar date, the date on which the
                                                rules in section 168(k)(2)(E)(iii) for                  January 1, 2027, to a plant that has                  contract was entered into is the date the
                                                syndication transactions. For new or                    already been planted, by the taxpayer in              taxpayer acquired the property. The
                                                used property, the proposed regulations                 the ordinary course of the taxpayer’s                 proposed regulations retain the rules in
                                                provide that if (1) a lessor has a                      farming business, as defined in section               § 1.168(k)–1(b)(4)(ii) defining a binding
                                                depreciable interest in the property and                263A(e)(4).                                           contract. Additionally, the proposed
                                                the lessor and any predecessor did not                     Pursuant to section 168(k)(2)(H), the              regulations provide that a letter of intent
                                                previously have a depreciable interest in               proposed regulations also provide that a              for an acquisition is not a binding
                                                the property, (2) the property is sold by               qualified film or television production               contract.
                                                the lessor or any subsequent purchaser                  is treated as placed in service at the time
                                                within three months after the date the                  of initial release or broadcast as defined            B. Self-Constructed Property
                                                property was originally placed in                       under § 1.181–1(a)(7), and a qualified                   If a taxpayer manufactures,
                                                service by the lessor (or, in the case of               live theatrical production is treated as              constructs, or produces property for its
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                                                multiple units of property subject to the               placed in service at the time of the                  own use, the Treasury Department and
                                                same lease, within three months after                   initial live staged performance. The                  the IRS recognize that the written
                                                the date the final unit is placed in                    proposed regulations also provide that                binding contract rule in section
                                                service, so long as the period between                  the initial live staged performance of a              13201(h)(1) of the Act does not apply.
                                                the time the first unit is placed in                    qualified live theatrical production is               In such case, the proposed regulations
                                                service and the time the last unit is                   the first commercial exhibition of a                  provide that the acquisition rules in
                                                placed in service does not exceed 12                    production to an audience. An initial                 section 13201(h)(1) of the Act are
                                                months), and (3) the user (lessee) of the               live staged performance does not                      treated as met if the taxpayer begins


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                                                39298                Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules

                                                manufacturing, constructing, or                         the taxpayer before January 1, 2027, or               limited to the property’s basis
                                                producing the property after September                  acquired by the taxpayer pursuant to a                attributable to manufacture,
                                                27, 2017. The proposed regulations                      written binding contract that is entered              construction, or production of the
                                                provide rules similar to those in                       into before January 1, 2027. These                    property before January 1, 2027, as
                                                § 1.168(k)–1(b)(4)(iii)(B) for defining                 acquisition requirements are in addition              provided in section 168(k)(2)(B)(ii).
                                                when manufacturing, construction, or                    to those in section 13201(h)(1) of the                   Pursuant to section 168(k)(2)(G), the
                                                production begins, including the safe                   Act, which require acquisition to occur               proposed regulations also provide that
                                                harbor, and in § 1.168(k)–1(b)(4)(iii)(C)               after September 27, 2017.                             the additional first year depreciation
                                                for a contract to acquire, or for the                      The proposed regulations provide that              deduction is allowed for both regular
                                                manufacture, construction, or                           the written binding contract rules for                tax and alternative minimum tax (AMT)
                                                production of, a component of the larger                longer production period property and                 purposes. However, for AMT purposes,
                                                self-constructed property. As stated in                 certain aircraft property are the same                the amount of the additional first year
                                                the preceding paragraph, these self-                    rules that apply for purposes of                      depreciation deduction is based on the
                                                constructed rules in the proposed                       determining whether the acquisition                   unadjusted depreciable basis of the
                                                regulations do not apply to property that               requirements of section 13201(h)(1) of                property for AMT purposes. The
                                                is manufactured, constructed, or                        the Act are met.                                      amount of the additional first year
                                                produced for the taxpayer by another                       With respect to self-constructed                   depreciation deduction is not affected
                                                person under a written binding contract                 property described in section                         by a taxable year of less than 12 months
                                                that is entered into prior to the                       168(k)(2)(B) or (C), the proposed                     for either regular or AMT purposes.
                                                manufacture, construction, or                           regulations follow the acquisition rule                  The proposed regulations provide
                                                production of the property.                             in section 168(k)(2)(E)(i) for self-                  rules similar to those in § 1.168(k)–
                                                                                                        constructed property and provide that                 1(d)(2) for determining the amount of
                                                C. Qualified Film, Television, or Live                  the acquisition requirements of section               depreciation otherwise allowable for
                                                Theatrical Productions                                  168(k)(2)(B)(i)(III) or (k)(2)(C)(i), as              qualified property. That is, before
                                                   The proposed regulations also provide                applicable, are met if a taxpayer                     determining the amount of depreciation
                                                rules for qualified film, television, or                manufactures, constructs, or produces                 otherwise allowable for qualified
                                                live theatrical productions. For                        the property for its own use and such                 property, the proposed regulations
                                                purposes of section 13201(h)(1)(A) of                   manufacturing, construction, or                       require the taxpayer to first reduce the
                                                the Act, the proposed regulations                       productions begins before January 1,                  unadjusted depreciable basis (as defined
                                                provide that a qualified film or                        2027. Further, only for purposes of                   in § 1.168(b)–1(a)(3)) of the property by
                                                television production is treated as                     section 168(k)(2)(B)(i)(III) and                      the amount of the additional first year
                                                acquired on the date principal                          (k)(2)(C)(i), the proposed regulations                depreciation deduction allowed or
                                                photography commences, and a                            provide that property that is                         allowable, whichever is greater (the
                                                qualified live theatrical production is                 manufactured, constructed, or produced                remaining adjusted depreciable basis),
                                                treated as acquired on the date when all                for the taxpayer by another person                    as provided in section 168(k)(1)(B).
                                                of the necessary elements for producing                 under a written binding contract that is              Then, the remaining adjusted
                                                the live theatrical production are                      entered into prior to the manufacture,                depreciable basis is depreciated using
                                                secured. These elements may include a                   construction, or production of the                    the applicable depreciation provisions
                                                script, financing, actors, set, scenic and              property for use by the taxpayer in its               of the Code for the property (for
                                                costume designs, advertising agents,                    trade or business or for its production of            example, section 168 for MACRS
                                                music, and lighting.                                    income is considered to be                            property, section 167(f)(1) for computer
                                                                                                        manufactured, constructed, or produced                software, and section 167 for film,
                                                D. Specified Plants                                     by the taxpayer. The proposed                         television, or theatrical productions).
                                                   Pursuant to section 13201(h)(2) of the               regulations also provide rules similar to             This amount of depreciation is allowed
                                                Act, if the taxpayer makes an election to               those in § 1.168(k)–1(b)(4)(iii)(B) for               for both regular tax and AMT purposes,
                                                apply section 168(k)(5) for a specified                 defining when manufacturing,                          and is affected by a taxable year of less
                                                plant, the proposed regulations provide                 construction, or production begins,                   than 12 months. However, for AMT
                                                that the specified plant must be planted                including the same safe harbor, and in                purposes, the amount of depreciation
                                                after September 27, 2017, or grafted after              § 1.168(k)–1(b)(4)(iii)(C) for a contract to          allowed is determined by calculating
                                                September 27, 2017, to a plant that has                 acquire, or for the manufacture,                      the remaining adjusted depreciable
                                                already been planted, by the taxpayer in                construction, or production of, a                     basis of the property for AMT purposes
                                                the ordinary course of the taxpayer’s                   component of the larger self-constructed              and using the same depreciation
                                                farming business, as defined in section                 property.                                             method, recovery period, and
                                                263A(e)(4).                                                                                                   convention that applies to the property
                                                                                                        7. Computation of Additional First Year
                                                                                                                                                              for regular tax purposes. If a taxpayer
                                                6. Longer Production Period Property or                 Depreciation Deduction and Otherwise
                                                                                                                                                              uses the optional depreciation tables in
                                                Certain Aircraft Property                               Allowable Depreciation
                                                                                                                                                              Rev. Proc. 87–57 (1987–2 C.B. 687) to
                                                   The proposed regulations provide                        Pursuant to section 168(k)(1)(A), the              compute depreciation for qualified
                                                rules for determining when longer                       proposed regulations provide that the                 property that is MACRS property, the
                                                production period property or certain                   allowable additional first year                       proposed regulations also provide that
                                                aircraft property described in section                  depreciation deduction for qualified                  the remaining adjusted depreciable
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                                                168(k)(2)(B) or (C) meets the acquisition               property is equal to the applicable                   basis of the property is the basis to
                                                requirements of section                                 percentage (as defined in section                     which the annual depreciation rates in
                                                168(k)(2)(B)(i)(III) or (k)(2)(C)(i), as                168(k)(6)) of the unadjusted depreciable              those tables apply.
                                                applicable. Pursuant to section                         basis (as defined in § 1.168(b)–1(a)(3)) of
                                                168(k)(2)(B)(i)(III) and (k)(2)(C)(i), the              the property. For qualified property                  8. Special Rules
                                                proposed regulations provide that                       described in section 168(k)(2)(B), the                   The proposed regulations also provide
                                                property described in section                           unadjusted depreciable basis (as defined              rules similar to those in § 1.168(k)–1(f)
                                                168(k)(2)(B) or (C) must be acquired by                 in § 1.168(b)–1(a)(3)) of the property is             for certain situations. However, the


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                                                                     Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules                                           39299

                                                special rules in § 1.168(k)–1(f)(9)                     168(k)(2)(E)(ii)(I). Therefore, the                   Special Analyses
                                                regarding the increase in basis due to a                proposed regulations provide that, in                   The Administrator of the Office of
                                                section 754 election are addressed in the               this situation, the additional first year             Information and Regulatory Affairs
                                                proposed regulations regarding the used                 depreciation deduction with respect to                (OIRA), Office of Management and
                                                property acquisition requirements.                      the contributed property is not allocated             Budget, has waived review of this
                                                Further, the special rules in § 1.168(k)–               under the general rules of § 1.168(d)–                proposed rule in accordance with
                                                1(f)(1)(iii) regarding property placed in               1(b)(7)(ii). Instead, the additional first            section 6(a)(3)(A) of Executive Order
                                                service and transferred in a section                    year depreciation deduction is allocated              12866. OIRA will subsequently make a
                                                168(i)(7) transaction in the same taxable               entirely to the contributing partner prior            significance determination of the final
                                                year, and in § 1.168(k)–1(f)(5) regarding               to the section 721(a) transaction and not             rule, pursuant to section 3(f) of
                                                like-kind exchanges or involuntary                      to the partnership.                                   Executive Order (E.O.) 12866 and the
                                                conversions, are updated to reflect the                   With respect to like-kind exchanges                 April 11, 2018, Memorandum of
                                                used property acquisition requirements                  and involuntary conversions,                          Agreement between the Department of
                                                in section 168(k)(2)(E)(ii). The special                § 1.168(k)–1(f)(5) provides that the                  Treasury and the Office of Management
                                                rules in the proposed regulations also                  exchanged basis and excess basis, if any,             and Budget (OMB).
                                                are updated to reflect the applicable                   of the replacement property is eligible                 The proposed regulations do not
                                                dates under section 168(k), and the                     for the additional first year depreciation            impose a collection of information on
                                                changes by the Act to technical                         deduction if the replacement property is              small entities and provide clarifying
                                                terminations of partnerships and the                    qualified property. The proposed                      rules for taxpayers to enjoy the tax
                                                rehabilitation credit.                                  regulations retain this rule if the                   benefit of 100-percent additional first
                                                   The proposed regulations provide                     replacement property also meets the                   year depreciation as provided by the
                                                rules for the following situations: (1)                 original use requirement. Pursuant to                 amendments to section 168 by the Act.
                                                Qualified property placed in service or                 section 168(k)(2)(E)(ii)(II) and its cross-           Therefore, a regulatory flexibility
                                                planted or grafted, as applicable, and                  reference to section 179(d)(3), the                   analysis is not required under the
                                                disposed of in the same taxable year; (2)               proposed regulations also provide that                Regulatory Flexibility Act (5 U.S.C.
                                                redetermination of basis of qualified                   only the excess basis, if any, of the                 chapter 6). Pursuant to section 7805(f) of
                                                property; (3) recapture of additional first             replacement property is eligible for the              the Code, this notice of proposed
                                                year depreciation for purposes of                       additional first year depreciation                    rulemaking will be submitted to the
                                                section 1245 and section 1250; (4) a                    deduction if the replacement property is              Chief Counsel for Advocacy of the Small
                                                certified pollution control facility that is            qualified property and also meets the                 Business Administration for comment
                                                qualified property; (5) like-kind                       used property acquisition requirements.               on its impact on small business.
                                                exchanges and involuntary conversions                   These rules also apply when a taxpayer
                                                of qualified property; (6) a change in use              makes the election under § 1.168(i)–                  Comments and Requests for a Public
                                                of qualified property; (7) the                          6(i)(1) to treat, for depreciation purposes           Hearing
                                                computation of earnings and profits; (8)                only, the total of the exchanged basis                  Before these proposed regulations are
                                                the increase in the limitation of the                   and excess basis, if any, in the                      adopted as final regulations,
                                                amount of depreciation for passenger                    replacement MACRS property as                         consideration will be given to any
                                                automobiles; (9) the rehabilitation credit              property placed in service by the                     comments that are submitted timely to
                                                under section 47; and (10) computation                  taxpayer at the time of replacement and               the IRS as prescribed in this preamble
                                                of depreciation for purposes of section                 the adjusted depreciable basis of the                 under the ADDRESSES heading. The
                                                514(a)(3).                                              relinquished MACRS property as                        Treasury Department and the IRS
                                                   The proposed regulations provide a                   disposed of by the taxpayer at the time               request comments on all aspects of the
                                                special rule for qualified property that is             of disposition. The proposed regulations              proposed rules. All comments will be
                                                placed in service in a taxable year and                 also retain the other rules in § 1.168(k)–            available at http://www.regulations.gov
                                                then contributed to a partnership under                 1(f)(5) for like-kind exchanges and                   or upon request. A public hearing will
                                                section 721(a) in the same taxable year                 involuntary conversions, but update the               be scheduled if requested in writing by
                                                when one of the other partners                          definitions to be consistent with the                 any person that timely submits written
                                                previously had a depreciable interest in                definitions in § 1.168(i)–6, which                    comments. If a public hearing is
                                                the property. Situation 1 of Rev. Rul.                  addresses how to compute depreciation                 scheduled, notice of the date, time, and
                                                99–5 (1999–1 C.B. 434) is an example of                 of property involved in like-kind                     place for the public hearing will be
                                                such a fact pattern. Under § 1.168(k)–                  exchanges or involuntary conversions.                 published in the Federal Register.
                                                1(f)(1)(iii) and its cross-reference to
                                                § 1.168(d)–1(b)(7)(ii), the additional first            Proposed Applicability Date                           Drafting Information
                                                year depreciation deduction associated                     These regulations are proposed to                    The principal authors of these
                                                with the contributed property would be                  apply to qualified property placed in                 proposed regulations are Kathleen Reed
                                                allocated between the contributing                      service or planted or grafted, as                     and Elizabeth R. Binder of the Office of
                                                partner and the partnership based on                    applicable, by the taxpayer during or                 Associate Chief Counsel (Income Tax
                                                the proportionate time the contributing                 after the taxpayer’s taxable year that                and Accounting). However, other
                                                partner and the partnership held the                    includes the date of publication of a                 personnel from the Treasury
                                                property throughout the taxable year.                   Treasury decision adopting these rules                Department and the IRS participated in
                                                The partnership could then allocate a                   as final regulations in the Federal                   their development.
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                                                portion of the deduction to the partner                 Register. Pending the issuance of the
                                                with a previous depreciable interest in                 final regulations, a taxpayer may choose              Statement of Availability
                                                the property. The Treasury Department                   to apply these proposed regulations to                  The IRS Revenue Procedures and
                                                and the IRS believe that allocating any                 qualified property acquired and placed                Revenue Rulings cited in this document
                                                portion of the deduction to a partner                   in service or planted or grafted, as                  are published in the Internal Revenue
                                                who previously had a depreciable                        applicable, after September 27, 2017, by              Bulletin (or Cumulative Bulletin) and
                                                interest in the property would be                       the taxpayer during taxable years ending              are available from the Superintendent of
                                                inconsistent with section                               on or after September 28, 2017.                       Documents, U.S. Government


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                                                39300                Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules

                                                Publishing Office, Washington, DC                          (i) * * * Further, see § 1.168(k)–                    (B) For purposes of section 168(k)(3)
                                                20402, or by visiting the IRS website at                2(f)(9) if the qualified rehabilitation               as in effect on the day before
                                                http://www.irs.gov.                                     expenditures are qualified property                   amendment by section 13204(a)(4)(B) of
                                                                                                        under section 168(k), as amended by the               the Tax Cuts and Jobs Act, Public Law
                                                List of Subjects in 26 CFR Part 1
                                                                                                        Tax Cuts and Jobs Act, Public Law 115–                115–97 (131 Stat. 2054 (December 22,
                                                  Income taxes, Reporting and                           97 (131 Stat. 2054 (December 22, 2017)).              2017)) (‘‘Act’’), the improvement is
                                                recordkeeping requirements.                             *      *     *     *     *                            acquired by the taxpayer before
                                                                                                        ■ Par. 3. Section 1.167(a)–14 is                      September 28, 2017, the improvement is
                                                Proposed Amendments to the                                                                                    placed in service by the taxpayer before
                                                                                                        amended by:
                                                Regulations                                             ■ 1. In the third sentence in paragraph               January 1, 2018, and the improvement
                                                  Accordingly, 26 CFR part 1 is                         (b)(1), removing ‘‘under section                      meets the original use requirement in
                                                proposed to be amended as follows:                      168(k)(2) or § 1.168(k)–1,’’ and adding               section 168(k)(2)(A)(ii) as in effect on
                                                                                                        ‘‘under section 168(k)(2) and § 1.168(k)–             the day before amendment by section
                                                PART 1—INCOME TAXES                                     1 or 1.168(k)–2, as applicable,’’ in its              13201(c)(1) of the Act; or
                                                                                                        place;                                                   (C) For purposes of section 168(k)(3)
                                                ■  Paragraph 1. The authority citation                  ■ 2. In the last sentence in paragraph                as in effect on the day before
                                                for part 1 is amended by adding an entry                (e)(3), removing ‘‘and before 2010’’; and             amendment by section 13204(a)(4)(B) of
                                                for § 1.168(k)––2 in numerical order to                 ■ 3. Adding two sentences at the end of
                                                                                                                                                              the Act, the improvement is acquired by
                                                read in part as follows:                                paragraph (e)(3).                                     the taxpayer after September 27, 2017;
                                                                                                           The addition reads as follows:                     the improvement is placed in service by
                                                    Authority: 26 U.S.C. 7805 * * *
                                                *      *     *       *      *                           § 1.167(a)–14 Treatment of certain                    the taxpayer after September 27, 2017,
                                                  Section 1.168(k)–2 also issued under 26               intangible property excluded from section             and before January 1, 2018; and the
                                                U.S.C. 1502.                                            197.                                                  improvement meets the requirements in
                                                *      *     *     *    *                               *     *     *     *    *                              section 168(k)(2)(A)(ii) as amended by
                                                ■  Par. 2. Section 1.48–12 is amended                     (e) * * *                                           section 13201(c)(1) of the Act; and
                                                by:                                                       (3) * * * The language ‘‘or                            (ii) Does not include any qualified
                                                ■ 1. In the last sentence in paragraph
                                                                                                        § 1.168(k)–2, as applicable,’’ in the third           improvement for which an expenditure
                                                (a)(2)(i), removing ‘‘The last sentence’’               sentence in paragraph (b)(1) of this                  is attributable to—
                                                                                                        section applies to computer software                     (A) The enlargement, as defined in
                                                and adding ‘‘The next to last sentence’’
                                                                                                        that is qualified property under section              § 1.48–12(c)(10), of the building;
                                                in its place;
                                                                                                        168(k)(2) and placed in service by a                     (B) Any elevator or escalator, as
                                                ■ 2. Adding two sentences at the end of
                                                                                                        taxpayer during or after the taxpayer’s               defined in § 1.48–1(m)(2); or
                                                paragraph (a)(2)(i); and
                                                                                                        taxable year that includes the date of
                                                ■ 3. Adding a sentence to the end of                                                                             (C) The internal structural framework,
                                                                                                        publication of a Treasury decision
                                                paragraph (c)(8)(i).                                                                                          as defined in § 1.48–12(b)(3)(iii), of the
                                                                                                        adopting these rules as final regulations
                                                   The additions read as follows:                                                                             building.
                                                                                                        in the Federal Register. However, a
                                                                                                        taxpayer may rely on the language ‘‘or                   (b) Effective date—(1) In general.
                                                § 1.48–12 Qualified rehabilitated building;
                                                expenditures incurred after December 31,                § 1.168(k)–2, as applicable,’’ in the third           Except as provided in paragraph (b)(2)
                                                1981.                                                   sentence in paragraph (b)(1) of this                  of this section, this section is applicable
                                                  (a) * * *                                             section in these proposed regulations for             on or after February 27, 2004.
                                                  (2) * * *                                             computer software that is qualified                      (2) Application of paragraph (a)(5) of
                                                  (i) * * * The last sentence of                        property under section 168(k)(2) and                  this section—(i) In general. Except as
                                                paragraph (c)(8)(i) of this section applies             acquired and placed in service after                  provided in paragraph (b)(2)(ii) of this
                                                to qualified rehabilitation expenditures                September 27, 2017, by the taxpayer                   section, paragraph (a)(5) of this section
                                                that are qualified property under section               during taxable years ending on or after               is applicable on or after the date of
                                                168(k)(2) and placed in service by a                    September 28, 2017, and ending before                 publication of a Treasury decision
                                                taxpayer during or after the taxpayer’s                 the taxpayer’s taxable year that includes             adopting these rules as final regulations
                                                taxable year that includes the date of                  the date of publication of a Treasury                 in the Federal Register.
                                                publication of a Treasury decision                      decision adopting these rules as final                   (ii) Early application of paragraph
                                                adopting these rules as final regulations               regulations in the Federal Register.                  (a)(5) of this section. A taxpayer may
                                                in the Federal Register. However, a                     ■ Par. 4. Section 1.168(b)–1 is amended               rely on the provisions of paragraph
                                                taxpayer may rely on the last sentence                  by adding paragraph (a)(5) and revising               (a)(5) of this section in these proposed
                                                in paragraph (c)(8)(i) of this section in               paragraph (b) to read as follows:                     regulations for the taxpayer’s taxable
                                                these proposed regulations for qualified                                                                      years ending on or after September 28,
                                                                                                        § 1.168(b)–1      Definitions.
                                                rehabilitation expenditures that are                                                                          2017, and ending before the taxpayer’s
                                                                                                           (a) * * *                                          taxable year that includes the date of
                                                qualified property under section                           (5) Qualified improvement property—
                                                168(k)(2) and acquired and placed in                                                                          publication of a Treasury decision
                                                                                                        (i) Is any improvement that is section                adopting these rules as final regulations
                                                service after September 27, 2017, by the                1250 property to an interior portion of
                                                taxpayer during taxable years ending on                                                                       in the Federal Register.
                                                                                                        a building, as defined in § 1.48–1(e)(1),
                                                or after September 28, 2017, and ending                                                                       ■ Par. 5. Section 1.168(d)–1 is amended
                                                                                                        that is nonresidential real property, as
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                                                before the taxpayer’s taxable year that                 defined in section 168(e)(2)(B), if the               by:
                                                includes the date of publication of a                   improvement is placed in service by the               ■ 1. Adding a sentence at the end of
                                                Treasury decision adopting these rules                  taxpayer after the date the building was              paragraph (b)(3)(ii);
                                                as final regulations in the Federal                     first placed in service by any person and             ■ 2. Adding a sentence at the end of
                                                Register.                                               if—                                                   paragraph (b)(7)(ii); and
                                                *     *     *     *     *                                  (A) For purposes of section 168(e)(6),             ■ 3. Adding two sentences at the end of
                                                  (c) * * *                                             the improvement is placed in service by               paragraph (d)(2).
                                                  (8) * * *                                             the taxpayer after December 31, 2017;                    The additions read as follows:


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                                                                     Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules                                              39301

                                                § 1.168(d)–1 Applicable conventions—half-               adding ‘‘§ 1.168(k)–1(f)(6)(iv) or                     ‘‘1.168(k)–1(f)(5), 1.168(k)–2(f)(5), or
                                                year and mid-quarter conventions.                       1.168(k)–2(f)(6)(iv), as applicable, and               1.1400L(b)–1(f)(5)’’ in its place;
                                                *       *     *     *     *                             § 1.400L(b)–1(f)(6)’’ in its place;                    ■ 2. In paragraph (d)(3)(ii)(E), removing
                                                   (b) * * *                                            ■ 4. In the last sentence in paragraph                 ‘‘1.168(k)–1(f)(5) or § 1.1400L(b)–1(f)(5)’’
                                                   (3) * * *                                            (d)(4)(i), removing ‘‘§§ 1.168(k)–                     and adding ‘‘1.168(k)–1(f)(5), 1.168(k)–
                                                   (ii) * * * Further, see § 1.168(k)–                  1T(f)(6)(iv) and 1.1400L(b)–1T(f)(6)’’                 2(f)(5), or 1.1400L(b)–1(f)(5)’’ in its
                                                2(f)(1) for rules relating to qualified                 and adding ‘‘§ 1.168(k)–1(f)(6)(iv) or                 place;
                                                property under section 168(k), as                       1.168(k)–2(f)(6)(iv), as applicable, and
                                                                                                                                                               ■ 3. Adding a sentence at the end of
                                                amended by the Tax Cuts and Jobs Act,                   § 1.400L(b)–1(f)(6)’’ in its place;
                                                                                                        ■ 5. Revising the first sentence in
                                                                                                                                                               paragraph (d)(4);
                                                Public Law 115–97 (131 Stat. 2054
                                                (December 22, 2017)), that is placed in                 paragraph (g)(1); and                                  ■ 4. Adding a sentence at the end of
                                                service by the taxpayer in the same                     ■ 6. Redesignating paragraph (g)(2) as                 paragraph (h); and
                                                taxable year in which either a                          paragraph (g)(3) and adding new                        ■ 5. Adding paragraph (k)(4).
                                                partnership is terminated as a result of                paragraph (g)(2).                                         The additions read as follows:
                                                a technical termination under section                     The addition and revision read as
                                                708(b)(1)(B) or the property is                         follows:                                               § 1.168(i)–6 Like-kind exchanges and
                                                                                                                                                               involuntary conversions.
                                                transferred in a transaction described in               § 1.168(i)–4      Changes in use.
                                                section 168(i)(7).                                                                                             *      *     *     *     *
                                                                                                        *      *     *     *     *                                (d) * * *
                                                *       *     *     *     *                                (g) * * *
                                                   (7) * * *                                               (1) * * * Except as provided in                        (4) * * * Further, see § 1.168(k)–
                                                   (ii) * * * However, see § 1.168(k)–                  paragraph (g)(2) of this section, this                 2(f)(5)(iv) for replacement MACRS
                                                2(f)(1)(iii) for a special rule regarding               section applies to any change in the use               property that is qualified property under
                                                the allocation of the additional first year             of MACRS property in a taxable year                    section 168(k), as amended by the Tax
                                                depreciation deduction in the case of                   ending on or after June 17, 2004. * * *                Cuts and Jobs Act, Public Law 115–97
                                                certain contributions of property to a                     (2) Qualified property under section                (131 Stat. 2054 (December 22, 2017)).
                                                partnership under section 721.                          168(k) acquired and placed in service                  *      *     *     *     *
                                                *       *     *     *     *                             after September 27, 2017. The language                    (h) * * * Further, see § 1.168(k)–
                                                   (d) * * *                                            ‘‘or § 1.168(k)–2(f)(6)(iii), as applicable’’          2(f)(5) for qualified property under
                                                   (2) * * * The last sentences in                      in paragraph (b)(1) of this section, the               section 168(k), as amended by the Tax
                                                paragraphs (b)(3)(ii) and (b)(7)(ii) of this            language ‘‘or § 1.168(k)–2(f)(6)(ii), as               Cuts and Jobs Act, Public Law 115–97
                                                section apply to qualified property                     applicable’’ in paragraph (c) of this                  (131 Stat. 2054 (December 22, 2017)).
                                                under section 168(k)(2) placed in                       section, and the language ‘‘or § 1.168(k)–             *      *     *     *     *
                                                service by a taxpayer during or after the               2(f)(6)(iv), as applicable’’ in paragraphs
                                                taxpayer’s taxable year that includes the               (d)(3)(i)(C) and (d)(4)(i) of this section                (k) * * *
                                                date of publication of a Treasury                       applies to any change in use of MACRS                     (4) Qualified property under section
                                                decision adopting these rules as final                  property, which is qualified property                  168(k) acquired and placed in service
                                                regulations in the Federal Register.                    under section 168(k)(2), by a taxpayer                 after September 27, 2017. The language
                                                However, a taxpayer may rely on the                     during or after the taxpayer’s taxable                 ‘‘1.168(k)–2(f)(5),’’ in paragraphs
                                                last sentences in paragraphs (b)(3)(ii)                 year that includes the date of                         (d)(3)(ii)(B) and (E) of this section and
                                                and (b)(7)(ii) of this section in these                 publication of a Treasury decision                     the last sentences in paragraphs (d)(4)
                                                proposed regulations for qualified                      adopting these rules as final regulations              and (h) of this section apply to a like-
                                                property under section 168(k)(2)                        in the Federal Register. However, a                    kind exchange or an involuntary
                                                acquired and placed in service after                    taxpayer may rely on the language ‘‘or                 conversion of MACRS property, which
                                                September 27, 2017, by the taxpayer                     § 1.168(k)–2(f)(6)(iii), as applicable’’ in            is qualified property under section
                                                during taxable years ending on or after                 paragraph (b)(1) of this section, the                  168(k)(2), for which the time of
                                                September 28, 2017, and ending before                   language ‘‘or § 1.168(k)–2(f)(6)(ii), as               replacement occurs on or after the date
                                                the taxpayer’s taxable year that includes               applicable’’ in paragraph (c) of this                  of publication of a Treasury decision
                                                the date of publication of a Treasury                   section, and the language ‘‘or § 1.168(k)–             adopting these rules as final regulations
                                                decision adopting these rules as final                  2(f)(6)(iv), as applicable’’ in paragraphs             in the Federal Register. However, a
                                                regulations in the Federal Register.                    (d)(3)(i)(C) and (d)(4)(i) of this section in          taxpayer may rely on the language
                                                *       *     *     *     *                             these proposed regulations for any                     ‘‘1.168(k)–2(f)(5),’’ in paragraphs
                                                ■ Par. 6. Section 1.168(i)–4 is amended                 change in use of MACRS property,                       (d)(3)(ii)(B) and (E) of this section and
                                                by:                                                     which is qualified property under                      the last sentences in paragraphs (d)(4)
                                                ■ 1. In the penultimate sentence in                     section 168(k)(2) and acquired and                     and (h) of this section in these proposed
                                                paragraph (b)(1), removing ‘‘§§ 1.168(k)–               placed in service after September 27,                  regulations for a like-kind exchange or
                                                1T(f)(6)(iii) and 1.1400L(b)–1T(f)(6)’’                 2017, by the taxpayer during taxable                   an involuntary conversion of MACRS
                                                and adding ‘‘§ 1.168(k)–1(f)(6)(iii) or                 years ending on or after September 28,                 property, which is qualified property
                                                1.168(k)–2(f)(6)(iii), as applicable, and               2017, and ending before the taxpayer’s                 under section 168(k)(2), for which the
                                                § 1.1400L(b)–1(f)(6)’’ in its place;                    taxable year that includes the date of                 time of replacement occurs on or after
                                                ■ 2. In the fifth sentence in paragraph                 publication of a Treasury decision                     September 28, 2017, and occurs before
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                                                (c), removing ‘‘§§ 1.168(k)–1T(f)(6)(ii)                adopting these rules as final regulations              the date of publication of a Treasury
                                                and 1.1400L(b)–1T(f)(6)’’ and adding                    in the Federal Register.                               decision adopting these rules as final
                                                ‘‘§ 1.168(k)–1(f)(6)(ii) or 1.168(k)–                   *      *     *     *     *                             regulations in the Federal Register.
                                                2(f)(6)(ii), as applicable, and                         ■ Par. 7. Section 1.168(i)–6 is amended                ■ Par. 8. Section 1.168(k)–0 is amended
                                                § 1.1400L(b)–1(f)(6)’’ in its place;                    by:                                                    by revising the introductory text and
                                                ■ 3. In the second sentence in paragraph                ■ 1. In paragraph (d)(3)(ii)(B), removing              adding an entry for § 1.168(k)–2 in
                                                (d)(3)(i)(C), removing ‘‘§§ 1.168(k)–                   ‘‘1.168(k)–1(f)(5) or § 1.1400L(b)–1(f)(5)’’           numerical order to the table of contents
                                                1T(f)(6)(iv) and 1.400L(b)–1T(f)(6)’’ and               wherever it appears and adding                         to read as follows:


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                                                39302                Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules

                                                § 1.168(k)–0     Table of contents.                        (v) Qualified film, television, or live              (i) In general.
                                                  This section lists the major                          theatrical production.                                  (ii) Technical termination of a
                                                paragraphs contained in §§ 1.168(k)–1                      (vi) Specified plant.                              partnership.
                                                and 1.168(k)–2.                                            (vii) Examples.                                      (iii) Section 168(i)(7) transactions.
                                                *    *     *     *     *                                   (c) Property described in section                    (iv) Examples.
                                                                                                        168(k)(2)(B) or (C).                                    (2) Redetermination of basis.
                                                § 1.168(k)–2 Additional first year                         (1) In general.                                      (i) Increase in basis.
                                                depreciation deduction for property                        (2) Definition of binding contract.                  (ii) Decrease in basis.
                                                acquired and placed in service after                       (3) Self-constructed property.                       (iii) Definitions.
                                                September 27, 2017.                                        (i) In general.                                      (iv) Examples.
                                                   (a) Scope and definitions.                              (ii) When does manufacture,                          (3) Sections 1245 and 1250
                                                   (1) Scope.                                           construction, or production begin.                    depreciation recapture.
                                                   (2) Definitions.                                        (A) In general.                                      (4) Coordination with section 169.
                                                   (b) Qualified property.                                 (B) Safe harbor.                                     (5) Like-kind exchanges and
                                                   (1) In general.                                         (iii) Components of self-constructed               involuntary conversions.
                                                   (2) Description of qualified property.               property.                                               (i) Scope.
                                                   (i) In general.                                         (A) Acquired components.                             (ii) Definitions.
                                                   (ii) Property not eligible for additional               (B) Self-constructed components.                     (iii) Computation.
                                                first year depreciation deduction.                         (iv) Examples.                                       (A) In general.
                                                   (3) Original use or used property                       (d) Computation of depreciation                      (B) Year of disposition and year of
                                                acquisition requirements.                               deduction for qualified property.                     replacement.
                                                   (i) In general.                                         (1) Additional first year depreciation               (C) Property described in section
                                                   (ii) Original use.                                   deduction.                                            168(k)(2)(B).
                                                   (A) In general.                                         (i) Allowable taxable year.                          (D) Effect of § 1.168(i)–6(i)(1) election.
                                                   (B) Conversion to business or income-                   (ii) Computation.                                    (E) Alternative minimum tax.
                                                producing use.                                             (iii) Property described in section                  (iv) Replacement MACRS property or
                                                   (C) Fractional interests in property.                168(k)(2)(B).                                         replacement computer software that is
                                                   (iii) Used property acquisition                         (iv) Alternative minimum tax.                      acquired and placed in service before
                                                requirements.                                              (A) In general.                                    disposition of relinquished MACRS
                                                   (A) In general.                                         (B) Special rules.                                 property or relinquished computer
                                                   (B) Property was not used by the                        (2) Otherwise allowable depreciation               software.
                                                taxpayer at any time prior to                           deduction.                                              (v) Examples.
                                                acquisition.                                               (i) In general.                                      (6) Change in use.
                                                   (C) Special rules for a series of related               (ii) Alternative minimum tax.                        (i) Change in use of depreciable
                                                transactions.                                              (3) Examples.                                      property.
                                                   (iv) Application to partnerships.                       (e) Elections under section 168(k).                  (ii) Conversion to personal use.
                                                   (A) Section 704(c) remedial                             (1) Election not to deduct additional                (iii) Conversion to business or
                                                allocations.                                            first year depreciation.                              income-producing use.
                                                   (B) Basis determined under section                      (i) In general.                                      (A) During the same taxable year.
                                                732.                                                       (ii) Definition of class of property.                (B) Subsequent to the acquisition
                                                   (C) Section 734(b) adjustments.                         (iii) Time and manner for making                   year.
                                                   (D) Section 743(b) adjustments.                      election.                                               (iv) Depreciable property changes use
                                                   (v) Syndication transaction.                            (A) Time for making election.                      subsequent to the placed-in-service
                                                   (vi) Examples.                                          (B) Manner of making election.                     year.
                                                   (4) Placed-in-service date.                             (iv) Failure to make election.                       (v) Examples.
                                                   (i) In general.                                         (2) Election to apply section 168(k)(5)              (7) Earnings and profits.
                                                   (ii) Specified plant.                                for specified plants.                                   (8) Limitation of amount of
                                                   (iii) Qualified film, television, or live               (i) In general.                                    depreciation for certain passenger
                                                theatrical production.                                     (ii) Time and manner for making                    automobiles.
                                                   (iv) Syndication transaction.                        election.                                               (9) Coordination with section 47.
                                                   (v) Technical termination of a                          (A) Time for making election.                        (i) In general.
                                                partnership.                                               (B) Manner of making election.                       (ii) Example.
                                                   (vi) Section 168(i)(7) transactions.                    (iii) Failure to make election.                      (10) Coordination with section
                                                   (5) Acquisition of property.                            (3) Election for qualified property                514(a)(3).
                                                   (i) In general.                                      placed in service during the 2017                       (g) Applicability dates.
                                                   (ii) Acquisition date.                               taxable year.                                           (1) In general.
                                                   (iii) Definition of binding contract.                   (i) In general.                                      (2) Early application.
                                                   (A) In general.                                         (ii) Time and manner for making                    ■ Par. 9. Section 1.168(k)–2 is added to
                                                   (B) Conditions.                                      election.                                             read as follows:
                                                   (C) Options.                                            (A) Time for making election.
                                                   (D) Letter of intent.                                   (B) Manner of making election.                     § 1.168 (k)–2 Additional first year
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                                                   (E) Supply agreements.                                  (iii) Failure to make election.                    depreciation deduction for property
                                                   (F) Components.                                         (4) Alternative minimum tax.                       acquired and placed in service after
                                                   (iv) Self-constructed property.                         (5) Revocation of election.                        September 27, 2017.
                                                   (A) In general.                                         (i) In general.                                      (a) Scope and definitions—(1) Scope.
                                                   (B) When does manufacture,                              (ii) Automatic 6-month extension.                  This section provides rules for
                                                construction, or production begin.                         (f) Special rules.                                 determining the additional first year
                                                   (C) Components of self-constructed                      (1) Property placed in service and                 depreciation deduction allowable under
                                                property.                                               disposed of in the same taxable year.                 section 168(k) for qualified property


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                                                                     Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules                                            39303

                                                acquired and placed in service after                       (C) Water utility property as defined              year beginning after December 31, 2017;
                                                September 27, 2017.                                     in section 168(e)(5) and depreciated                  or
                                                   (2) Definitions. For purposes of this                under section 168;                                       (G) Described in section 168(k)(9)(B)
                                                section—                                                   (D) Qualified improvement property                 and placed in service in any taxable
                                                   (i) Act is the Tax Cuts and Jobs Act,                as defined in § 1.168(b)–1(a)(5)(i)(C) and            year beginning after December 31, 2017.
                                                Public Law 115–97 (131 Stat. 2054                       (a)(5)(ii) and depreciated under section                 (3) Original use or used property
                                                (December 22, 2017)); and                               168;                                                  acquisition requirements—(i) In general.
                                                                                                           (E) Qualified film or television                   Depreciable property will meet the
                                                   (ii) Applicable percentage is the
                                                                                                        production, as defined in section 181(d)              requirements of this paragraph (b)(3) if
                                                percentage provided in section
                                                                                                        and § 1.181–3, for which a deduction                  the property meets the original use
                                                168(k)(6).
                                                                                                        would have been allowable under                       requirements in paragraph (b)(3)(ii) of
                                                   (b) Qualified property—(1) In general.                                                                     this section or if the property meets the
                                                                                                        section 181 without regard to section
                                                Qualified property is depreciable                                                                             used property acquisition requirements
                                                                                                        181(a)(2) and (g), or section 168(k);
                                                property, as defined in § 1.168(b)–                        (F) Qualified live theatrical                      in paragraph (b)(3)(iii) of this section.
                                                1(a)(1), that meets all the following                   production, as defined in section 181(e),                (ii) Original use—(A) In general.
                                                requirements in the first taxable year in               for which a deduction would have been                 Depreciable property will meet the
                                                which the property is subject to                        allowable under section 181 without                   requirements of this paragraph (b)(3)(ii)
                                                depreciation by the taxpayer whether or                 regard to section 181(a)(2) and (g), or               if the original use of the property
                                                not depreciation deductions for the                     section 168(k); or                                    commences with the taxpayer. Except as
                                                property are allowable:                                    (G) A specified plant, as defined in               provided in paragraphs (b)(3)(ii)(B) and
                                                   (i) The requirements in § 1.168(k)–                  section 168(k)(5)(B), for which the                   (C) of this section, original use means
                                                2(b)(2) (description of qualified                       taxpayer has properly made an election                the first use to which the property is
                                                property);                                              to apply section 168(k)(5) for the taxable            put, whether or not that use corresponds
                                                   (ii) The requirements in § 1.168(k)–                 year in which the specified plant is                  to the use of the property by the
                                                2(b)(3) (original use or used property                  planted, or grafted to a plant that has               taxpayer. Additional capital
                                                acquisition requirements);                              already been planted, by the taxpayer in              expenditures incurred by a taxpayer to
                                                   (iii) The requirements in § 1.168(k)–                the ordinary course of the taxpayer’s                 recondition or rebuild property acquired
                                                2(b)(4) (placed-in-service date); and                   farming business, as defined in section               or owned by the taxpayer satisfy the
                                                   (iv) The requirements in § 1.168(k)–                 263A(e)(4) (for further guidance, see                 original use requirement. However, the
                                                2(b)(5) (acquisition of property).                      paragraph (e) of this section).                       cost of reconditioned or rebuilt property
                                                   (2) Description of qualified property—                  (ii) Property not eligible for additional          does not satisfy the original use
                                                (i) In general. Depreciable property will               first year depreciation deduction.                    requirement (but may satisfy the used
                                                meet the requirements of this paragraph                 Depreciable property will not meet the                property acquisition requirements in
                                                (b)(2) if the property is—                              requirements of this paragraph (b)(2) if              paragraph (b)(3)(iii) of this section). The
                                                   (A) MACRS property, as defined in                    the property is—                                      question of whether property is
                                                                                                           (A) Described in section 168(f) (for               reconditioned or rebuilt property is a
                                                § 1.168(b)–1(a)(2), that has a recovery
                                                                                                        example, automobiles for which the                    question of fact. For purposes of this
                                                period of 20 years or less. For purposes
                                                                                                        taxpayer uses the optional business                   paragraph (b)(3)(ii)(A), property that
                                                of this paragraph (b)(2)(i)(A) and section
                                                                                                        standard mileage rate);                               contains used parts will not be treated
                                                168(k)(2)(A)(i)(I), the recovery period is
                                                                                                           (B) Required to be depreciated under               as reconditioned or rebuilt if the cost of
                                                determined in accordance with section
                                                                                                        the alternative depreciation system of                the used parts is not more than 20
                                                168(c) regardless of any election made
                                                                                                        section 168(g) pursuant to section                    percent of the total cost of the property,
                                                by the taxpayer under section 168(g)(7).
                                                                                                        168(g)(1)(A), (B), (C), (D), (F), or (G), or          whether acquired or self-constructed.
                                                This paragraph (b)(2)(i)(A) includes the                                                                         (B) Conversion to business or income-
                                                following MACRS property that is                        other provisions of the Internal Revenue
                                                                                                        Code (for example, property described                 producing use—(1) Personal use to
                                                acquired by the taxpayer after                                                                                business or income-producing use. If a
                                                September 27, 2017, and placed in                       in section 263A(e)(2)(A) if the taxpayer
                                                                                                        or any related person, as defined in                  taxpayer initially acquires new property
                                                service by the taxpayer after September                                                                       for personal use and subsequently uses
                                                27, 2017, and before January 1, 2018:                   section 263A(e)(2)(B), has made an
                                                                                                        election under section 263A(d)(3), or                 the property in the taxpayer’s trade or
                                                   (1) Qualified leasehold improvement                                                                        business or for the taxpayer’s
                                                                                                        property described in section
                                                property as defined in section 168(e)(6)                                                                      production of income, the taxpayer is
                                                                                                        280F(b)(1));
                                                as in effect on the day before                             (C) Included in any class of property              considered the original user of the
                                                amendment by section 13204(a)(1) of                     for which the taxpayer elects not to                  property. If a person initially acquires
                                                the Act;                                                deduct the additional first year                      new property for personal use and a
                                                   (2) Qualified restaurant property, as                depreciation (for further guidance, see               taxpayer subsequently acquires the
                                                defined in section 168(e)(7) as in effect               paragraph (e) of this section);                       property from the person for use in the
                                                on the day before amendment by section                     (D) A specified plant that is placed in            taxpayer’s trade or business or for the
                                                13204(a)(1) of the Act, that is qualified               service by the taxpayer during the                    taxpayer’s production of income, the
                                                improvement property as defined in                      taxable year and for which the taxpayer               taxpayer is not considered the original
                                                § 1.168(b)–1(a)(5)(i)(C) and (a)(5)(ii); and            made an election to apply section                     user of the property.
                                                   (3) Qualified retail improvement                     168(k)(5) for a prior taxable year;                      (2) Inventory to business or income-
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                                                property as defined in section 168(e)(8)                   (E) Included in any class of property              producing use. If a taxpayer initially
                                                as in effect on the day before                          for which the taxpayer elects to apply                acquires new property and holds the
                                                amendment by section 13204(a)(1) of                     section 168(k)(4). This paragraph                     property primarily for sale to customers
                                                the Act;                                                (b)(2)(ii)(E) applies to property placed in           in the ordinary course of the taxpayer’s
                                                   (B) Computer software as defined in,                 service in any taxable year beginning                 business and subsequently withdraws
                                                and depreciated under, section 167(f)(1)                before January 1, 2018;                               the property from inventory and uses
                                                and the regulations under section                          (F) Described in section 168(k)(9)(A)              the property primarily in the taxpayer’s
                                                167(f)(1);                                              and placed in service in any taxable                  trade or business or primarily for the


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                                                39304                Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules

                                                taxpayer’s production of income, the                    any time prior to acquisition by the                  had a depreciable interest in the
                                                taxpayer is considered the original user                taxpayer or predecessor if the taxpayer               property while a member of the group.
                                                of the property. If a person initially                  or the predecessor had a depreciable                     (ii) Certain acquisitions pursuant to a
                                                acquires new property and holds the                     interest in the property at any time prior            series of related transactions. Solely for
                                                property primarily for sale to customers                to such acquisition, whether or not the               purposes of applying paragraph
                                                in the ordinary course of the person’s                  taxpayer or the predecessor claimed                   (b)(3)(iii)(A)(1) of this section, if a series
                                                business and a taxpayer subsequently                    depreciation deductions for the                       of related transactions includes one or
                                                acquires the property from the person                   property. If a lessee has a depreciable               more transactions in which property is
                                                for use primarily in the taxpayer’s trade               interest in the improvements made to                  acquired by a member of a consolidated
                                                or business or primarily for the                        leased property and subsequently the                  group and one or more transactions in
                                                taxpayer’s production of income, the                    lessee acquires the leased property of                which a corporation that had a
                                                taxpayer is considered the original user                which the improvements are a part, the                depreciable interest in the property
                                                of the property. For purposes of this                   unadjusted depreciable basis, as defined              becomes a member of the group, the
                                                paragraph (b)(3)(ii)(B)(2), the original                in § 1.168(b)–1(a)(3), of the acquired                member that acquires the property will
                                                use of the property by the taxpayer                     property that is eligible for the                     be treated as having a depreciable
                                                commences on the date on which the                      additional first year depreciation                    interest in the property prior to the time
                                                taxpayer uses the property primarily in                 deduction, assuming all other                         of its acquisition.
                                                the taxpayer’s trade or business or                     requirements are met, must not include                   (iii) Time for testing membership.
                                                primarily for the taxpayer’s production                 the unadjusted depreciable basis                      Solely for purposes of applying
                                                of income.                                              attributable to the improvements.                     paragraph (b)(3)(iii)(B)(3)(i) and (ii) of
                                                   (C) Fractional interests in property. If,               (2) Taxpayer has a depreciable                     this section, if a series of related
                                                in the ordinary course of its business, a               interest in a portion of the property. If             transactions includes one or more
                                                taxpayer sells fractional interests in new              a taxpayer initially acquires a                       transactions in which property is
                                                property to third parties unrelated to the              depreciable interest in a portion of the              acquired by a member of a consolidated
                                                taxpayer, each first fractional owner of                property and subsequently acquires a                  group and one or more transactions in
                                                the property is considered as the                       depreciable interest in an additional                 which the transferee of the property
                                                original user of its proportionate share                portion of the same property, such                    ceases to be a member of a consolidated
                                                of the property. Furthermore, if the                    additional depreciable interest is not                group, whether the taxpayer is a
                                                taxpayer uses the property before all of                treated as used by the taxpayer at any                member of a consolidated group is
                                                the fractional interests of the property                                                                      tested immediately after the last
                                                                                                        time prior to its acquisition by the
                                                are sold but the property continues to be                                                                     transaction in the series.
                                                                                                        taxpayer. This paragraph (b)(3)(iii)(B)(2)
                                                held primarily for sale by the taxpayer,                                                                         (C) Special rules for a series of related
                                                                                                        does not apply if the taxpayer or a
                                                the original use of any fractional interest                                                                   transactions. Solely for purposes of
                                                                                                        predecessor previously had a
                                                sold to a third party unrelated to the                                                                        section 168(k)(2)(E)(ii) and paragraph
                                                                                                        depreciable interest in the subsequently
                                                taxpayer subsequent to the taxpayer’s                                                                         (b)(3)(iii)(A) of this section, in the case
                                                                                                        acquired additional portion. For
                                                use of the property begins with the first                                                                     of a series of related transactions (for
                                                                                                        purposes of this paragraph
                                                purchaser of that fractional interest. For                                                                    example, a series of related transactions
                                                                                                        (b)(3)(iii)(B)(2), a portion of the property
                                                purposes of this paragraph (b)(3)(ii)(C),                                                                     including the transfer of a partnership
                                                                                                        is considered to be the percentage
                                                persons are not related if they do not                                                                        interest, the transfer of partnership
                                                                                                        interest in the property. If a taxpayer
                                                have a relationship described in section                                                                      assets, or the disposition of property
                                                                                                        holds a depreciable interest in a portion
                                                267(b) or 707(b) and the regulations                                                                          and the disposition, directly or
                                                                                                        of the property, sells that portion or a
                                                under section 267(b) or 707(b).                                                                               indirectly, of the transferor or transferee
                                                   (iii) Used property acquisition                      part of that portion, and subsequently
                                                                                                        acquires a depreciable interest in                    of the property)—
                                                requirements—(A) In general.                                                                                     (1) The property is treated as directly
                                                Depreciable property will meet the                      another portion of the same property,
                                                                                                                                                              transferred from the original transferor
                                                requirements of this paragraph (b)(3)(iii)              the taxpayer will be treated as
                                                                                                                                                              to the ultimate transferee; and
                                                if the acquisition of the used property                 previously having a depreciable interest                 (2) The relation between the original
                                                meets the following requirements:                       in the property up to the amount of the               transferor and the ultimate transferee is
                                                   (1) Such property was not used by the                portion for which the taxpayer held a                 tested immediately after the last
                                                taxpayer or a predecessor at any time                   depreciable interest in the property                  transaction in the series.
                                                prior to such acquisition;                              before the sale.                                         (iv) Application to partnerships—(A)
                                                   (2) The acquisition of such property                    (3) Application to members of a                    Section 704(c) remedial allocations.
                                                meets the requirements of section                       consolidated group—(i) Same                           Remedial allocations under section
                                                179(d)(2)(A), (B), and (C), and § 1.179–                consolidated group. Solely for purposes               704(c) do not satisfy the requirements of
                                                4(c)(1)(ii), (iii), and (iv), or 1.179–4(c)(2)          of applying paragraph (b)(3)(iii)(A)(1) of            paragraph (b)(3) of this section. See
                                                (property is acquired by purchase); and                 this section, if a member of a                        § 1.704–3(d)(2).
                                                   (3) The acquisition of such property                 consolidated group, as defined in                        (B) Basis determined under section
                                                meets the requirements of section                       § 1.1502–1(h), acquires depreciable                   732. Any basis of distributed property
                                                179(d)(3) and § 1.179–4(d) (cost of                     property in which the consolidated                    determined under section 732 does not
                                                property) (for further guidance regarding               group had a depreciable interest at any               satisfy the requirements of paragraph
                                                like-kind exchanges and involuntary                     time prior to the member’s acquisition                (b)(3) of this section.
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                                                conversions, see paragraph (f)(5) of this               of the property, the member will be                      (C) Section 734(b) adjustments. Any
                                                section).                                               treated as having a depreciable interest              increase in basis of depreciable property
                                                   (B) Property was not used by the                     in the property prior to the acquisition.             under section 734(b) does not satisfy the
                                                taxpayer at any time prior to                           For purposes of this paragraph                        requirements of paragraph (b)(3) of this
                                                acquisition—(1) In general. Solely for                  (b)(3)(iii)(B)(3)(i), a consolidated group            section.
                                                purposes of paragraph (b)(3)(iii)(A)(1) of              will be treated as having a depreciable                  (D) Section 743(b) adjustments—(1) In
                                                this section, the property is treated as                interest in property during the time any              general. For purposes of determining
                                                used by the taxpayer or a predecessor at                current or previous member of the group               whether the transfer of a partnership


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                                                                     Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules                                                 39305

                                                interest meets the requirements of                         Example 1. (i) On August 1, 2018, A buys           remaining unsold 3⁄8 fractional interests in
                                                paragraph (b)(3)(iii)(A) of this section,               a new machine for $35,000 from an unrelated           the aircraft. H is considered the original user
                                                each partner is treated as having a                     party for use in A’s trade or business. On July       as to its 5⁄8 fractional interest in the aircraft
                                                                                                        1, 2020, B buys that machine from A for               and I is considered the original user as to its
                                                depreciable interest in the partner’s
                                                                                                        $20,000 for use in B’s trade or business. On          3⁄8 fractional interest in the aircraft. Thus,
                                                proportionate share of partnership                      October 1, 2020, B makes a $5,000 capital             assuming all other requirements are met, H’s
                                                property. Any increase in basis of                      expenditure to recondition the machine. B             purchase price for its 5⁄8 fractional interest in
                                                depreciable property under section                      did not have any depreciable interest in the          the aircraft qualifies for the additional first
                                                743(b) satisfies the requirements of                    machine before B acquired it on July 1, 2020.         year depreciation deduction and I’s purchase
                                                paragraph (b)(3)(iii)(A) of this section                   (ii) A’s purchase price of $35,000 satisfies       price for its 3⁄8 fractional interest in the
                                                if—                                                     the original use requirement of paragraph             aircraft qualifies for the additional first year
                                                   (i) At any time prior to the transfer of             (b)(3)(ii) of this section and, assuming all          depreciation deduction.
                                                the partnership interest that gave rise to              other requirements are met, qualifies for the            Example 5. On September 1, 2017, J, an
                                                such basis increase, neither the                        additional first year depreciation deduction.         equipment dealer, buys new tractors that are
                                                                                                           (iii) B’s purchase price of $20,000 does not       held by J primarily for sale to customers in
                                                transferee partner nor a predecessor of                 satisfy the original use requirement of               the ordinary course of its business. On
                                                the transferee partner had any                          paragraph (b)(3)(ii) of this section, but it does     October 15, 2017, J withdraws the tractors
                                                depreciable interest in the portion of the              satisfy the used property acquisition                 from inventory and begins to use the tractors
                                                property deemed acquired to which the                   requirements of paragraph (b)(3)(iii) of this         primarily for producing rental income. The
                                                section 743(b) adjustment is allocated                  section. Assuming all other requirements are          holding of the tractors by J as inventory does
                                                under section 755 and the regulations                   met, the $20,000 purchase price qualifies for         not constitute a ‘‘use’’ for purposes of the
                                                under section 755; and                                  the additional first year depreciation                original use requirement and, therefore, the
                                                   (ii) The transfer of the partnership                 deduction. Further, B’s $5,000 expenditure            original use of the tractors commences with
                                                interest that gave rise to such basis                   satisfies the original use requirement of             J on October 15, 2017, for purposes of
                                                increase satisfies the requirements of                  paragraph (b)(3)(ii) of this section and,             paragraph (b)(3)(ii) of this section. However,
                                                                                                        assuming all other requirements are met,              the tractors are not eligible for the 100-
                                                paragraphs (b)(3)(iii)(A)(2) and (3) of
                                                                                                        qualifies for the additional first year               percent additional first year depreciation
                                                this section.                                           depreciation deduction, regardless of                 deduction because J acquired the tractors
                                                   (2) Relatedness tested at partner level.             whether the $5,000 is added to the basis of           before September 28, 2017.
                                                Solely for purposes of paragraph                        the machine or is capitalized as a separate              Example 6. K is in the trade or business of
                                                (b)(3)(iv)(D)(1)(ii) of this section,                   asset.                                                leasing equipment to others. During 2016, K
                                                whether the parties are related or                         Example 2. C, an automobile dealer, uses           buys a new machine (Machine #1) and then
                                                unrelated is determined by comparing                    some of its automobiles as demonstrators in           leases it to L for use in L’s trade or business.
                                                the transferor and the transferee of the                order to show them to prospective customers.          The lease between K and L for Machine #1
                                                transferred partnership interest.                       The automobiles that are used as                      is a true lease for federal income tax
                                                   (v) Syndication transaction. If a lessor             demonstrators by C are held by C primarily            purposes. During 2018, L enters into a
                                                has a depreciable interest in the                       for sale to customers in the ordinary course          written binding contract with K to buy
                                                property and the lessor and any                         of its business. On November 1, 2017, D buys          Machine #1 at its fair market value on May
                                                                                                        from C an automobile that was previously              15, 2018. L did not have any depreciable
                                                predecessor did not previously have a                   used as a demonstrator by C. D will use the           interest in Machine #1 before L acquired it
                                                depreciable interest in the property, and               automobile solely for business purposes. The          on May 15, 2018. As a result, L’s acquisition
                                                the property is sold by the lessor or any               use of the automobile by C as a demonstrator          of Machine #1 satisfies the used property
                                                subsequent purchaser within three                       does not constitute a ‘‘use’’ for purposes of         acquisition requirements of paragraph
                                                months after the date the property was                  the original use requirement and, therefore,          (b)(3)(iii) of this section. Assuming all other
                                                originally placed in service by the lessor              D will be considered the original user of the         requirements are met, L’s purchase price of
                                                (or, in the case of multiple units of                   automobile for purposes of paragraph                  Machine #1 qualifies for the additional first
                                                property subject to the same lease,                     (b)(3)(ii) of this section. Assuming all other        year depreciation deduction for L.
                                                within three months after the date the                  requirements are met, D’s purchase price of              Example 7. The facts are the same as in
                                                final unit is placed in service, so long                the automobile qualifies for the additional           Example 6 of this paragraph (b)(3)(vi), except
                                                                                                        first year depreciation deduction for D,              that K and L are related parties within the
                                                as the period between the time the first                subject to any limitation under section 280F.         meaning of section 179(d)(2)(A) or (B) and
                                                unit is placed in service and the time                     Example 3. On April 1, 2015, E acquires            § 1.179–4(c). As a result, L’s acquisition of
                                                the last unit is placed in service does                 a horse to be used in E’s thoroughbred racing         Machine #1 does not satisfy the used
                                                not exceed 12 months), and the user of                  business. On October 1, 2018, F buys the              property acquisition requirements of
                                                the property after the last sale during                 horse from E and will use the horse in F’s            paragraph (b)(3)(iii) of this section. Thus,
                                                the three-month period remains the                      horse breeding business. F did not have any           Machine #1 is not eligible for the additional
                                                same as when the property was                           depreciable interest in the horse before F            first year depreciation deduction for L.
                                                originally placed in service by the                     acquired it on October 1, 2018. The use of the           Example 8. The facts are the same as in
                                                lessor, the purchaser of the property in                horse by E in its racing business prevents F          Example 6 of this paragraph (b)(3)(vi), except
                                                                                                        from satisfying the original use requirement          L incurred capital expenditures of $5,000 to
                                                the last sale during the three-month                    of paragraph (b)(3)(ii) of this section.              improve Machine #1 on September 5, 2017,
                                                period is considered the taxpayer that                  However, F’s acquisition of the horse satisfies       and has a depreciable interest in such
                                                acquired the property for purposes of                   the used property acquisition requirements of         improvements. L’s purchase price of $5,000
                                                applying paragraphs (b)(3)(ii) and (iii) of             paragraph (b)(3)(iii) of this section. Assuming       for the improvements to Machine #1 satisfies
                                                this section.                                           all other requirements are met, F’s purchase          the original use requirement of § 1.168(k)–
                                                   (vi) Examples. The application of this               price of the horse qualifies for the additional       1(b)(3)(i) and, assuming all other
                                                paragraph (b)(3) is illustrated by the                  first year depreciation deduction for F.              requirements are met, qualifies for the 50-
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                                                following examples. Unless the facts                       Example 4. In the ordinary course of its           percent additional first year depreciation
                                                specifically indicate otherwise, assume                 business, G sells fractional interests in its         deduction. Because L had a depreciable
                                                                                                        aircraft to unrelated parties. G holds out for        interest only in the improvements to
                                                that the parties are not related within
                                                                                                        sale eight equal fractional interests in an           Machine #1, L’s acquisition of Machine #1,
                                                the meaning of section 179(d)(2)(A) or                  aircraft. On October 1, 2017, G sells five of         excluding L’s improvements to such
                                                (B) and § 1.179–4(c), no corporation is a               the eight fractional interests in the aircraft to     machine, satisfies the used property
                                                member of a consolidated or controlled                  H and H begins to use its proportionate share         acquisition requirements of paragraph
                                                group, and the parties do not have                      of the aircraft immediately upon purchase.            (b)(3)(iii) of this section. Assuming all other
                                                predecessors:                                           On February 1, 2018, G sells to I the                 requirements are met, L’s unadjusted



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                                                39306                Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules

                                                depreciable basis of Machine #1, excluding              contributes $100, which QRS uses to                      Example 18. In a series of related
                                                the amount of such unadjusted depreciable               purchase a retail motor fuels outlet for $300.        transactions, a father sells a machine to an
                                                basis attributable to L’s improvements to               Assume this retail motor fuels outlet is QRS’         unrelated party who sells the machine to the
                                                Machine #1, qualifies for the 100-percent               only property and is qualified property under         father’s daughter for use in the daughter’s
                                                additional first year depreciation deduction.           section 168(k)(2)(A)(i). QRS makes an                 trade or business. Pursuant to paragraph
                                                   Example 9. During 2016, M and N                      election not to deduct the additional first           (b)(3)(iii)(C) of this section, the transfers of
                                                purchased used equipment for use in their               year depreciation for all qualified property          the machine are treated as a direct transfer
                                                trades or businesses and each own a 50                  placed in service during 2019. QRS has a              from the father to his daughter and the time
                                                percent interest in such equipment. Prior to            section 754 election in effect. QRS claimed           to test whether the parties are related is
                                                this acquisition, M and N did not have any              depreciation of $15 for the retail motor fuels        immediately after the last transaction in the
                                                depreciable interest in the equipment.                  outlet for 2019. During 2020, when the retail         series. Because the father and the daughter
                                                Assume this ownership arrangement is not a              motor fuels outlet’s fair market value is $600,       are related parties within the meaning of
                                                partnership. During 2018, N enters into a               Q sells all of his partnership interest to T in       section 179(d)(2)(A) and § 1.179–4(c)(ii), the
                                                written binding contract with M to buy M’s              a fully taxable transaction for $200. T never         daughter’s acquisition of the machine does
                                                interest in the equipment. Pursuant to                  previously had a depreciable interest in the          not satisfy the used property acquisition
                                                paragraph (b)(3)(iii)(B)(2) of this section, N is       retail motor fuels outlet. T takes an outside         requirements of paragraph (b)(3)(iii) of this
                                                not treated as using M’s interest in the                basis of $200 in the partnership interest             section. Further, because the transfers of the
                                                equipment prior to N’s acquisition of M’s               previously owned by Q. T’s share of the               machine are treated as a direct transfer from
                                                interest. As a result, N’s acquisition of M’s           partnership’s previously taxed capital is $95.        the father to his daughter, the unrelated
                                                interest in the equipment satisfies the used            Accordingly, T’s section 743(b) adjustment is         party’s acquisition of the machine is not
                                                property acquisition requirements of                    $105 and is allocated entirely to the retail          eligible for the additional first year
                                                paragraph (b)(3)(iii) of this section. Assuming         motor fuels outlet under section 755.                 depreciation deduction.
                                                all other requirements are met, N’s purchase            Assuming all other requirements are met, T’s             Example 19. Parent owns all of the stock
                                                price of M’s interest in the equipment                  section 743(b) adjustment qualifies for the           of B Corporation and C Corporation. Parent,
                                                qualifies for the additional first year                 additional first year depreciation deduction.         B Corporation, and C Corporation are all
                                                depreciation deduction for N.                              Example 14. The facts are the same as in           members of the Parent consolidated group. C
                                                   Example 10. The facts are the same as in             Example 13 of this paragraph (b)(3)(vi),              Corporation has a depreciable interest in
                                                Example 9 of this paragraph (b)(3)(vi), except          except that Q sells his partnership interest to       Equipment #1. During 2018, C Corporation
                                                N had a 100 percent depreciable interest in             U, a related person within the meaning of             sells Equipment #1 to B Corporation. Prior to
                                                the equipment prior to 2016 and M                       section 179(d)(2)(A) or (B) and § 1.179–4(c).         this acquisition, B Corporation never had a
                                                purchased from N a 50 percent interest in the           U’s section 743(b) adjustment does not                depreciable interest in Equipment #1. B
                                                                                                        qualify for the additional first year                 Corporation’s acquisition of Equipment #1
                                                equipment during 2016. As a result, N’s
                                                                                                        depreciation deduction.
                                                acquisition of M’s interest in the equipment                                                                  does not satisfy the used property acquisition
                                                                                                           Example 15. The facts are the same as in
                                                during 2018 does not satisfy the used                                                                         requirements of paragraph (b)(3)(iii) of this
                                                                                                        Example 13 of this paragraph (b)(3)(vi),
                                                property acquisition requirements of                                                                          section for two reasons. First, B Corporation
                                                                                                        except that Q dies and his partnership
                                                paragraphs (b)(3)(iii)(A)(1) and                                                                              and C Corporation are related parties within
                                                                                                        interest is transferred to V. V takes a basis in
                                                (b)(3)(iii)(B)(1) of this section. Paragraph                                                                  the meaning of section 179(d)(2)(B) and
                                                                                                        Q’s partnership interest under section 1014.
                                                (b)(3)(iii)(B)(2) of this section does not apply                                                              § 1.179–4(c)(2)(iii). Second, pursuant to
                                                                                                        As a result, section 179(d)(2)(C)(ii) and
                                                because N initially acquired a 100 percent              § 1.179–4(c)(1)(iv) are not satisfied, and V’s        paragraph (b)(3)(iii)(B)(3)(i) of this section, B
                                                depreciable interest in the equipment.                  section 743(b) adjustment does not qualify            Corporation is treated as previously having a
                                                Accordingly, N’s purchase price of M’s                  for the additional first year depreciation            depreciable interest in Equipment #1 because
                                                interest in the equipment during 2018 does              deduction.                                            B Corporation is a member of the Parent
                                                not qualify for the additional first year                  Example 16. The facts are the same as in           consolidated group and C Corporation, while
                                                depreciation deduction for N.                           Example 13 of this paragraph (b)(3)(vi),              a member of the Parent consolidated group,
                                                   Example 11. The facts are the same as in             except that QRS purchased the retail motor            had a depreciable interest in Equipment #1.
                                                Example 9 of this paragraph (b)(3)(vi), except          fuels outlet from T prior to T purchasing Q’s         Accordingly, B Corporation’s acquisition of
                                                during 2018, M also enters into a written               partnership interest in QRS. T had a                  Equipment #1 is not eligible for the
                                                binding contract with N to buy N’s interest             depreciable interest in such retail motor fuels       additional first year depreciation deduction.
                                                in the equipment. Pursuant to paragraph                 outlet. Because T had a depreciable interest             Example 20. (i) Parent owns all of the stock
                                                (b)(3)(iii)(B)(2) of this section, both M and N         in the retail motor fuels outlet before T             of D Corporation and E Corporation. Parent,
                                                are treated as previously having a depreciable          acquired its interest in QRS, T’s section             D Corporation, and E Corporation are all
                                                interest in a 50-percent portion of the                 743(b) adjustment does not qualify for the            members of the Parent consolidated group. D
                                                equipment. Accordingly, the acquisition by              additional first year depreciation deduction.         Corporation has a depreciable interest in
                                                M of N’s 50-percent interest and the                       Example 17. In November 2017, AA                   Equipment #2. No other members of the
                                                acquisition by N of M’s 50-percent interest in          Corporation purchases a used drill press              Parent consolidated group ever had a
                                                the equipment during 2018 do not qualify for            costing $10,000 and is granted a trade-in             depreciable interest in Equipment #2. During
                                                the additional first year depreciation                  allowance of $2,000 on its old drill press.           2018, D Corporation sells Equipment #2 to
                                                deduction.                                              The used drill press is qualified property            BA, a person not related, within the meaning
                                                   Example 12. O and P form an equal                    under section 168(k)(2)(A)(i). The old drill          of section 179(d)(2)(A) or (B) and § 1.179–
                                                partnership, OP, in 2018. O contributes cash            press had a basis of $1,200. Under sections           4(c), to any member of the Parent
                                                to OP, and P contributes equipment to OP.               1012 and 1031(d), the basis of the used drill         consolidated group. In an unrelated
                                                OP’s basis in the equipment contributed by              press is $9,200 ($1,200 basis of old drill press      transaction during 2019, E Corporation
                                                P is determined under section 723. Because              plus cash expended of $8,000). Only $8,000            acquires Equipment #2 from BA or another
                                                OP’s basis in such equipment is determined              of the basis of the used drill press satisfies        person not related to any member of the
                                                in whole or in part by reference to P’s                 the requirements of section 179(d)(3) and             Parent consolidated group within the
                                                adjusted basis in such equipment, OP’s                  § 1.179–4(d) and, thus, satisfies the used            meaning of section 179(d)(2)(A) or (B) and
                                                acquisition of such equipment does not                  property acquisition requirement of                   § 1.179–4(c).
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                                                satisfy section 179(d)(2)(C) and § 1.179–               paragraph (b)(3)(iii) of this section. The               (ii) Pursuant to paragraph (b)(3)(iii)(B)(3)(i)
                                                4(c)(1)(iv) and, thus, does not satisfy the used        remaining $1,200 of the basis of the used             of this section, E Corporation is treated as
                                                property acquisition requirements of                    drill press does not satisfy the requirements         previously having a depreciable interest in
                                                paragraph (b)(3)(iii) of this section.                  of section 179(d)(3) and § 1.179–4(d) because         Equipment #2 because E Corporation is a
                                                Accordingly, OP’s acquisition of such                   it is determined by reference to the old drill        member of the Parent consolidated group,
                                                equipment is not eligible for the additional            press. Accordingly, assuming all other                and D Corporation, while a member of the
                                                first year depreciation deduction.                      requirements are met, only $8,000 of the              Parent consolidated group, had a depreciable
                                                   Example 13. Q, R, and S form an equal                basis of the used drill press is eligible for the     interest in Equipment #2. As a result, E
                                                partnership, QRS, in 2019. Each partner                 additional first year depreciation deduction.         Corporation’s acquisition of Equipment #2



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                                                                     Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules                                                 39307

                                                does not satisfy the used property acquisition          (b)(3)(iii)(A)(1) of this section and, assuming       Corporation the used airplane subject to the
                                                requirements of paragraph (b)(3)(iii) of this           all other requirements are met, F                     lease with N Corporation. M Corporation and
                                                section. Thus, E Corporation’s acquisition of           Corporation’s acquisition of Equipment #3 is          O Corporation are related parties within the
                                                Equipment #2 is not eligible for the                    eligible for the additional first year                meaning of section 179(d)(2)(A) or (B) and
                                                additional first year depreciation deduction.           depreciation deduction.                               § 1.179–4(c). As of May 27, 2018, N
                                                The results would be the same if D                         Example 22. (i) H Corporation, which is            Corporation is still the lessee of the used
                                                Corporation had ceased to be a member of the            not a member of a consolidated group, has a           airplane. Prior to this acquisition, O
                                                Parent consolidated group prior to E                    depreciable interest in Equipment #4. Parent          Corporation never had a depreciable interest
                                                Corporation’s acquisition of Equipment #2.              owns all the stock of I Corporation, and              in the used airplane. O Corporation is a
                                                   Example 21. (i) Parent owns all of the stock         Parent and I Corporation are members of the           calendar-year taxpayer.
                                                of F Corporation and G Corporation. Parent,             Parent consolidated group. No member of the              (ii) The sale transaction of May 27, 2018,
                                                F Corporation, and G Corporation are all                Parent consolidated group ever had a                  satisfies the requirements of paragraph
                                                members of the Parent consolidated group. G             depreciable interest in Equipment #4. Neither         (b)(3)(v) of this section. As a result, O
                                                Corporation has a depreciable interest in               Parent nor I Corporation is related to H              Corporation is considered the taxpayer that
                                                Equipment #3. No other members of the                   Corporation within the meaning of section             acquired the used airplane for purposes of
                                                Parent consolidated group ever had a                    179(d)(2)(A) or (B) and § 1.179–4(c). During          applying the used property acquisition
                                                depreciable interest in Equipment #3. X                 2018, H Corporation sells Equipment #4 to a           requirements in paragraph (b)(3)(iii) of this
                                                Corporation is the common parent of a                   person not related to H Corporation, Parent,          section. In applying these rules, the fact that
                                                consolidated group and is not related, within           or I Corporation within the meaning of                M Corporation and O Corporation are related
                                                the meaning of section 179(d)(2)(A) or (B)              section 179(d)(2)(A) or (B) and § 1.179–4(c).         parties is not taken into account because O
                                                and § 1.179–4(c), to any member of the Parent           In a series of related transactions, during           Corporation, not M Corporation, is treated as
                                                consolidated group. No member of the X                  2019, Parent acquires all of the stock of H           acquiring the used airplane. Further,
                                                consolidated group ever had a depreciable               Corporation, and I Corporation purchases              pursuant to paragraph (b)(4)(iv) of this
                                                interest in Equipment #3. In a series of                Equipment #4 from an unrelated person.                section, the used airplane is treated as
                                                related transactions, G Corporation sells                  (ii) In a series of related transactions, H        originally placed in service by O Corporation
                                                Equipment #3 to F Corporation, and Parent               Corporation became a member of the Parent             on May 27, 2018. Because O Corporation
                                                sells all of the stock of F Corporation to X            consolidated group, and I Corporation, also a         never had a depreciable interest in the used
                                                Corporation.                                            member of the Parent consolidated group,              airplane and assuming all other requirements
                                                   (ii) F Corporation was a member of the               acquired Equipment #4. Because H                      are met, O Corporation’s purchase price of
                                                Parent consolidated group at the time it                Corporation previously had a depreciable              the used airplane qualifies for the 100-
                                                acquired Equipment #3 from G Corporation,               interest in Equipment #4, pursuant to                 percent additional first year depreciation
                                                another member of the group. Paragraph                  paragraph (b)(3)(iii)(B)(3)(ii) of this section, I    deduction for O Corporation.
                                                (b)(3)(iii)(B)(3)(i) of this section generally          Corporation is treated as having a depreciable           Example 25. (i) The facts are the same as
                                                treats each member of a consolidated group              interest in Equipment #4. As a result, I              in Example 24 of this paragraph (b)(3)(vi).
                                                as having a depreciable interest in property            Corporation’s acquisition of Equipment #4             Additionally, on September 5, 2018, O
                                                during the time any member of the group had             does not satisfy the used property acquisition        Corporation sells to P Corporation the used
                                                a depreciable interest in such property while           requirements of paragraph (b)(3)(iii) of this         airplane subject to the lease with N
                                                a member of the group. Nevertheless, because            section. Accordingly, I Corporation’s                 Corporation. Prior to this acquisition, P
                                                there is a series of related transactions that          acquisition of Equipment #4 is not eligible           Corporation never had a depreciable interest
                                                includes the acquisition of Equipment #3 and            for the additional first year depreciation            in the used airplane.
                                                a transaction in which F Corporation, the               deduction.                                               (ii) Because O Corporation, a calendar-year
                                                transferee of the property, leaves the Parent              Example 23. (i) J Corporation, K                   taxpayer, placed in service and disposed of
                                                consolidated group and joins the X                      Corporation, and L Corporation are unrelated          the used airplane during 2018, the used
                                                consolidated group, the time to test whether            parties within the meaning of section                 airplane is not eligible for the additional first
                                                F Corporation is a member of the Parent                 179(d)(2)(A) or (B) and § 1.179–4(c). None of         year depreciation deduction for O
                                                consolidated group for purposes of paragraph            J Corporation, K Corporation, and L                   Corporation pursuant to paragraph (f)(1)(i) of
                                                (b)(3)(iii)(B)(3)(i) of this section is met is          Corporation is a member of a consolidated             this section.
                                                                                                        group. J Corporation has a depreciable                   (iii) Because P Corporation never had a
                                                immediately after the last transaction in the
                                                                                                                                                              depreciable interest in the used airplane and
                                                series, that is, the sale of the F Corporation          interest in Equipment #5. During 2018, J
                                                                                                                                                              assuming all other requirements are met, P
                                                stock to X Corporation. See paragraph                   Corporation sells Equipment #5 to K
                                                                                                                                                              Corporation’s purchase price of the used
                                                (b)(3)(iii)(B)(3)(iii) of this section.                 Corporation. During 2020, J Corporation
                                                                                                                                                              airplane qualifies for the 100-percent
                                                Accordingly, because F Corporation is not a             merges into L Corporation in a transaction
                                                                                                                                                              additional first year depreciation deduction
                                                member of the Parent consolidated group                 described in section 368(a)(1)(A). In 2021, L
                                                                                                                                                              for P Corporation.
                                                after the last transaction of the series, F             Corporation acquires Equipment #5 from K
                                                Corporation is not treated as previously                Corporation.                                             (4) Placed-in-service date—(i) In
                                                having a depreciable interest in Equipment                 (ii) Because J Corporation is the                  general. Depreciable property will meet
                                                #3 by virtue of G Corporation’s depreciable             predecessor of L Corporation and J                    the requirements of this paragraph (b)(4)
                                                interest in Equipment #3 under paragraph                Corporation previously had a depreciable              if the property is placed in service by
                                                (b)(3)(iii)(B)(3)(i) of this section.                   interest in Equipment #5, L Corporation’s             the taxpayer for use in its trade or
                                                   (iii) After the sale of the F Corporation            acquisition of Equipment #5 does not satisfy
                                                stock to X Corporation, F Corporation is a              paragraphs (b)(3)(iii)(A)(1) and
                                                                                                                                                              business or for production of income
                                                member of the X consolidated group. Because             (b)(3)(iii)(B)(1) of this section and, thus, does     after September 27, 2017; and, except as
                                                no member of the X consolidated group                   not satisfy the used property acquisition             provided in paragraphs (b)(2)(i)(A) and
                                                previously had a depreciable interest in                requirements of paragraph (b)(3)(iii) of this         (D) of this section, before January 1,
                                                Equipment #3, F Corporation is not treated as           section. Accordingly, L Corporation’s                 2027, or, in the case of property
                                                previously having a depreciable interest in             acquisition of Equipment #5 is not eligible           described in section 168(k)(2)(B) or (C),
                                                Equipment #3 under paragraph                            for the additional first year depreciation            before January 1, 2028.
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                                                (b)(3)(iii)(B)(3)(i) of this section.                   deduction.                                               (ii) Specified plant. If the taxpayer has
                                                   (iv) Because relatedness is tested after F              Example 24. (i) M Corporation acquires             properly made an election to apply
                                                Corporation leaves the Parent consolidated              and places in service a used airplane on
                                                                                                                                                              section 168(k)(5) for a specified plant,
                                                group, F Corporation and G Corporation are              March 26, 2018. Prior to this acquisition, M
                                                not related within the meaning of section               Corporation never had a depreciable interest          the requirements of this paragraph (b)(4)
                                                179(d)(2)(A) or (B) and § 1.179–4(c).                   in this airplane. On March 26, 2018, M                are satisfied only if the specified plant
                                                Accordingly, F Corporation’s acquisition of             Corporation also leases the used airplane to          is planted before January 1, 2027, or is
                                                Equipment #3 satisfies the used property                N Corporation, an airline company. On May             grafted before January 1, 2027, to a plant
                                                acquisition requirements of paragraph                   27, 2018, M Corporation sells to O                    that has already been planted, by the


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                                                39308                Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules

                                                taxpayer in the ordinary course of the                  qualified property is contributed by the              price will not be treated as limiting
                                                taxpayer’s farming business, as defined                 terminated partnership to the new                     damages to a specified amount. In
                                                in section 263A(e)(4).                                  partnership.                                          determining whether a contract limits
                                                   (iii) Qualified film, television, or live               (vi) Section 168(i)(7) transactions. For           damages, the fact that there may be little
                                                theatrical production—(A) For purposes                  purposes of this paragraph (b)(4), if                 or no damages because the contract
                                                of this paragraph (b)(4), a qualified film              qualified property is transferred in a                price does not significantly differ from
                                                or television production is treated as                  transaction described in section                      fair market value will not be taken into
                                                placed in service at the time of initial                168(i)(7) in the same taxable year that               account. For example, if a taxpayer
                                                release or broadcast as defined under                   the qualified property is placed in                   entered into an irrevocable written
                                                § 1.181–1(a)(7).                                        service by the transferor, the transferred            contract to purchase an asset for $100
                                                   (B) For purposes of this paragraph                   property is treated as originally placed              and the contract did not contain a
                                                (b)(4), a qualified live theatrical                     in service on the date the transferor                 provision for liquidated damages, the
                                                production is treated as placed in                      placed in service the qualified property.             contract is considered binding
                                                service at the time of the initial live                 In the case of multiple transfers of                  notwithstanding the fact that the asset
                                                staged performance. Solely for purposes                 qualified property in multiple                        had a fair market value of $99 and under
                                                of this paragraph, the term initial live                transactions described in section                     local law the seller would only recover
                                                staged performance means the first                      168(i)(7) in the same taxable year, the               the difference in the event the purchaser
                                                commercial exhibition of a production                   placed-in-service date of the transferred             failed to perform. If the contract
                                                to an audience. However, the term                       property is deemed to be the date on                  provided for a full refund of the
                                                initial live staged performance does not                which the first transferor placed in                  purchase price in lieu of any damages
                                                include limited exhibition, prior to                    service the qualified property.                       allowable by law in the event of breach
                                                commercial exhibition to general                           (5) Acquisition of property—(i) In                 or cancellation, the contract is not
                                                audiences, if the limited exhibition is                 general. This paragraph (b)(5) provides               considered binding.
                                                primarily for purposes of publicity,                    rules for the acquisition requirements in                (B) Conditions. A contract is binding
                                                determining the need for further                        section 13201(h) of the Act. These rules              even if subject to a condition, as long as
                                                production activity, or raising funds for               apply to all property, including self-                the condition is not within the control
                                                the completion of production. For                       constructed property or property                      of either party or a predecessor. A
                                                example, an initial live staged                         described in section 168(k)(2)(B) or (C).             contract will continue to be binding if
                                                performance does not include a preview                     (ii) Acquisition date. Except as                   the parties make insubstantial changes
                                                of the production if the preview is                     provided in paragraph (b)(5)(vi) of this              in its terms and conditions or if any
                                                primarily to determine the need for                     section, depreciable property will meet               term is to be determined by a standard
                                                further production activity.                            the requirements of this paragraph (b)(5)             beyond the control of either party. A
                                                   (iv) Syndication transaction. If a                   if the property is acquired by the                    contract that imposes significant
                                                lessor has a depreciable interest in the                taxpayer after September 27, 2017, or is              obligations on the taxpayer or a
                                                property and the lessor and any                         acquired by the taxpayer pursuant to a                predecessor will be treated as binding
                                                predecessor did not previously have a                   written binding contract entered into by              notwithstanding the fact that certain
                                                depreciable interest in the property, and               the taxpayer after September 27, 2017.                terms remain to be negotiated by the
                                                the property is sold by the lessor or any               Property that is manufactured,                        parties to the contract.
                                                subsequent purchaser within three                       constructed, or produced for the                         (C) Options. An option to either
                                                months after the date the property was                  taxpayer by another person under a                    acquire or sell property is not a binding
                                                originally placed in service by the lessor              written binding contract that is entered              contract.
                                                (or, in the case of multiple units of                   into prior to the manufacture,                           (D) Letter of intent. A letter of intent
                                                property subject to the same lease,                     construction, or production of the                    for an acquisition is not a binding
                                                within three months after the date the                  property for use by the taxpayer in its               contract.
                                                final unit is placed in service, so long                trade or business or for its production of               (E) Supply agreements. A binding
                                                as the period between the time the first                income is acquired pursuant to a written              contract does not include a supply or
                                                unit is placed in service and the time                  binding contract. If a taxpayer acquired              similar agreement if the amount and
                                                the last unit is placed in service does                 the property pursuant to a written                    design specifications of the property to
                                                not exceed 12 months), and the user of                  binding contract and such contract                    be purchased have not been specified.
                                                the property after the last sale during                 states the date on which the contract                 The contract will not be a binding
                                                this three-month period remains the                     was entered into and a closing date,                  contract for the property to be
                                                same as when the property was                           delivery date, or other similar date, the             purchased until both the amount and
                                                originally placed in service by the                     date on which the contract was entered                the design specifications are specified.
                                                lessor, the property is treated as                      into is the date the taxpayer acquired                For example, if the provisions of a
                                                originally placed in service by the                     the property. See paragraph (b)(5)(v) of              supply or similar agreement state the
                                                purchaser of the property in the last sale              this section for when a qualified film,               design specifications of the property to
                                                during the three-month period but not                   television, or live theatrical production             be purchased, a purchase order under
                                                earlier than the date of the last sale.                 is treated as acquired for purposes of                the agreement for a specific number of
                                                   (v) Technical termination of a                       this paragraph (b)(5).                                assets is treated as a binding contract.
                                                partnership. For purposes of this                          (iii) Definition of binding contract—                 (F) Components. A binding contract to
                                                paragraph (b)(4), in the case of a                      (A) In general. A contract is binding                 acquire one or more components of a
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                                                technical termination of a partnership                  only if it is enforceable under State law             larger property will not be treated as a
                                                under section 708(b)(1)(B) occurring in                 against the taxpayer or a predecessor,                binding contract to acquire the larger
                                                a taxable year beginning before January                 and does not limit damages to a                       property. If a binding contract to acquire
                                                1, 2018, qualified property placed in                   specified amount (for example, by use of              the component does not satisfy the
                                                service by the terminated partnership                   a liquidated damages provision). For                  requirements of this paragraph (b)(5),
                                                during the taxable year of termination is               this purpose, a contractual provision                 the component does not qualify for the
                                                treated as originally placed in service by              that limits damages to an amount equal                additional first year depreciation
                                                the new partnership on the date the                     to at least 5 percent of the total contract           deduction.


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                                                                     Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules                                              39309

                                                   (iv) Self-constructed property—(A) In                case of a cash basis taxpayer) more than              depreciable basis of the larger self-
                                                general. If a taxpayer manufactures,                    10 percent of the total cost of the                   constructed property that is eligible for
                                                constructs, or produces property for use                property (excluding the cost of any land              the additional first year depreciation
                                                by the taxpayer in its trade or business                and preliminary activities such as                    deduction, assuming all other
                                                or for its production of income, the                    planning or designing, securing                       requirements are met, must not include
                                                acquisition rules in paragraph (b)(5)(ii)               financing, exploring, or researching). A              the unadjusted depreciable basis of any
                                                of this section are treated as met for the              taxpayer chooses to apply this                        component that does not qualify for the
                                                property if the taxpayer begins                         paragraph (b)(5)(iv)(B)(2) by filing a                additional first year depreciation
                                                manufacturing, constructing, or                         federal income tax return for the placed-             deduction. If the manufacture,
                                                producing the property after September                  in-service year of the property that                  construction, or production of the larger
                                                27, 2017. This paragraph (b)(5)(iv) does                determines when physical work of a                    self-constructed property began before
                                                not apply to property that is                           significant nature begins consistent with             September 28, 2017, the larger self-
                                                manufactured, constructed, or produced                  this paragraph (b)(5)(iv)(B)(2).                      constructed property and any self-
                                                for the taxpayer by another person                         (C) Components of self-constructed                 constructed components related to the
                                                under a written binding contract that is                property—(1) Acquired components. If a                larger self-constructed property do not
                                                entered into prior to the manufacture,                  binding contract, as defined in                       qualify for the additional first year
                                                construction, or production of the                      paragraph (b)(5)(iii) of this section, to             depreciation deduction under this
                                                property for use by the taxpayer in its                 acquire a component does not satisfy                  section.
                                                trade or business or for its production of              the requirements of paragraph (b)(5)(ii)                 (v) Qualified film, television, or live
                                                income (for further guidance, see                       of this section, the component does not               theatrical production—(A) For purposes
                                                paragraphs (b)(5)(ii) and (iii) of this                 qualify for the additional first year                 of section 13201(h)(1)(A) of the Act, a
                                                section).                                               depreciation deduction. A binding                     qualified film or television production
                                                   (B) When does manufacture,                           contract described in the preceding                   is treated as acquired on the date
                                                construction, or production begin—(1)                   sentence to acquire one or more                       principal photography commences.
                                                In general. For purposes of paragraph                   components of a larger self-constructed                  (B) For purposes of section
                                                (b)(5)(iv)(A) of this section,                          property will not preclude the larger                 13201(h)(1)(A) of the Act, a qualified
                                                manufacture, construction, or                           self-constructed property from satisfying             live theatrical production is treated as
                                                production of property begins when                      the acquisition rules in paragraph                    acquired on the date when all of the
                                                physical work of a significant nature                   (b)(5)(iv)(A) of this section. Accordingly,           necessary elements for producing the
                                                begins. Physical work does not include                  the unadjusted depreciable basis of the               live theatrical production are secured.
                                                preliminary activities such as planning                 larger self-constructed property that is              These elements may include a script,
                                                or designing, securing financing,                       eligible for the additional first year                financing, actors, set, scenic and
                                                exploring, or researching. The                          depreciation deduction, assuming all                  costume designs, advertising agents,
                                                determination of when physical work of                  other requirements are met, must not                  music, and lighting.
                                                a significant nature begins depends on                  include the unadjusted depreciable                       (vi) Specified plant. If the taxpayer
                                                the facts and circumstances. For                        basis of any component that does not                  has properly made an election to apply
                                                example, if the taxpayer constructs a                   satisfy the requirements of paragraph                 section 168(k)(5) for a specified plant,
                                                retail motor fuels outlet on-site for use               (b)(5)(ii) of this section. If the                    the requirements of this paragraph (b)(5)
                                                by the taxpayer in its trade or business,               manufacture, construction, or                         are satisfied if the specified plant is
                                                construction begins when physical work                  production of the larger self-constructed             planted after September 27, 2017, or is
                                                of a significant nature commences at the                property begins before September 28,                  grafted after September 27, 2017, to a
                                                site by the taxpayer; that is, when work                2017, the larger self-constructed                     plant that has already been planted, by
                                                begins on the excavation for footings,                  property and any acquired components                  the taxpayer in the ordinary course of
                                                pouring the pads for the outlet, or the                 related to the larger self-constructed                the taxpayer’s farming business, as
                                                driving of foundation pilings into the                  property do not qualify for the                       defined in section 263A(e)(4).
                                                ground. Preliminary work, such as                       additional first year depreciation                       (vii) Examples. The application of this
                                                clearing a site, test drilling to determine             deduction under this section.                         paragraph (b)(5) is illustrated by the
                                                soil condition, or excavation to change                    (2) Self-constructed components. If                following examples. Unless the facts
                                                the contour of the land (as distinguished               the manufacture, construction, or                     specifically indicate otherwise, assume
                                                from excavation for footings) does not                  production of a component by the                      that the parties are not related within
                                                constitute the beginning of construction.               taxpayer does not satisfy the                         the meaning of section 179(d)(2)(A) or
                                                However, if the taxpayer assembles a                    requirements of this paragraph (b)(5)(iv),            (B) and § 1.179–4(c), and the parties do
                                                retail motor fuels outlet on-site from                  the component does not qualify for the                not have predecessors:
                                                modular units manufactured off-site by                  additional first year depreciation
                                                                                                        deduction. However, if the manufacture,                 Example 1. On September 1, 2017, BB, a
                                                the taxpayer and delivered to the site
                                                                                                                                                              corporation, entered into a written agreement
                                                where the outlet will be used,                          construction, or production of a                      with CC, a manufacturer, to purchase 20 new
                                                manufacturing begins when physical                      component does not satisfy the                        lamps for $100 each within the next two
                                                work of a significant nature commences                  requirements of this paragraph (b)(5)(iv),            years. Although the agreement specifies the
                                                at the off-site location by the taxpayer.               but the manufacture, construction, or                 number of lamps to be purchased, the
                                                   (2) Safe harbor. For purposes of                     production of the larger self-constructed             agreement does not specify the design of the
                                                paragraph (b)(5)(iv)(B)(1) of this section,             property satisfies the requirements of                lamps to be purchased. Accordingly, the
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                                                a taxpayer may choose to determine                      this paragraph (b)(5)(iv), the larger self-           agreement is not a binding contract pursuant
                                                when physical work of a significant                     constructed property qualifies for the                to paragraph (b)(5)(iii)(E) of this section.
                                                nature begins in accordance with this                   additional first year depreciation                      Example 2. The facts are the same as in
                                                                                                                                                              Example 1 of this paragraph (b)(5)(vii). On
                                                paragraph (b)(5)(iv)(B)(2). Physical work               deduction, assuming all other                         December 1, 2017, BB placed a purchase
                                                of a significant nature will be                         requirements are met, even though the                 order with CC to purchase 20 new model
                                                considered to begin at the time the                     component does not qualify for the                    XPC5 lamps for $100 each for a total amount
                                                taxpayer incurs (in the case of an                      additional first year depreciation                    of $2,000. Because the agreement specifies
                                                accrual basis taxpayer) or pays (in the                 deduction. Accordingly, the unadjusted                the number of lamps to be purchased and the



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                                                39310                Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules

                                                purchase order specifies the design of the              the aircraft does not qualify for the 100-               (c) Property described in section
                                                lamps to be purchased, the purchase order               percent additional first year depreciation            168(k)(2)(B) or (C)—(1) In general.
                                                placed by BB with CC on December 1, 2017,               deduction.                                            Property described in section
                                                is a binding contract pursuant to paragraph                Example 7. On June 1, 2017, HH entered
                                                                                                                                                              168(k)(2)(B) or (C) will meet the
                                                (b)(5)(iii)(E) of this section. Accordingly,            into a written binding contract to acquire a
                                                assuming all other requirements are met, the            new component part of property that is being          acquisition requirements of section
                                                cost of the 20 lamps qualifies for the 100-             constructed by HH for its own use in its trade        168(k)(2)(B)(i)(III) or (k)(2)(C)(i) if the
                                                percent additional first year depreciation              or business. HH commenced construction of             property is acquired by the taxpayer
                                                deduction.                                              the property in November 2017, and placed             before January 1, 2027, or acquired by
                                                   Example 3. The facts are the same as in              the property in service in November 2018.             the taxpayer pursuant to a written
                                                Example 1 of this paragraph (b)(5)(vii),                Because HH entered into a written binding             binding contract that is entered into
                                                except that the written agreement between               contract to acquire a component part prior to         before January 1, 2027. Property
                                                BB and CC is to purchase 100 model XPC5                 September 28, 2017, pursuant to paragraphs            described in section 168(k)(2)(B) or (C)
                                                lamps for $100 each within the next two                 (b)(5)(ii) and (b)(5)(iv)(C)(1) of this section,
                                                                                                                                                              also must meet the acquisition
                                                years. Because this agreement specifies the             the component part does not qualify for the
                                                amount and design of the lamps to be                    100-percent additional first year depreciation        requirement in section 13201(h)(1)(A) of
                                                purchased, the agreement is a binding                   deduction. However, pursuant to paragraphs            the Act (for further guidance, see
                                                contract pursuant to paragraph (b)(5)(iii)(E) of        (b)(5)(iv)(A) and (b)(5)(iv)(C)(1) of this            paragraph (b)(5) of this section).
                                                this section. However, because the agreement            section, the property constructed by HH will             (2) Definition of binding contract. For
                                                was entered into before September 28, 2017,             qualify for the 100-percent additional first          purposes of this paragraph (c), the rules
                                                no lamp acquired by BB under this contract              year depreciation deduction, because                  in paragraph (b)(5)(iii) of this section for
                                                qualifies for the 100-percent additional first          construction of the property began after              a binding contract apply.
                                                year depreciation deduction.                            September 27, 2017, assuming all other                   (3) Self-constructed property—(i) In
                                                   Example 4. On September 1, 2017, DD                  requirements are met. Accordingly, the                general. If a taxpayer manufactures,
                                                began constructing a retail motor fuels outlet          unadjusted depreciable basis of the property          constructs, or produces property for use
                                                for its own use. On November 1, 2018, DD                that is eligible for the 100-percent additional
                                                                                                                                                              by the taxpayer in its trade or business
                                                ceases construction of the retail motor fuels           first year depreciation deduction must not
                                                outlet prior to its completion. Between                 include the unadjusted depreciable basis of           or for its production of income, the
                                                September 1, 2017, and November 1, 2018,                the component part.                                   acquisition rules in paragraph (c)(1) of
                                                DD incurred $3,000,000 of expenditures for                 Example 8. The facts are the same as in            this section are treated as met for the
                                                the construction of the retail motor fuels              Example 7 of this paragraph (b)(5)(vii) except        property if the taxpayer begins
                                                outlet. On May 1, 2019, DD resumed                      that HH entered into the written binding              manufacturing, constructing, or
                                                construction of the retail motor fuels outlet           contract to acquire the new component part            producing the property before January 1,
                                                and completed its construction on August 31,            on September 30, 2017, and HH commenced               2027. Property that is manufactured,
                                                2019. Between May 1, 2019, and August 31,               construction of the property on August 1,             constructed, or produced for the
                                                2019, DD incurred another $1,600,000 of                 2017. Pursuant to paragraphs (b)(5)(iv)(A)            taxpayer by another person under a
                                                expenditures to complete the construction of            and (C) of this section, neither the property
                                                                                                                                                              written binding contract, as defined in
                                                the retail motor fuels outlet and, on                   constructed by HH nor the component part
                                                September 1, 2019, DD placed the retail                 will qualify for the 100-percent additional           paragraph (b)(5)(iii) of this section, that
                                                motor fuels outlet in service. None of DD’s             first year depreciation deduction, because            is entered into prior to the manufacture,
                                                total expenditures of $4,600,000 qualify for            HH began construction of the property prior           construction, or production of the
                                                the 100-percent additional first year                   to September 28, 2017.                                property for use by the taxpayer in its
                                                depreciation deduction because, pursuant to                Example 9. On September 1, 2017, II                trade or business or for its production of
                                                paragraph (b)(5)(iv)(A) of this section, DD             acquired and placed in service equipment.             income is considered to be
                                                began constructing the retail motor fuels               On October 15, 2017, II sells the equipment           manufactured, constructed, or produced
                                                outlet before September 28, 2017.                       to JJ and leases the property back from JJ in         by the taxpayer. If a taxpayer enters into
                                                   Example 5. The facts are the same as in              a sale-leaseback transaction. Pursuant to             a written binding contract, as defined in
                                                Example 4 of this paragraph (b)(5)(vii) except          paragraph (b)(5)(ii) of this section, II’s cost of
                                                                                                                                                              paragraph (b)(5)(iii) of this section,
                                                that DD began constructing the retail motor             the equipment does not qualify for the 100-
                                                fuels outlet for its own use on October 1,              percent additional first year depreciation            before January 1, 2027, with another
                                                2017, and DD incurred the $3,000,000                    deduction because II acquired the equipment           person to manufacture, construct, or
                                                between October 1, 2017, and November 1,                prior to September 28, 2017. However, JJ              produce property described in section
                                                2018. DD’s total expenditures of $4,600,000             acquired used equipment from an unrelated             168(k)(2)(B) or (C) and the manufacture,
                                                qualify for the 100-percent additional first            party after September 27, 2017, and,                  construction, or production of this
                                                year depreciation deduction because,                    assuming all other requirements are met, JJ’s         property begins after December 31,
                                                pursuant to paragraph (b)(5)(iv)(A) of this             cost of the used equipment does qualify for           2026, the acquisition rule in paragraph
                                                section, DD began constructing the retail               the 100-percent additional first year                 (c)(1) of this section is met.
                                                motor fuels outlet after September 27, 2017,            depreciation deduction for JJ.                           (ii) When does manufacture,
                                                and DD placed the retail motor fuels outlet                Example 10. On July 1, 2017, KK began              construction, or production begin—(A)
                                                in service on September 1, 2019.                        constructing property for its own use in its
                                                Accordingly, assuming all other requirements            trade or business. KK placed this property in
                                                                                                                                                              In general. For purposes of this
                                                are met, the additional first year depreciation         service on September 15, 2017. On October             paragraph (c)(3), manufacture,
                                                deduction for the retail motor fuels outlet             15, 2017, KK sells the property to LL and             construction, or production of property
                                                will be $4,600,000, computed as $4,600,000              leases the property back from LL in a sale-           begins when physical work of a
                                                multiplied by 100 percent.                              leaseback transaction. Pursuant to paragraph          significant nature begins. Physical work
                                                   Example 6. On August 15, 2017, EE                    (b)(5)(iv) of this section, KK’s cost of the          does not include preliminary activities
                                                entered into a written binding contract with            property does not qualify for the 100-percent         such as planning or designing, securing
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                                                FF to manufacture an aircraft described in              additional first year depreciation deduction          financing, exploring, or researching. The
                                                section 168(k)(2)(C) for use in EE’s trade or           because construction began prior to                   determination of when physical work of
                                                business. FF begins to manufacture the                  September 28, 2017. However, LL acquired
                                                                                                                                                              a significant nature begins depends on
                                                aircraft on October 1, 2017. EE places the              used property from an unrelated party after
                                                aircraft in service on March 1, 2018. Pursuant          September 27, 2017, and, assuming all other           the facts and circumstances. For
                                                to paragraph (b)(5)(ii) of this section, the            requirements are met, LL’s cost of the used           example, if a retail motor fuels outlet is
                                                aircraft is acquired by EE pursuant to a                property does qualify for the 100-percent             to be constructed on-site, construction
                                                written binding contract. Because EE entered            additional first year depreciation deduction          begins when physical work of a
                                                into such contract before September 28, 2017,           for LL.                                               significant nature commences at the


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                                                                     Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules                                                39311

                                                site; that is, when work begins on the                  self-constructed property from satisfying                Example 1. On June 1, 2017, MM decided
                                                excavation for footings, pouring the                    the acquisition rules in paragraph                    to construct property described in section
                                                pads for the outlet, or the driving of                  (c)(3)(i) of this section. Accordingly, the           168(k)(2)(B) for its own use. However, one of
                                                                                                                                                              the component parts of the property had to
                                                foundation pilings into the ground.                     unadjusted depreciable basis of the
                                                                                                                                                              be manufactured by another person for MM.
                                                Preliminary work, such as clearing a                    larger self-constructed property that is              On August 15, 2017, MM entered into a
                                                site, test drilling to determine soil                   eligible for the additional first year                written binding contract with NN to acquire
                                                condition, or excavation to change the                  depreciation deduction, assuming all                  this component part of the property for
                                                contour of the land (as distinguished                   other requirements are met, must not                  $100,000. The manufacture of the component
                                                from excavation for footings) does not                  include the unadjusted depreciable                    part commenced on September 1, 2018, and
                                                constitute the beginning of construction.               basis of any component that does not                  MM received the completed component part
                                                However, if a retail motor fuels outlet is              satisfy the requirements of paragraph                 on February 1, 2020. The cost of this
                                                to be assembled on-site from modular                                                                          component part is 9 percent of the total cost
                                                                                                        (c)(1) of this section. If a binding
                                                                                                                                                              of the property to be constructed by MM. MM
                                                units manufactured off-site and                         contract to acquire the component is                  began constructing the property described in
                                                delivered to the site where the outlet                  entered into before January 1, 2027, but              section 168(k)(2)(B) on January 15, 2020, and
                                                will be used, manufacturing begins                      the manufacture, construction, or                     placed this property, including all
                                                when physical work of a significant                     production of the larger self-constructed             component parts, in service on November 1,
                                                nature commences at the off-site                        property does not begin before January                2021. Pursuant to paragraphs (b)(5)(iv)(C)(1)
                                                location.                                               1, 2027, the component qualifies for the              and (c)(1) of this section, the component part
                                                   (B) Safe harbor. For purposes of                     additional first year depreciation                    of $100,000 manufactured by NN for MM is
                                                paragraph (c)(3)(ii)(A) of this section, a                                                                    not eligible for the 100-percent additional
                                                                                                        deduction, assuming all other
                                                taxpayer may choose to determine when                                                                         first year depreciation deduction because the
                                                                                                        requirements are met, but the larger self-            written binding contract to acquire such
                                                physical work of a significant nature                   constructed property does not.                        component part was entered into before
                                                begins in accordance with this                             (B) Self-constructed components. If                September 28, 2017. However, pursuant to
                                                paragraph (c)(3)(ii)(B). Physical work of               the manufacture, construction, or                     paragraph (c)(3)(i) of this section, the cost of
                                                a significant nature will be considered                 production of a component by the                      the property described in section
                                                to begin at the time the taxpayer incurs                taxpayer does not satisfy the                         168(k)(2)(B), excluding the cost of the
                                                (in the case of an accrual basis taxpayer)              requirements of paragraph (c)(3)(i) of                component part of $100,000 manufactured by
                                                or pays (in the case of a cash basis                    this section, the component does not                  NN for MM, is eligible for the 100-percent
                                                taxpayer) more than 10 percent of the                   qualify for the additional first year
                                                                                                                                                              additional first year depreciation deduction,
                                                total cost of the property (excluding the                                                                     assuming all other requirements are met,
                                                                                                        depreciation deduction. However, if the               because construction of the property began
                                                cost of any land and preliminary
                                                                                                        manufacture, construction, or                         after September 27, 2017, and before January
                                                activities such as planning or designing,
                                                                                                        production of a component does not                    1, 2027, and the property described in
                                                securing financing, exploring, or
                                                                                                        satisfy the requirements of paragraph                 section 168(k)(2)(B) was placed in service by
                                                researching). When property is                                                                                MM before January 1, 2028.
                                                                                                        (c)(3)(i) of this section, but the
                                                manufactured, constructed, or produced                                                                           Example 2. On June 1, 2026, OO decided
                                                                                                        manufacture, construction, or
                                                for the taxpayer by another person, this                                                                      to construct property described in section
                                                                                                        production of the larger self-constructed
                                                safe harbor test must be satisfied by the                                                                     168(k)(2)(B) for its own use. However, one of
                                                                                                        property satisfies the requirements of
                                                taxpayer. For example, if a retail motor                                                                      the component parts of the property had to
                                                                                                        paragraph (c)(3)(i) of this section, the
                                                fuels outlet is to be constructed for an                                                                      be manufactured by another person for OO.
                                                accrual basis taxpayer by another person                larger self-constructed property qualifies            On August 15, 2026, OO entered into a
                                                for the total cost of $200,000 (excluding               for the additional first year depreciation            written binding contract with PP to acquire
                                                the cost of any land and preliminary                    deduction, assuming all other                         this component part of the property for
                                                activities such as planning or designing,               requirements are met, even though the                 $100,000. The manufacture of the component
                                                                                                        component does not qualify for the                    part commenced on September 1, 2026, and
                                                securing financing, exploring, or                                                                             OO received the completed component part
                                                researching), construction is deemed to                 additional first year depreciation
                                                                                                        deduction. Accordingly, the unadjusted                on February 1, 2027. The cost of this
                                                begin for purposes of this paragraph                                                                          component part is 9 percent of the total cost
                                                (c)(3)(ii)(B) when the taxpayer has                     depreciable basis of the larger self-
                                                                                                                                                              of the property to be constructed by OO. OO
                                                incurred more than 10 percent (more                     constructed property that is eligible for             began constructing the property described in
                                                than $20,000) of the total cost of the                  the additional first year depreciation                section 168(k)(2)(B) on January 15, 2027, and
                                                property. A taxpayer chooses to apply                   deduction, assuming all other                         placed this property, including all
                                                this paragraph (c)(3)(ii)(B) by filing a                requirements are met, must not include                component parts, in service on November 1,
                                                federal income tax return for the placed-               the unadjusted depreciable basis of any               2027. Pursuant to paragraph (c)(3)(iii)(B) of
                                                                                                        component that does not qualify for the               this section, the self-constructed component
                                                in-service year of the property that
                                                                                                        additional first year depreciation                    part of $100,000 manufactured by PP for OO
                                                determines when physical work of a                                                                            is eligible for the additional first year
                                                significant nature begins consistent with               deduction. If the manufacture,
                                                                                                                                                              depreciation deduction, assuming all other
                                                this paragraph (c)(3)(ii)(B).                           construction, or production of a
                                                                                                                                                              requirements are met, because the
                                                   (iii) Components of self-constructed                 component begins before January 1,                    manufacturing of the component part began
                                                property—(A) Acquired components. If                    2027, but the manufacture, construction,              before January 1, 2027, and the property
                                                a binding contract, as defined in                       or production of the larger self-                     described in section 168(k)(2)(B), the larger
                                                paragraph (b)(5)(iii) of this section, to               constructed property does not begin                   self-constructed property, was placed in
                                                acquire a component does not satisfy                    before January 1, 2027, the component                 service by OO before January 1, 2028.
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                                                the requirements of paragraph (c)(1) of                 qualifies for the additional first year               However, pursuant to paragraph (c)(3)(i) of
                                                this section, the component does not                    depreciation deduction, assuming all                  this section, the cost of the property
                                                                                                        other requirements are met, but the                   described in section 168(k)(2)(B), excluding
                                                qualify for the additional first year
                                                                                                                                                              the cost of the self-constructed component
                                                depreciation deduction. A binding                       larger self-constructed property does
                                                                                                                                                              part of $100,000 manufactured by PP for OO,
                                                contract described in the preceding                     not.                                                  is not eligible for the additional first year
                                                sentence to acquire one or more                            (iv) Examples. The application of this             depreciation deduction because construction
                                                components of a larger self-constructed                 paragraph (c) is illustrated by the                   of the property began after December 31,
                                                property will not preclude the larger                   following examples:                                   2026.



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                                                39312                Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules

                                                  Example 3. On December 1, 2026, QQ                    property’s manufacture, construction, or              on the remaining adjusted depreciable
                                                entered into a written binding contract, as             production before January 1, 2027.                    basis for alternative minimum tax
                                                defined in paragraph (b)(5)(iii) of this section,          (iv) Alternative minimum tax—(A) In                purposes. The remaining adjusted
                                                with RR to manufacture an aircraft described            general. The additional first year                    depreciable basis of the qualified
                                                in section 168(k)(2)(C) for use in QQ’s trade           depreciation deduction is allowable for
                                                or business. RR begins to manufacture the
                                                                                                                                                              property for alternative minimum tax
                                                aircraft on February 1, 2027. QQ places the
                                                                                                        alternative minimum tax purposes—                     purposes is depreciated using the same
                                                aircraft in service on August 1, 2027.
                                                                                                           (1) Except as provided in paragraph                depreciation method, recovery period
                                                Pursuant to paragraph (c)(3)(i) of this section,        (d)(1)(iv)(A)(2) of this section, in the              (or useful life in the case of computer
                                                the aircraft meets the requirements of                  taxable year in which the qualified                   software), and convention that apply to
                                                paragraph (c)(1) of this section because the            property is placed in service by the                  the qualified property for regular tax
                                                aircraft was acquired by QQ pursuant to a               taxpayer; or                                          purposes.
                                                written binding contract entered into before               (2) In the taxable year in which a                    (3) Examples. This paragraph (d) is
                                                January 1, 2027. Further, the aircraft was              specified plant is planted by the                     illustrated by the following examples:
                                                placed in service by QQ before January 1,               taxpayer, or grafted by the taxpayer to
                                                2028. Thus, assuming all other requirements                                                                     Example 1. On March 1, 2023, SS, a
                                                                                                        a plant that was previously planted, if
                                                are met, QQ’s cost of the aircraft is eligible                                                                calendar-year taxpayer, purchased and
                                                                                                        the taxpayer properly made the election               placed in service qualified property that costs
                                                for the additional first year depreciation
                                                                                                        to apply section 168(k)(5) (for further               $1 million and is 5-year property under
                                                deduction.
                                                                                                        guidance, see paragraph (e) of this                   section 168(e). SS depreciates its 5-year
                                                  (d) Computation of depreciation                       section).                                             property placed in service in 2023 using the
                                                deduction for qualified property—(1)                       (B) Special rules. In general, the                 optional depreciation table that corresponds
                                                Additional first year depreciation                      additional first year depreciation                    with the general depreciation system, the
                                                deduction—(i) Allowable taxable year.                   deduction for alternative minimum tax                 200-percent declining balance method, a 5-
                                                The additional first year depreciation                  purposes is based on the unadjusted                   year recovery period, and the half-year
                                                deduction is allowable—                                 depreciable basis of the property for                 convention. For 2023, SS is allowed an 80-
                                                  (A) Except as provided in paragraph                   alternative minimum tax purposes.                     percent additional first year depreciation
                                                (d)(1)(i)(B) or (f) of this section, in the                                                                   deduction of $800,000 (the unadjusted
                                                                                                        However, see paragraph (f)(5)(iii)(E) of              depreciable basis of $1 million multiplied by
                                                taxable year in which the qualified                     this section for qualified property                   0.80). Next, SS must reduce the unadjusted
                                                property is placed in service by the                    acquired in a like-kind exchange or as                depreciable basis of $1 million by the
                                                taxpayer for use in its trade or business               a result of an involuntary conversion.                additional first year depreciation deduction
                                                or for the production of income; or                        (2) Otherwise allowable depreciation               of $800,000 to determine the remaining
                                                  (B) In the taxable year in which the                  deduction—(i) In general. Before                      adjusted depreciable basis of $200,000. Then,
                                                specified plant is planted, or grafted to               determining the amount otherwise                      SS’ depreciation deduction allowable in 2023
                                                a plant that has already been planted, by               allowable as a depreciation deduction                 for the remaining adjusted depreciable basis
                                                the taxpayer in the ordinary course of                  for the qualified property for the placed-            of $200,000 is $40,000 (the remaining
                                                the taxpayer’s farming business, as                     in-service year and any subsequent                    adjusted depreciable basis of $200,000
                                                                                                        taxable year, the taxpayer must                       multiplied by the annual depreciation rate of
                                                defined in section 263A(e)(4), if the
                                                                                                                                                              0.20 for recovery year 1).
                                                taxpayer properly made the election to                  determine the remaining adjusted                        Example 2. On June 1, 2023, TT, a
                                                apply section 168(k)(5) (for further                    depreciable basis of the qualified                    calendar-year taxpayer, purchased and
                                                guidance, see paragraph (e) of this                     property. This remaining adjusted                     placed in service qualified property that costs
                                                section).                                               depreciable basis is equal to the                     $1,500,000. The property qualifies for the
                                                  (ii) Computation. Except as provided                  unadjusted depreciable basis, as defined              expensing election under section 179 and is
                                                in paragraph (f)(5) of this section, the                in § 1.168(b)-1(a)(3), of the qualified               5-year property under section 168(e). TT did
                                                allowable additional first year                         property reduced by the amount of the                 not purchase any other section 179 property
                                                depreciation deduction for qualified                    additional first year depreciation                    in 2023. TT makes the election under section
                                                property is determined by multiplying                   allowed or allowable, whichever is                    179 for the property and depreciates its 5-
                                                                                                                                                              year property placed in service in 2023 using
                                                the unadjusted depreciable basis, as                    greater. The remaining adjusted                       the optional depreciation table that
                                                defined in § 1.168(b)-1(a)(3), of the                   depreciable basis of the qualified                    corresponds with the general depreciation
                                                qualified property by the applicable                    property is then depreciated using the                system, the 200-percent declining balance
                                                percentage. Except as provided in                       applicable depreciation provisions                    method, a 5-year recovery period, and the
                                                paragraph (f)(1) of this section, the                   under the Internal Revenue Code for the               half-year convention. Assume the maximum
                                                additional first year depreciation                      qualified property. The remaining                     section 179 deduction for 2023 is $1,000,000.
                                                deduction is not affected by a taxable                  adjusted depreciable basis of the                     For 2023, TT is first allowed a $1,000,000
                                                year of less than 12 months. See                        qualified property that is MACRS                      deduction under section 179. Next, TT must
                                                paragraph (f)(1) of this section for                    property is also the basis to which the               reduce the cost of $1,500,000 by the section
                                                                                                                                                              179 deduction of $1,000,000 to determine the
                                                qualified property placed in service or                 annual depreciation rates in the                      unadjusted depreciable basis of $500,000.
                                                planted or grafted, as applicable, and                  optional depreciation tables apply (for               Then, for 2023, TT is allowed an 80-percent
                                                disposed of during the same taxable                     further guidance, see section 8 of Rev.               additional first year depreciation deduction
                                                year. See paragraph (f)(5) of this section              Proc. 87–57 (1987–2 C.B. 687) and                     of $400,000 (the unadjusted depreciable basis
                                                for qualified property acquired in a like-              § 601.601(d)(2)(ii)(b) of this chapter).              of $500,000 multiplied by 0.80). Next, TT
                                                kind exchange or as a result of an                      The depreciation deduction allowable                  must reduce the unadjusted depreciable basis
                                                involuntary conversion.                                 for the remaining adjusted depreciable                of $500,000 by the additional first year
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                                                   (iii) Property described in section                  basis of the qualified property is                    depreciation deduction of $400,000 to
                                                168(k)(2)(B). For purposes of paragraph                 affected by a taxable year of less than 12            determine the remaining adjusted
                                                (d)(1)(ii) of this section, the unadjusted                                                                    depreciable basis of $100,000. Then, TT’s
                                                                                                        months.                                               depreciation deduction allowable in 2023 for
                                                depreciable basis, as defined in                           (ii) Alternative minimum tax. For                  the remaining adjusted depreciable basis of
                                                § 1.168(b)-1(a)(3), of qualified property               alternative minimum tax purposes, the                 $100,000 is $20,000 (the remaining adjusted
                                                described in section 168(k)(2)(B) is                    depreciation deduction allowable for                  depreciable basis of $100,000 multiplied by
                                                limited to the property’s unadjusted                    the remaining adjusted depreciable                    the annual depreciation rate of 0.20 for
                                                depreciable basis attributable to the                   basis of the qualified property is based              recovery year 1).



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                                                                     Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules                                            39313

                                                   (e) Elections under section 168(k)—(1)               corporation). If Form 4562 is revised or              specified plant is treated as qualified
                                                Election not to deduct additional first                 renumbered, any reference in this                     property under section 168(k), assuming
                                                year depreciation—(i) In general. A                     section to that form shall be treated as              all requirements are met, in the taxable
                                                taxpayer may make an election not to                    a reference to the revised or renumbered              year in which such plant is placed in
                                                deduct the additional first year                        form.                                                 service by the taxpayer. Thus, any
                                                depreciation for any class of property                     (iv) Failure to make election. If a                election specified in paragraph (e)(2)(i)
                                                that is qualified property placed in                    taxpayer does not make the election                   of this section shall not be made by the
                                                service during the taxable year. If this                specified in paragraph (e)(1)(i) of this              taxpayer in any other manner (for
                                                election is made, the election applies to               section within the time and in the                    example, the election cannot be made
                                                all qualified property that is in the same              manner prescribed in paragraph                        through a request under section 446(e)
                                                class of property and placed in service                 (e)(1)(iii) of this section, the amount of            to change the taxpayer’s method of
                                                in the same taxable year, and no                        depreciation allowable for that property              accounting).
                                                additional first year depreciation                      under section 167(f)(1) or 168, as                       (3) Election for qualified property
                                                deduction is allowable for the property                 applicable, must be determined for the                placed in service during the 2017
                                                placed in service during the taxable year               placed-in-service year and for all                    taxable year—(i) In general. A taxpayer
                                                in the class of property, except as                     subsequent taxable years by taking into               may make an election to deduct 50
                                                provided in § 1.743–1(j)(4)(i)(B)(1).                   account the additional first year                     percent, instead of 100 percent,
                                                   (ii) Definition of class of property. For            depreciation deduction. Thus, any                     additional first year depreciation for all
                                                purposes of this paragraph (e)(1), the                  election specified in paragraph (e)(1)(i)             qualified property acquired after
                                                term class of property means:                           of this section shall not be made by the              September 27, 2017, by the taxpayer and
                                                   (A) Except for the property described                taxpayer in any other manner (for                     placed in service by the taxpayer during
                                                in paragraphs (e)(1)(ii)(B) and (D), and                example, the election cannot be made                  its taxable year that includes September
                                                (e)(2) of this section, each class of                   through a request under section 446(e)                28, 2017. If a taxpayer makes an election
                                                property described in section 168(e) (for               to change the taxpayer’s method of                    to apply section 168(k)(5) for its taxable
                                                example, 5-year property);                              accounting).                                          year that includes September 28, 2017,
                                                   (B) Water utility property as defined                   (2) Election to apply section 168(k)(5)            the taxpayer also may make an election
                                                in section 168(e)(5) and depreciated                    for specified plants—(i) In general. A                to deduct 50 percent, instead of 100
                                                under section 168;                                      taxpayer may make an election to apply                percent, additional first year
                                                   (C) Computer software as defined in,                 section 168(k)(5) to one or more                      depreciation for all specified plants that
                                                and depreciated under, section 167(f)(1)                specified plants that are planted, or                 are planted, or grafted to a plant that has
                                                and the regulations under section                       grafted to a plant that has already been              already been planted, after September
                                                167(f)(1);                                              planted, by the taxpayer in the ordinary              27, 2017, by the taxpayer in the ordinary
                                                   (D) Qualified improvement property                   course of the taxpayer’s farming                      course of the taxpayer’s farming
                                                as defined in § 1.168(b)–1(a)(5)(i)(C) and              business, as defined in section                       business during such taxable year.
                                                (a)(5)(ii), and depreciated under section               263A(e)(4). If this election is made for                 (ii) Time and manner for making
                                                168;                                                    a specified plant, such plant is not                  election—(A) Time for making election.
                                                   (E) Each separate production, as                     treated as qualified property under                   Any election specified in paragraph
                                                defined in § 1.181–3(b), of a qualified                 section 168(k) and this section in its                (e)(3)(i) of this section must be made by
                                                film or television production;                          placed-in-service year.                               the due date, including extensions, of
                                                   (F) Each separate production, as                        (ii) Time and manner for making                    the Federal tax return for the taxpayer’s
                                                defined in section 181(e)(2), of a                      election—(A) Time for making election.                taxable year that includes September 28,
                                                qualified live theatrical production; or                Any election specified in paragraph                   2017.
                                                   (G) A partner’s basis adjustment in                  (e)(2)(i) of this section must be made by                (B) Manner of making election. Any
                                                partnership assets under section 743(b)                 the due date, including extensions, of                election specified in paragraph (e)(3)(i)
                                                for each class of property described in                 the Federal tax return for the taxable                of this section must be made in the
                                                paragraphs (e)(1)(ii)(A) through (F), and               year in which the taxpayer planted or                 manner prescribed on the 2017 Form
                                                (e)(2) of this section (for further                     grafted the specified plant to which the              4562, ‘‘Depreciation and Amortization,’’
                                                guidance, see § 1.743–1(j)(4)(i)(B)(1)).                election applies.                                     and its instructions. The election is
                                                   (iii) Time and manner for making                        (B) Manner of making election. Any                 made separately by each person owning
                                                election—(A) Time for making election.                  election specified in paragraph (e)(2)(i)             qualified property (for example, for each
                                                Any election specified in paragraph                     of this section must be made in the                   member of a consolidated group by the
                                                (e)(1)(i) of this section must be made by               manner prescribed on Form 4562,                       common parent of the group, by the
                                                the due date, including extensions, of                  ‘‘Depreciation and Amortization,’’ and                partnership, or by the S corporation).
                                                the Federal tax return for the taxable                  its instructions. The election is made                   (iii) Failure to make election. If a
                                                year in which the qualified property is                 separately by each person owning                      taxpayer does not make the election
                                                placed in service by the taxpayer.                      specified plants (for example, for each               specified in paragraph (e)(3)(i) of this
                                                   (B) Manner of making election. Any                   member of a consolidated group by the                 section within the time and in the
                                                election specified in paragraph (e)(1)(i)               common parent of the group, by the                    manner prescribed in paragraph
                                                of this section must be made in the                     partnership, or by the S corporation). If             (e)(3)(ii) of this section, the amount of
                                                manner prescribed on Form 4562,                         Form 4562 is revised or renumbered,                   depreciation allowable for qualified
                                                ‘‘Depreciation and Amortization,’’ and                  any reference in this section to that form            property under section 167(f)(1) or 168,
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                                                its instructions. The election is made                  shall be treated as a reference to the                as applicable, acquired and placed in
                                                separately by each person owning                        revised or renumbered form.                           service, or planted or grafted, as
                                                qualified property (for example, for each                  (iii) Failure to make election. If a               applicable, by the taxpayer after
                                                member of a consolidated group by the                   taxpayer does not make the election                   September 27, 2017, must be
                                                common parent of the group, by the                      specified in paragraph (e)(2)(i) of this              determined for the taxable year that
                                                partnership (including basis                            section for a specified plant within the              includes September 28, 2017, and for all
                                                adjustments in the partnership assets                   time and in the manner prescribed in                  subsequent taxable years by taking into
                                                under section 743(b)), or by the S                      paragraph (e)(2)(ii) of this section, the             account the 100-percent additional first


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                                                39314                Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules

                                                year depreciation deduction, unless the                 the specified plant is planted or grafted,            taxable year in which the property is
                                                taxpayer makes the election specified in                as applicable, in a manner that is                    placed in service or planted or grafted,
                                                paragraph (e)(1)(i) of this section within              consistent with the revocation of the                 as applicable, is allocated between the
                                                the time and in the manner prescribed                   election.                                             transferor and the transferee on a
                                                in paragraph (e)(1)(iii) of this section for               (f) Special rules—(1) Property placed              monthly basis. This allocation shall be
                                                the class of property in which the                      in service and disposed of in the same                made in accordance with the rules in
                                                qualified property is included. Thus,                   taxable year—(i) In general. Except as                § 1.168(d)–1(b)(7)(ii) for allocating the
                                                any election specified in paragraph                     provided in paragraphs (f)(1)(ii) and (iii)           depreciation deduction between the
                                                (e)(3)(i) of this section shall not be made             of this section, the additional first year            transferor and the transferee. However,
                                                by the taxpayer in any other manner (for                depreciation deduction is not allowed                 solely for purposes of this section, if the
                                                example, the election cannot be made                    for qualified property placed in service              qualified property is transferred in a
                                                through a request under section 446(e)                  or planted or grafted, as applicable, and             section 721(a) transaction to a
                                                to change the taxpayer’s method of                      disposed of during the same taxable                   partnership that has as a partner a
                                                accounting).                                            year. Also if qualified property is placed            person, other than the transferor, who
                                                   (4) Alternative minimum tax. If a                    in service and disposed of during the                 previously had a depreciable interest in
                                                taxpayer makes an election specified in                 same taxable year and then reacquired                 the qualified property, in the same
                                                paragraph (e)(1) of this section for a                  and again placed in service in a                      taxable year that the qualified property
                                                class of property or in paragraph (e)(2)                subsequent taxable year, the additional               is placed in service or planted or
                                                of this section for a specified plant, the              first year depreciation deduction is not              grafted, as applicable, by the transferor,
                                                depreciation adjustments under section                  allowable for the property in the                     the allowable additional first year
                                                56 and the regulations under section 56                 subsequent taxable year.                              depreciation deduction is allocated
                                                do not apply to the property or specified                  (ii) Technical termination of a                    entirely to the transferor, and not to the
                                                plant, as applicable, to which that                     partnership. In the case of a technical               partnership. Additionally, if qualified
                                                election applies for purposes of                        termination of a partnership under                    property is both placed in service or
                                                computing the taxpayer’s alternative                    section 708(b)(1)(B) in a taxable year                planted or grafted, as applicable, and
                                                minimum taxable income. If a taxpayer                   beginning before January 1, 2018, the                 transferred in a transaction described in
                                                makes an election specified in                          additional first year depreciation                    section 168(i)(7) by the transferor during
                                                paragraph (e)(3) of this section for all                deduction is allowable for any qualified              the same taxable year, and if such
                                                qualified property, see paragraphs                      property placed in service or planted or              property is disposed of by the
                                                (d)(1)(iv) and (d)(2)(ii) of this section.              grafted, as applicable, by the terminated             transferee, other than by a transaction
                                                   (5) Revocation of election—(i) In                    partnership during the taxable year of                described in section 168(i)(7), during
                                                general. Except as provided in                          termination and contributed by the                    the same taxable year the transferee
                                                paragraph (e)(5)(ii) of this section, an                terminated partnership to the new
                                                                                                                                                              received such property from the
                                                election specified in this paragraph (e),               partnership. The allowable additional
                                                                                                                                                              transferor, then no additional first year
                                                once made, may be revoked only by                       first year depreciation deduction for the
                                                                                                                                                              depreciation deduction is allowable to
                                                filing a request for a private letter ruling            qualified property shall not be claimed
                                                                                                                                                              either party.
                                                and obtaining the Commissioner of                       by the terminated partnership but
                                                                                                                                                                 (iv) Examples. The application of this
                                                Internal Revenue’s written consent to                   instead shall be claimed by the new
                                                                                                                                                              paragraph (f)(1) is illustrated by the
                                                revoke the election. The Commissioner                   partnership for the new partnership’s
                                                                                                                                                              following examples:
                                                may grant a request to revoke the                       taxable year in which the qualified
                                                election if the taxpayer acted reasonably               property was contributed by the                          Example 1. UU and VV are equal partners
                                                and in good faith, and the revocation                   terminated partnership to the new                     in Partnership JL, a general partnership.
                                                will not prejudice the interests of the                 partnership. However, if qualified                    Partnership JL is a calendar-year taxpayer.
                                                                                                                                                              On October 1, 2017, Partnership JL
                                                Government. See generally § 301.9100–                   property is both placed in service or
                                                                                                                                                              purchased and placed in service qualified
                                                3 of this chapter. An election specified                planted or grafted, as applicable, and                property at a cost of $30,000. On November
                                                in this paragraph (e) may not be revoked                contributed to a new partnership in a                 1, 2017, UU sells its entire 50 percent interest
                                                through a request under section 446(e)                  transaction described in section                      to WW in a transfer that terminates the
                                                to change the taxpayer’s method of                      708(b)(1)(B) by the terminated                        partnership under section 708(b)(1)(B). As a
                                                accounting.                                             partnership during the taxable year of                result, terminated Partnership JL is deemed
                                                   (ii) Automatic 6-month extension. If a               termination, and if such property is                  to have contributed the qualified property to
                                                taxpayer made an election specified in                  disposed of by the new partnership in                 new Partnership JL. Pursuant to paragraph
                                                this paragraph (e), an automatic                        the same taxable year the new                         (f)(1)(ii) of this section, new Partnership JL,
                                                extension of 6 months from the due date                 partnership received such property from               not terminated Partnership JL, is eligible to
                                                of the taxpayer’s Federal tax return,                                                                         claim the 100-percent additional first year
                                                                                                        the terminated partnership, then no
                                                                                                                                                              depreciation deduction allowable for the
                                                excluding extensions, for the placed-in-                additional first year depreciation                    qualified property for the taxable year 2017,
                                                service year or the taxable year in which               deduction is allowable to either                      assuming all other requirements are met.
                                                the specified plant is planted or grafted,              partnership.                                             Example 2. On January 5, 2018, XX
                                                as applicable, is granted to revoke that                   (iii) Section 168(i)(7) transactions. If           purchased and placed in service qualified
                                                election, provided the taxpayer timely                  any qualified property is transferred in              property for a total amount of $9,000. On
                                                filed the taxpayer’s Federal tax return                 a transaction described in section                    August 20, 2018, XX transferred this
                                                for the placed-in-service year or the                   168(i)(7) in the same taxable year that               qualified property to Partnership BC in a
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                                                taxable year in which the specified                     the qualified property is placed in                   transaction described in section 721(a). No
                                                plant is planted or grafted, as                         service or planted or grafted, as                     other partner of Partnership BC has ever had
                                                applicable, and, within this 6-month                    applicable, by the transferor, the                    a depreciable interest in the qualified
                                                                                                                                                              property. XX and Partnership BC are
                                                extension period, the taxpayer, and all                 additional first year depreciation                    calendar-year taxpayers. Because the
                                                taxpayers whose tax liability would be                  deduction is allowable for the qualified              transaction between XX and Partnership BC
                                                affected by the election, file an amended               property. The allowable additional first              is a transaction described in section 168(i)(7),
                                                Federal tax return for the placed-in-                   year depreciation deduction for the                   pursuant to paragraph (f)(1)(iii) of this
                                                service year or the taxable year in which               qualified property for the transferor’s               section, the 100-percent additional first year



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                                                                     Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules                                             39315

                                                depreciation deduction allowable for the                property that applies for the taxable year            year depreciation deduction that
                                                qualified property is allocated between XX              in which the increase in basis occurs;                reduced the total amount otherwise
                                                and Partnership BC in accordance with the               and                                                   allowable as a depreciation deduction,
                                                rules in § 1.168(d)–1(b)(7)(ii) for allocating             (B) Computer software, as defined in               as determined under this paragraph
                                                the depreciation deduction between the
                                                transferor and the transferee. Accordingly,
                                                                                                        paragraph (b)(2)(i)(B) of this section,               (f)(2)(ii), and the remaining decrease in
                                                the 100-percent additional first year                   that is qualified property is depreciated             basis of—
                                                depreciation deduction allowable of $9,000              ratably over the remainder of the 36-                    (A) Qualified property, except for
                                                for the qualified property for 2018 is                  month period, the useful life under                   computer software described in
                                                allocated between XX and Partnership BC                 section 167(f)(1), as of the beginning of             paragraph (b)(2)(i)(B) of this section,
                                                based on the number of months that XX and               the first day of the month in which the               reduces the amount otherwise allowable
                                                Partnership BC held the qualified property in           increase in basis occurs.                             as a depreciation deduction over the
                                                service during 2018. Thus, because the                     (ii) Decrease in basis. For the taxable            recovery period of the qualified
                                                qualified property was held in service by XX            year in which a decrease in basis of
                                                for 7 of 12 months, which includes the
                                                                                                                                                              property remaining as of the beginning
                                                month in which XX placed the qualified                  qualified property occurs, the taxpayer               of the taxable year in which the
                                                property in service but does not include the            shall reduce the total amount otherwise               decrease in basis occurs, and using the
                                                month in which the qualified property was               allowable as a depreciation deduction                 same depreciation method and
                                                transferred, XX is allocated $5,250 (7⁄12 ×             for all of the taxpayer’s depreciable                 convention of the qualified property
                                                $9,000 additional first year depreciation               property by the excess additional first               that applies in the taxable year in which
                                                deduction). Partnership BC is allocated                 year depreciation deduction previously                the decrease in basis occurs. If, for any
                                                $3,750, the remaining 5⁄12 of the $9,000                claimed for the qualified property. If, for           taxable year, the reduction to the
                                                additional first year depreciation deduction            such taxable year, the excess additional
                                                allowable for the qualified property.
                                                                                                                                                              amount otherwise allowable as a
                                                                                                        first year depreciation deduction                     depreciation deduction, as determined
                                                   (2) Redetermination of basis. If the                 exceeds the total amount otherwise                    under this paragraph (f)(2)(ii)(A),
                                                unadjusted depreciable basis, as defined                allowable as a depreciation deduction                 exceeds the total amount otherwise
                                                in § 1.168(b)–1(a)(3), of qualified                     for all of the taxpayer’s depreciable                 allowable as a depreciation deduction
                                                property is redetermined (for example,                  property, the taxpayer shall take into                for all of the taxpayer’s depreciable
                                                due to contingent purchase price or                     account a negative depreciation                       property, the taxpayer shall take into
                                                discharge of indebtedness) before                       deduction in computing taxable income.                account a negative depreciation
                                                January 1, 2027, or in the case of                      The excess additional first year                      deduction in computing taxable income;
                                                property described in section                           depreciation deduction for qualified                  and
                                                168(k)(2)(B) or (C), is redetermined                    property is determined by multiplying                    (B) Computer software, as defined in
                                                before January 1, 2028, the additional                  the amount of the decrease in basis for               paragraph (b)(2)(i)(B) of this section,
                                                first year depreciation deduction                       this property by the applicable                       that is qualified property reduces the
                                                allowable for the qualified property is                 percentage for the taxable year in which              amount otherwise allowable as a
                                                redetermined as follows:                                the underlying property was placed in                 depreciation deduction over the
                                                   (i) Increase in basis. For the taxable               service by the taxpayer. For purposes of              remainder of the 36-month period, the
                                                year in which an increase in basis of                   this paragraph (f)(2)(ii), the additional             useful life under section 167(f)(1), as of
                                                qualified property occurs, the taxpayer                 first year depreciation deduction applies             the beginning of the first day of the
                                                shall claim an additional first year                    to the decrease in basis only if the                  month in which the decrease in basis
                                                depreciation deduction for qualified                    underlying property is qualified                      occurs. If, for any taxable year, the
                                                property by multiplying the amount of                   property. Also, if the taxpayer                       reduction to the amount otherwise
                                                the increase in basis for this property by              establishes by adequate records or other              allowable as a depreciation deduction,
                                                the applicable percentage for the taxable               sufficient evidence that the taxpayer                 as determined under this paragraph
                                                year in which the underlying property                   claimed less than the additional first                (f)(2)(ii)(B), exceeds the total amount
                                                was placed in service by the taxpayer.                  year depreciation deduction allowable                 otherwise allowable as a depreciation
                                                For purposes of this paragraph (f)(2)(i),               for the qualified property before the                 deduction for all of the taxpayer’s
                                                the additional first year depreciation                  decrease in basis, or if the taxpayer                 depreciable property, the taxpayer shall
                                                deduction applies to the increase in                    claimed more than the additional first                take into account a negative
                                                basis only if the underlying property is                year depreciation deduction allowable                 depreciation deduction in computing
                                                qualified property. To determine the                    for the qualified property before the                 taxable income.
                                                amount otherwise allowable as a                         decrease in basis, the excess additional                 (iii) Definitions. Except as otherwise
                                                depreciation deduction for the increase                 first year depreciation deduction is                  expressly provided by the Internal
                                                in basis of qualified property, the                     determined by multiplying the amount                  Revenue Code (for example, section
                                                amount of the increase in basis of the                  of the decrease in basis by the                       1017(a)), the regulations under the
                                                qualified property must be reduced by                   additional first year depreciation                    Internal Revenue Code, or other
                                                the additional first year depreciation                  deduction percentage actually claimed                 guidance published in the Internal
                                                deduction allowed or allowable,                         by the taxpayer for the qualified                     Revenue Bulletin for purposes of this
                                                whichever is greater, for the increase in               property before the decrease in basis. To             paragraph (f)(2)—
                                                basis and the remaining increase in                     determine the amount to reduce the                       (A) An increase in basis occurs in the
                                                basis of—                                               total amount otherwise allowable as a                 taxable year an amount is taken into
                                                   (A) Qualified property, except for                   depreciation deduction for all of the                 account under section 461; and
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                                                computer software described in                          taxpayer’s depreciable property for the                  (B) A decrease in basis occurs in the
                                                paragraph (b)(2)(i)(B) of this section, is              excess depreciation previously claimed,               taxable year an amount would be taken
                                                depreciated over the recovery period of                 other than the additional first year                  into account under section 451.
                                                the qualified property remaining as of                  depreciation deduction, resulting from                   (iv) Examples. The application of this
                                                the beginning of the taxable year in                    the decrease in basis of the qualified                paragraph (f)(2) is illustrated by the
                                                which the increase in basis occurs, and                 property, the amount of the decrease in               following examples:
                                                using the same depreciation method and                  basis of the qualified property must be                 Example 1. (i) On May 15, 2023, YY, a
                                                convention applicable to the qualified                  adjusted by the excess additional first               cash-basis taxpayer, purchased and placed in



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                                                39316                Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules

                                                service qualified property that is 5-year               basis of $80,000 (the unadjusted depreciable          amortize the certified pollution control
                                                property at a cost of $200,000. In addition to          basis of $400,000 reduced by the additional           facility under section 169 and the
                                                the $200,000, YY agrees to pay the seller 25            first year depreciation deduction of $320,000)        regulations under section 169 in the
                                                percent of the gross profits from the                   is $16,000 (the remaining adjusted
                                                                                                                                                              certified pollution control facility’s
                                                operation of the property in 2023. On May               depreciable basis of $80,000 multiplied by
                                                15, 2024, YY paid to the seller an additional           the annual depreciation rate of 0.20 for              placed-in-service year.
                                                $10,000. YY depreciates the 5-year property             recovery year 1).                                        (5) Like-kind exchanges and
                                                placed in service in 2023 using the optional               (iii) For 2024, ZZ’s deduction for the             involuntary conversions—(i) Scope. The
                                                depreciation table that corresponds with the            remaining adjusted depreciable basis of               rules of this paragraph (f)(5) apply to
                                                general depreciation system, the 200-percent            $80,000 is $25,600 (the remaining adjusted            replacement MACRS property or
                                                declining balance method, a 5-year recovery             depreciable basis of $80,000 multiplied by            replacement computer software that is
                                                period, and the half-year convention.                   the annual depreciation rate 0.32 for recovery        qualified property at the time of
                                                   (ii) For 2023, YY is allowed an 80-percent           year 2). Although Bank1 forgave the                   replacement provided the time of
                                                additional first year depreciation deduction            indebtedness in 2024, the basis of the
                                                of $160,000 (the unadjusted depreciable basis           property is reduced on January 1, 2025,
                                                                                                                                                              replacement is after September 27, 2017,
                                                of $200,000 multiplied by 0.80). In addition,           pursuant to sections 108(b)(5) and 1017(a)            and before January 1, 2027; or, in the
                                                YY’s depreciation deduction for 2023 for the            under which basis is reduced at the                   case of replacement MACRS property or
                                                remaining adjusted depreciable basis of                 beginning of the taxable year following the           replacement computer software that is
                                                $40,000 (the unadjusted depreciable basis of            taxable year in which the discharge of                qualified property described in section
                                                $200,000 reduced by the additional first year           indebtedness occurs.                                  168(k)(2)(B) or (C), the time of
                                                depreciation deduction of $160,000) is                     (iv) For 2025, ZZ’s deduction for the              replacement is after September 27, 2017,
                                                $8,000 (the remaining adjusted depreciable              remaining adjusted depreciable basis of               and before January 1, 2028.
                                                basis of $40,000 multiplied by the annual               $80,000 is $15,360 (the remaining adjusted               (ii) Definitions. For purposes of this
                                                depreciation rate of 0.20 for recovery year 1).         depreciable basis of $80,000 multiplied by
                                                                                                        the annual depreciation rate 0.192 for
                                                                                                                                                              paragraph (f)(5), the following
                                                   (iii) For 2024, YY’s depreciation deduction
                                                for the remaining adjusted depreciable basis            recovery year 3). However, pursuant to                definitions apply:
                                                of $40,000 is $12,800 (the remaining adjusted           paragraph (f)(2)(ii) of this section, ZZ must            (A) Replacement MACRS property has
                                                depreciable basis of $40,000 multiplied by              reduce the amount otherwise allowable as a            the same meaning as that term is
                                                the annual depreciation rate of 0.32 for                depreciation deduction for 2025 by the                defined in § 1.168(i)–6(b)(1).
                                                recovery year 2). In addition, pursuant to              excess depreciation previously claimed for               (B) Relinquished MACRS property has
                                                paragraph (f)(2)(i) of this section, YY is              the $50,000 decrease in basis of the qualified        the same meaning as that term is
                                                allowed an additional first year depreciation           property. Consequently, ZZ must reduce the            defined in § 1.168(i)–6(b)(2).
                                                deduction for 2024 for the $10,000 increase             amount of depreciation otherwise allowable               (C) Replacement computer software is
                                                in basis of the qualified property.                     for 2025 by the excess additional first year          computer software, as defined in
                                                Consequently, YY is allowed an additional               depreciation of $40,000 (the decrease in basis
                                                                                                        of $50,000 multiplied by 0.80, the applicable
                                                                                                                                                              paragraph (b)(2)(i)(B) of this section, in
                                                first year depreciation deduction of $8,000
                                                                                                        percentage for 2023). Also, ZZ must reduce            the hands of the acquiring taxpayer that
                                                (the increase in basis of $10,000 multiplied
                                                by 0.80, the applicable percentage for 2023).           the amount of depreciation otherwise                  is acquired for other computer software
                                                Also, YY is allowed a depreciation deduction            allowable for 2025 by the excess depreciation         in a like-kind exchange or in an
                                                for 2024 attributable to the remaining                  attributable to the remaining decrease in             involuntary conversion.
                                                increase in basis of $2,000 (the increase in            basis of $10,000 (the decrease in basis of               (D) Relinquished computer software is
                                                basis of $10,000 reduced by the additional              $50,000 reduced by the excess additional              computer software that is transferred by
                                                first year depreciation deduction of $8,000).           first year depreciation of $40,000). The              the taxpayer in a like-kind exchange or
                                                The depreciation deduction allowable for                reduction in the amount of depreciation               in an involuntary conversion.
                                                2024 attributable to the remaining increase in          otherwise allowable for 2025 for the
                                                                                                                                                                 (E) Time of disposition has the same
                                                basis of $2,000 is $889 (the remaining                  remaining decrease in basis of $10,000 is
                                                                                                        $5,714 (the remaining decrease in basis of            meaning as that term is defined in
                                                increase in basis of $2,000 multiplied by                                                                     § 1.168(i)–6(b)(3) for relinquished
                                                0.4444, which is equal to 1/remaining                   $10,000 multiplied by 0.5714, which is equal
                                                recovery period of 4.5 years at January 1,              to (1/remaining recovery period of 3.5 years          MACRS property. For relinquished
                                                2024, multiplied by 2). Accordingly, for                at January 1, 2025) multiplied by 2).                 computer software, time of disposition
                                                2024, YY’s total depreciation deduction                 Accordingly, assuming the qualified property          is when the disposition of the
                                                allowable for the qualified property is                 is the only depreciable property owned by             relinquished computer software takes
                                                $21,689 ($12,800 plus $8,000 plus $889).                ZZ, for 2025, ZZ has a negative depreciation          place under the convention determined
                                                   Example 2. (i) On May 15, 2023, ZZ, a                deduction for the qualified property of               under § 1.167(a)–14(b).
                                                calendar-year taxpayer, purchased and                   $30,354 ($15,360 minus $40,000 minus                     (F) Except as provided in paragraph
                                                placed in service qualified property that is 5-         $5,714).
                                                                                                                                                              (f)(5)(iv) of this section, the time of
                                                year property at a cost of $400,000. To                    (3) Sections 1245 and 1250                         replacement has the same meaning as
                                                purchase the property, ZZ borrowed                      depreciation recapture. For purposes of               that term is defined in § 1.168(i)–6(b)(4)
                                                $250,000 from Bank1. On May 15, 2024,                   section 1245 and the regulations under
                                                Bank1 forgives $50,000 of the indebtedness.                                                                   for replacement MACRS property. For
                                                ZZ makes the election provided in section
                                                                                                        section 1245, the additional first year               replacement computer software, the
                                                108(b)(5) to apply any portion of the                   depreciation deduction is an amount                   time of replacement is, except as
                                                reduction under section 1017 to the basis of            allowed or allowable for depreciation.                provided in paragraph (f)(5)(iv) of this
                                                the depreciable property of the taxpayer. ZZ            Further, for purposes of section 1250(b)              section, the later of—
                                                depreciates the 5-year property placed in               and the regulations under section                        (1) When the replacement computer
                                                service in 2023 using the optional                      1250(b), the additional first year                    software is placed in service under the
                                                depreciation table that corresponds with the            depreciation deduction is not a straight              convention determined under
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                                                general depreciation system, the 200-percent            line method.                                          § 1.167(a)–14(b); or
                                                declining balance method, a 5-year recovery                (4) Coordination with section 169. The                (2) The time of disposition of the
                                                period, and the half-year convention.
                                                                                                        additional first year depreciation                    relinquished property.
                                                   (ii) For 2023, ZZ is allowed an 80-percent
                                                additional first year depreciation deduction            deduction is allowable in the placed-in-                 (G) Exchanged basis has the same
                                                of $320,000 (the unadjusted depreciable basis           service year of a certified pollution                 meaning as that term is defined in
                                                of $400,000 multiplied by 0.80). In addition,           control facility, as defined in § 1.169–              § 1.168(i)–6(b)(7) for MACRS property,
                                                ZZ’s depreciation deduction allowable for               2(a), that is qualified property even if              as defined in § 1.168(b)–1(a)(2). For
                                                2023 for the remaining adjusted depreciable             the taxpayer makes the election to                    computer software, the exchanged basis


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                                                                     Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules                                             39317

                                                is determined after the amortization                    replacement computer software, as                     requirement in paragraph (b)(3)(ii) of
                                                deductions for the year of disposition                  applicable, meets the original use                    this section is limited to the total of the
                                                are determined under § 1.167(a)–14(b)                   requirement in paragraph (b)(3)(ii) of                property’s remaining exchanged basis
                                                and is the lesser of—                                   this section and all other requirements               and remaining excess basis, if any,
                                                   (1) The basis in the replacement                     of section 168(k) and this section, the               attributable to the property’s
                                                computer software, as determined under                  remaining exchanged basis for the year                manufacture, construction, or
                                                section 1031(d) and the regulations                     of replacement and the remaining                      production after September 27, 2017,
                                                under section 1031(d), or section                       excess basis, if any, for the year of                 and before January 1, 2027. For
                                                1033(b) and the regulations under                       replacement for the replacement                       purposes of paragraph (f)(5)(iii)(A) of
                                                section 1033(b); or                                     MACRS property or the replacement                     this section, the remaining excess basis,
                                                   (2) The adjusted depreciable basis of                computer software, as applicable, are                 if any, of the replacement MACRS
                                                the relinquished computer software.                     eligible for the additional first year                property that is qualified property
                                                   (H) Excess basis has the same                        depreciation deduction. If the                        described in section 168(k)(2)(B) and
                                                meaning as that term is defined in                      replacement MACRS property or the                     meets the used property acquisition
                                                § 1.168(i)–6(b)(8) for replacement                      replacement computer software, as                     requirements in paragraph (b)(3)(iii) of
                                                MACRS property. For replacement                         applicable, meets the used property                   this section is limited to the property’s
                                                computer software, the excess basis is                  acquisition requirements in paragraph                 remaining excess basis, if any,
                                                any excess of the basis in the                          (b)(3)(iii) of this section and all other             attributable to the property’s
                                                replacement computer software, as                       requirements of section 168(k) and this               manufacture, construction, or
                                                determined under section 1031(d) and                    section, only the remaining excess basis              production after September 27, 2017,
                                                the regulations under section 1031(d), or               for the year of replacement for the                   and before January 1, 2027.
                                                section 1033(b) and the regulations                     replacement MACRS property or the                        (D) Effect of § 1.168(i)–6(i)(1) election.
                                                under section 1033(b), over the                         replacement computer software, as                     If a taxpayer properly makes the
                                                exchanged basis as determined under                     applicable, is eligible for the additional            election under § 1.168(i)–6(i)(1) not to
                                                paragraph (f)(5)(ii)(G) of this section.                first year depreciation deduction. See                apply § 1.168(i)–6 for any MACRS
                                                   (I) Remaining exchanged basis is the                 paragraph (b)(3)(iii)(A)(3) of this section.          property, as defined in § 1.168(b)–
                                                exchanged basis as determined under                     The additional first year depreciation                1(a)(2), involved in a like-kind exchange
                                                paragraph (f)(5)(ii)(G) of this section                 deduction applies to the remaining                    or involuntary conversion and either of
                                                reduced by—                                             exchanged basis and any remaining                     the following:
                                                   (1) The percentage of such basis                     excess basis, as applicable, of the                      (1) The replacement MACRS property
                                                attributable to the taxpayer’s use of                   replacement MACRS property or the                     meets the original use requirement in
                                                property for the taxable year other than                replacement computer software, as                     paragraph (b)(3)(ii) of this section and
                                                in the taxpayer’s trade or business or for              applicable, if the time of replacement is             all other requirements of section 168(k)
                                                the production of income; and                           after September 27, 2017, and before                  and this section, the total of the
                                                   (2) Any adjustments to basis provided                January 1, 2027; or, in the case of                   exchanged basis, as defined in
                                                by other provisions of the Code and the                 replacement MACRS property or                         § 1.168(i)–6(b)(7), and the excess basis,
                                                regulations under the Code (including                   replacement computer software, as                     as defined in § 1.168(i)–6(b)(8), if any, in
                                                section 1016(a)(2) and (3)) for periods                 applicable, described in section                      the replacement MACRS property is
                                                prior to the disposition of the                         168(k)(2)(B) or (C), the time of                      eligible for the additional first year
                                                relinquished property.                                  replacement is after September 27, 2017,              depreciation deduction; or
                                                   (J) Remaining excess basis is the                    and before January 1, 2028. The                          (2) The replacement MACRS property
                                                excess basis as determined under                        additional first year depreciation                    meets the used property acquisition
                                                paragraph (f)(5)(ii)(H) of this section                 deduction is computed separately for                  requirements in paragraph (b)(3)(iii) of
                                                reduced by—                                             the remaining exchanged basis and any                 this section and all other requirements
                                                   (1) The percentage of such basis                     remaining excess basis, as applicable.                of section 168(k) and this section, only
                                                attributable to the taxpayer’s use of                      (B) Year of disposition and year of                the excess basis, as defined in
                                                property for the taxable year other than                replacement. The additional first year                § 1.168(i)–6(b)(8), if any, in the
                                                in the taxpayer’s trade or business or for              depreciation deduction is allowable for               replacement MACRS property is eligible
                                                the production of income;                               the replacement MACRS property or                     for the additional first year depreciation
                                                   (2) Any portion of the basis the                     replacement computer software in the                  deduction.
                                                taxpayer properly elects to treat as an                 year of replacement. However, the                        (E) Alternative minimum tax. The
                                                expense under section 179 or 179C; and                  additional first year depreciation                    additional first year depreciation
                                                   (3) Any adjustments to basis provided                deduction is not allowable for the                    deduction is allowed for alternative
                                                by other provisions of the Code and the                 relinquished MACRS property or the                    minimum tax purposes for the year of
                                                regulations under the Code.                             relinquished computer software, as                    replacement of replacement MACRS
                                                   (K) Year of disposition has the same                 applicable, if the relinquished MACRS                 property or replacement computer
                                                meaning as that term is defined in                      property or the relinquished computer                 software, as applicable, that is qualified
                                                § 1.168(i)–6(b)(5).                                     software, as applicable, is placed in                 property. If the replacement MACRS
                                                   (L) Year of replacement has the same                 service and disposed of in a like-kind                property or the replacement computer
                                                meaning as that term is defined in                      exchange or in an involuntary                         software, as applicable, meets the
                                                § 1.168(i)–6(b)(6).                                     conversion in the same taxable year.                  original use requirement in paragraph
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                                                   (M) Like-kind exchange has the same                     (C) Property described in section                  (b)(3)(ii) of this section and all other
                                                meaning as that term is defined in                      168(k)(2)(B). For purposes of paragraph               requirements of section 168(k) and this
                                                § 1.168(i)–6(b)(11).                                    (f)(5)(iii)(A) of this section, the total of          section, the additional first year
                                                   (N) Involuntary conversion has the                   the remaining exchanged basis and the                 depreciation deduction for alternative
                                                same meaning as that term is defined in                 remaining excess basis, if any, of the                minimum tax purposes is based on the
                                                § 1.168(i)–6(b)(12).                                    replacement MACRS property that is                    remaining exchanged basis and the
                                                   (iii) Computation—(A) In general. If                 qualified property described in section               remaining excess basis, if any, of the
                                                the replacement MACRS property or the                   168(k)(2)(B) and meets the original use               replacement MACRS property or the


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                                                39318                Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules

                                                replacement computer software, as                       § 1.168(i)–6(c). The depreciable excess               $100,000 multiplied by the annual
                                                applicable, for alternative minimum tax                 basis, as defined in § 1.168(i)–6(b)(10),             depreciation rate of 0.20 for recovery year 1).
                                                purposes. If the replacement MACRS                      of the replacement MACRS property                       (iii) For 2017, CSK is allowed a regular
                                                                                                        continues to be depreciated by the                    MACRS depreciation deduction of $16,000
                                                property or the replacement computer
                                                                                                                                                              for Canopy V1 (the remaining adjusted
                                                software, as applicable, meets the used                 taxpayer in accordance with the first                 depreciable basis of $100,000 multiplied by
                                                property acquisition requirements in                    sentence of this paragraph (f)(5)(iv)(B).             the annual depreciation rate of 0.32 for
                                                paragraph (b)(3)(iii) of this section and               Further, in the year of disposition of the            recovery year 2 × 1⁄2 year).
                                                all other requirements of section 168(k)                involuntarily converted MACRS                           (iv) Pursuant to paragraph (f)(5)(iii)(A) of
                                                and this section, the additional first year             property, the taxpayer must include in                this section, the additional first year
                                                depreciation deduction for alternative                  taxable income the excess of the                      depreciation deduction allowable for Canopy
                                                minimum tax purposes is based on the                    depreciation deductions allowable,                    W1 for 2017 equals $64,000 (100 percent of
                                                remaining excess basis, if any, of the                  including the additional first year                   Canopy W1’s remaining exchanged basis at
                                                                                                                                                              the time of replacement of $64,000 (Canopy
                                                replacement MACRS property or the                       depreciation deduction allowable, on                  V1’s remaining adjusted depreciable basis of
                                                replacement computer software, as                       the unadjusted depreciable basis of the               $100,000 minus 2016 regular MACRS
                                                applicable, for alternative minimum tax                 replacement MACRS property over the                   depreciation deduction of $20,000 minus
                                                purposes.                                               additional first year depreciation                    2017 regular MACRS depreciation deduction
                                                   (iv) Replacement MACRS property or                   deduction that would have been                        of $16,000)).
                                                replacement computer software that is                   allowable to the taxpayer on the                        Example 2. (i) The facts are the same as in
                                                acquired and placed in service before                   remaining exchanged basis of the                      Example 1 of this paragraph (f)(5)(v), except
                                                disposition of relinquished MACRS                       replacement MACRS property at the                     CSK elected not to deduct the additional first
                                                property or relinquished computer                                                                             year depreciation for 5-year property placed
                                                                                                        time of replacement, as defined in                    in service in 2016. CSK deducted the
                                                software. If, in an involuntary                         paragraph (f)(5)(v)(A) of this section,               additional first year depreciation for 5-year
                                                conversion, a taxpayer acquires and                     plus the depreciation deductions that                 property placed in service in 2017.
                                                places in service the replacement                       would have been allowable, including                    (ii) For 2016, CSK is allowed a regular
                                                MACRS property or the replacement                       the additional first year depreciation                MACRS depreciation deduction of $40,000
                                                computer software, as applicable, before                deduction allowable, to the taxpayer on               for Canopy V1 (the unadjusted depreciable
                                                the time of disposition of the                          the depreciable excess basis of the                   basis of $200,000 multiplied by the annual
                                                involuntarily converted MACRS                           replacement MACRS property from the                   depreciation rate of 0.20 for recovery year 1).
                                                property or the involuntarily converted                 date the replacement MACRS property                     (iii) For 2017, CSK is allowed a regular
                                                computer software, as applicable; and                                                                         MACRS depreciation deduction of $32,000
                                                                                                        was placed in service by the taxpayer,                for Canopy V1 (the unadjusted depreciable
                                                the time of disposition of the                          taking into account the applicable
                                                involuntarily converted MACRS                                                                                 basis of $200,000 multiplied by the annual
                                                                                                        convention, to the time of disposition of             depreciation rate of 0.32 for recovery year 2
                                                property or the involuntarily converted                 the involuntarily converted MACRS                     × 1⁄2 year).
                                                computer software, as applicable, is                    property. Similar rules apply to                        (iv) Pursuant to paragraph (f)(5)(iii)(A) of
                                                after December 31, 2026, or, in the case                replacement computer software.                        this section, the additional first year
                                                of property described in service                           (v) Examples. The application of this              depreciation deduction allowable for Canopy
                                                168(k)(2)(B) or (C), after December 31,                 paragraph (f)(5) is illustrated by the                W1 for 2017 equals $128,000 (100 percent of
                                                2027, then—                                             following examples:                                   Canopy W1’s remaining exchanged basis at
                                                   (A) The time of replacement for                                                                            the time of replacement of $128,000 (Canopy
                                                purposes of this paragraph (f)(5) is when                  Example 1. (i) In April 2016, CSK, a               V1’s unadjusted depreciable basis of
                                                                                                        calendar-year corporation, acquired for               $200,000 minus 2016 regular MACRS
                                                the replacement MACRS property or
                                                                                                        $200,000 and placed in service Canopy V1,             depreciation deduction of $40,000 minus
                                                replacement computer software, as                       a gas station canopy. Canopy V1 is qualified
                                                applicable, is placed in service by the                                                                       2017 regular MACRS depreciation deduction
                                                                                                        property under section 168(k)(2), as in effect        of $32,000)).
                                                taxpayer, provided the threat or                        on the day before amendment by the Act, and             Example 3. The facts are the same as in
                                                imminence of requisition or                             is 5-year property under section 168(e). CSK          Example 1 of this paragraph (f)(5)(v), except
                                                condemnation of the involuntarily                       depreciated Canopy V1 under the general               Canopy W1 meets the used property
                                                converted MACRS property or                             depreciation system of section 168(a) by              acquisition requirements in paragraph
                                                involuntarily converted computer                        using the 200-percent declining balance
                                                                                                                                                              (b)(3)(iii) of this section. Because the
                                                                                                        method of depreciation, a 5-year recovery
                                                software, as applicable, existed before                                                                       remaining excess basis of Canopy W1 is zero,
                                                                                                        period, and the half-year convention. CSK
                                                January 1, 2027, or, in the case of                     elected to use the optional depreciation
                                                                                                                                                              CSK is not allowed any additional first year
                                                property described in section                                                                                 depreciation for Canopy W1 pursuant to
                                                                                                        tables to compute the depreciation allowance
                                                168(k)(2)(B) or (C), existed before                     for Canopy V1. In November 2017, Canopy               paragraph (f)(5)(iii)(A) of this section.
                                                January 1, 2028; and                                    V1 was destroyed in a fire and was no longer            Example 4. (i) In December 2016, AB, a
                                                   (B) The taxpayer depreciates the                     usable in CSK’s business. In December 2017,           calendar-year corporation, acquired for
                                                                                                        in an involuntary conversion, CSK acquired            $10,000 and placed in service Computer X2.
                                                replacement MACRS property or
                                                                                                        and placed in service Canopy W1 with all of           Computer X2 is qualified property under
                                                replacement computer software, as                                                                             section 168(k)(2), as in effect on the day
                                                applicable, in accordance with                          the $160,000 of insurance proceeds CSK
                                                                                                        received due to the loss of Canopy V1.                before amendment by the Act, and is 5-year
                                                paragraph (d) of this section. However,                 Canopy W1 is qualified property under                 property under section 168(e). AB
                                                at the time of disposition of the                       section 168(k)(2) and this section, and is 5-         depreciated Computer X2 under the general
                                                involuntarily converted MACRS                           year property under section 168(e). Canopy            depreciation system of section 168(a) by
                                                property, the taxpayer determines the                   W1 also meets the original use requirement            using the 200-percent declining balance
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                                                exchanged basis, as defined in                          in paragraph (b)(3)(ii) of this section. CSK did      method of depreciation, a 5-year recovery
                                                § 1.168(i)–6(b)(7), and the excess basis,               not make the election under § 1.168(i)–6(i)(1).       period, and the half-year convention. AB
                                                as defined in § 1.168(i)–6(b)(8), of the                   (ii) For 2016, CSK is allowed a 50-percent         elected to use the optional depreciation
                                                                                                        additional first year depreciation deduction          tables to compute the depreciation allowance
                                                replacement MACRS property and                                                                                for Computer X2. In November 2017, AB
                                                                                                        of $100,000 for Canopy V1 (the unadjusted
                                                begins to depreciate the depreciable                    depreciable basis of $200,000 multiplied by           acquired Computer Y2 by exchanging
                                                exchanged basis, as defined in                          0.50), and a regular MACRS depreciation               Computer X2 and $1,000 cash in a like-kind
                                                § 1.168(i)–6(b)(9), of the replacement                  deduction of $20,000 for Canopy V1 (the               exchange. Computer Y2 is qualified property
                                                MACRS property in accordance with                       remaining adjusted depreciable basis of               under section 168(k)(2) and this section, and



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                                                                     Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules                                               39319

                                                is 5-year property under section 168(e).                deduction is allowable for Equipment Y3’s             in the taxable year the property is
                                                Computer Y2 also meets the original use                 remaining excess basis at the time of                 converted to business or income-
                                                requirement in paragraph (b)(3)(ii) of this             replacement of $5,000 (cash paid for                  producing use, assuming all of the
                                                section. AB did not make the election under             Equipment Y3). Thus, the 100-percent                  requirements in paragraph (b) of this
                                                § 1.168(i)–6(i)(1).                                     additional first year depreciation deduction
                                                   (ii) For 2016, AB is allowed a 50-percent            allowable for Equipment Y3 is $5,000 for
                                                                                                                                                              section are met. For purposes of
                                                additional first year depreciation deduction            2017.                                                 paragraphs (b)(4) and (5) of this section,
                                                of $5,000 for Computer X2 (unadjusted basis                Example 6. (i) The facts are the same as in        the property must be acquired by the
                                                of $10,000 multiplied by 0.50), and a regular           Example 5 of this paragraph (f)(5)(v), except         taxpayer for personal use after
                                                MACRS depreciation deduction of $1,000 for              BC properly makes the election under                  September 27, 2017, and converted by
                                                Computer X2 (the remaining adjusted                     § 1.168(i)–6(i)(1) not to apply § 1.168(i)–6 to       the taxpayer from personal use to
                                                depreciable basis of $5,000 multiplied by the           Equipment X3 and Equipment Y3.                        business or income-producing use by
                                                annual depreciation rate of 0.20 for recovery              (ii) Pursuant to § 1.168(k)–1(f)(5)(iii)(B), no    January 1, 2027. See paragraph (b)(3)(ii)
                                                year 1).                                                additional first year depreciation deduction
                                                   (iii) For 2017, AB is allowed a regular                                                                    of this section relating to the original
                                                                                                        is allowable for Equipment X3 and, pursuant
                                                MACRS depreciation deduction of $800 for                to § 1.168(d)–1(b)(3)(ii), no regular
                                                                                                                                                              use rules for a conversion of property to
                                                Computer X2 (the remaining adjusted                     depreciation deduction is allowable for               business or income-producing use.
                                                depreciable basis of $5,000 multiplied by the           Equipment X3, for 2017.                                 (iv) Depreciable property changes use
                                                annual depreciation rate of 0.32 for recovery              (iii) Pursuant to § 1.168(i)–6(i)(1), BC is        subsequent to the placed-in-service
                                                year 2 × 1⁄2 year).                                     treated as placing Equipment Y3 in service in         year—(A) If the use of qualified property
                                                   (iv) Pursuant to paragraph (f)(5)(iii)(A) of         December 2017 with a basis of $25,000 (the            changes in the hands of the same
                                                this section, the 100-percent additional first          total of the exchanged basis of $20,000 and           taxpayer subsequent to the taxable year
                                                year depreciation deduction for Computer Y2             the excess basis of $5,000). However,                 the qualified property is placed in
                                                for 2017 is allowable for the remaining                 pursuant to paragraph (f)(5)(iii)(D)(2) of this
                                                exchanged basis at the time of replacement                                                                    service and, as a result of the change in
                                                                                                        section, the 100-percent additional first year
                                                of $3,200 (Computer X2’s unadjusted                                                                           use, the property is no longer qualified
                                                                                                        depreciation deduction is allowable only for
                                                depreciable basis of $10,000 minus                      Equipment Y3’s excess basis at the time of            property, the additional first year
                                                additional first year depreciation deduction            replacement of $5,000 (cash paid for                  depreciation deduction allowable for
                                                allowable of $5,000 minus the 2016 regular              Equipment Y3). Thus, the 100-percent                  the qualified property is not
                                                MACRS depreciation deduction of $1,000                  additional first year depreciation deduction          redetermined.
                                                minus the 2017 regular MACRS depreciation               allowable for Equipment Y3 is $5,000 for                (B) If depreciable property is not
                                                deduction of $800) and for the remaining                2017.                                                 qualified property in the taxable year
                                                excess basis at the time of replacement of                                                                    the property is placed in service by the
                                                $1,000 (cash paid for Computer Y2). Thus,                  (6) Change in use—(i) Change in use
                                                the 100-percent additional first year                   of depreciable property. The                          taxpayer, the additional first year
                                                depreciation deduction allowable for                    determination of whether the use of                   depreciation deduction is not allowable
                                                Computer Y2 totals $4,200 for 2017.                     depreciable property changes is made in               for the property even if a change in the
                                                   Example 5. (i) In July 2017, BC, a calendar-         accordance with section 168(i)(5) and                 use of the property subsequent to the
                                                year corporation, acquired for $20,000 and              § 1.168(i)–4.                                         taxable year the property is placed in
                                                placed in service Equipment X3. Equipment                  (ii) Conversion to personal use. If                service results in the property being
                                                X3 is qualified property under section                                                                        qualified property in the taxable year of
                                                168(k)(2), as in effect on the day before
                                                                                                        qualified property is converted from
                                                                                                        business or income-producing use to                   the change in use.
                                                amendment by the Act, and is 5-year                                                                             (v) Examples. The application of this
                                                property under section 168(e). BC                       personal use in the same taxable year in
                                                                                                        which the property is placed in service               paragraph (f)(6) is illustrated by the
                                                depreciated Equipment X3 under the general
                                                depreciation system of section 168(a) by                by a taxpayer, the additional first year              following examples:
                                                using the 200-percent declining balance                 depreciation deduction is not allowable                  Example 1. (i) On January 1, 2019, FFF, a
                                                method of depreciation, a 5-year recovery               for the property.                                     calendar year corporation, purchased and
                                                period, and the half-year convention. BC                   (iii) Conversion to business or income-            placed in service several new computers at
                                                elected to use the optional depreciation                producing use—(A) During the same                     a total cost of $100,000. FFF used these
                                                tables to compute the depreciation allowance                                                                  computers within the United States for 3
                                                for Equipment X3. In December 2017, BC
                                                                                                        taxable year. If, during the same taxable             months in 2019 and then moved and used
                                                acquired Equipment Y3 by exchanging                     year, property is acquired by a taxpayer              the computers outside the United States for
                                                Equipment X3 and $5,000 cash in a like-kind             for personal use and is converted by the              the remainder of 2019. On January 1, 2020,
                                                exchange. Equipment Y3 is qualified                     taxpayer from personal use to business                FFF permanently returns the computers to
                                                property under section 168(k)(2) and this               or income-producing use, the additional               the United States for use in its business.
                                                section, and is 5-year property under section           first year depreciation deduction is                     (ii) For 2019, the computers are considered
                                                168(e). Equipment Y3 also meets the used                allowable for the property in the taxable             as used predominantly outside the United
                                                property acquisition requirements in                    year the property is converted to                     States in 2019 pursuant to § 1.48–1(g)(1)(i).
                                                paragraph (b)(3)(iii) of this section. BC did           business or income-producing use,                     As a result, the computers are required to be
                                                not make the election under § 1.168(i)–6(i)(1).                                                               depreciated under the alternative
                                                   (ii) Pursuant to § 1.168(k)–1(f)(5)(iii)(B), no
                                                                                                        assuming all of the requirements in                   depreciation system of section 168(g).
                                                additional first year depreciation deduction            paragraph (b) of this section are met. See            Pursuant to paragraph (b)(2)(ii)(B) of this
                                                is allowable for Equipment X3 and, pursuant             paragraph (b)(3)(ii) of this section                  section, the computers are not qualified
                                                to § 1.168(d)–1(b)(3)(ii), no regular                   relating to the original use rules for a              property in 2019, the placed-in-service year.
                                                depreciation deduction is allowable for                 conversion of property to business or                 Thus, pursuant to paragraph (f)(6)(iv)(B) of
                                                Equipment X3, for 2017.                                 income-producing use.                                 this section, no additional first year
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                                                   (iii) Pursuant to paragraph (f)(5)(iii)(A) of           (B) Subsequent to the acquisition                  depreciation deduction is allowed for these
                                                this section, no additional first year                  year. If property is acquired by a                    computers, regardless of the fact that the
                                                depreciation deduction is allowable for                 taxpayer for personal use and, during a               computers are permanently returned to the
                                                Equipment Y3’s remaining exchanged basis                                                                      United States in 2020.
                                                at the time of replacement of $20,000
                                                                                                        subsequent taxable year, is converted by                 Example 2. (i) On February 8, 2023, GGG,
                                                (Equipment X3’s unadjusted depreciable                  the taxpayer from personal use to                     a calendar year corporation, purchased and
                                                basis of $20,000). However, pursuant to                 business or income-producing use, the                 placed in service new equipment at a cost of
                                                paragraph (f)(5)(iii)(A) of this section, the           additional first year depreciation                    $1,000,000 for use in its California plant. The
                                                100-percent additional first year depreciation          deduction is allowable for the property               equipment is 5-year property under section



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                                                39320                Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules

                                                168(e) and is qualified property under                  attributable to the qualified                         remaining adjusted depreciable basis of
                                                section 168(k). GGG depreciates its 5-year              rehabilitation expenditures if the                    $32,000 (the unadjusted depreciable basis
                                                property placed in service in 2023 using the            taxpayer claims the additional first year             (before reduction in basis for the
                                                optional depreciation table that corresponds                                                                  rehabilitation credit) of $200,000 less the
                                                                                                        depreciation deduction on the
                                                with the general depreciation system, the                                                                     additional first year depreciation deduction
                                                200-percent declining balance method, a 5-              unadjusted depreciable basis, as defined              of $160,000 less the rehabilitation credit of
                                                year recovery period, and the half-year                 in § 1.168(b)–1(a)(3) but before the                  $8,000) is $376.64 (the remaining adjusted
                                                convention. On June 4, 2024, due to changes             reduction in basis for the amount of the              depreciable basis of $32,000 multiplied by
                                                in GGG’s business circumstances, GGG                    rehabilitation credit, of the qualified               the depreciation rate of 0.01177 for recovery
                                                permanently moves the equipment to its                  rehabilitation expenditures; and the                  year 1, placed in service in month 7).
                                                plant in Mexico.                                        taxpayer depreciates the remaining
                                                   (ii) For 2023, GGG is allowed an 80-percent                                                                   (10) Coordination with section
                                                                                                        adjusted depreciable basis, as defined in             514(a)(3). The additional first year
                                                additional first year depreciation deduction
                                                                                                        paragraph (d)(2)(i) of this section, of               depreciation deduction is not allowable
                                                of $800,000 (the adjusted depreciable basis of
                                                $1,000,000 multiplied by 0.80). In addition,            such expenditures using straight line                 for purposes of section 514(a)(3).
                                                GGG’s depreciation deduction allowable in               cost recovery in accordance with section                 (g) Applicability dates—(1) In general.
                                                2023 for the remaining adjusted depreciable             47(c)(2)(B)(i) and § 1.48–12(c)(7)(i). For            Except as provided in paragraph (g)(2)
                                                basis of $200,000 (the unadjusted depreciable           purposes of this paragraph (f)(9)(i)(B),              of this section, the rules of this section
                                                basis of $1,000,000 reduced by the additional           the remaining rehabilitated basis is
                                                first year depreciation deduction of $800,000)
                                                                                                                                                              apply to—
                                                                                                        equal to the unadjusted depreciable                      (i) Qualified property under section
                                                is $40,000 (the remaining adjusted                      basis, as defined in § 1.168(b)–1(a)(3)
                                                depreciable basis of $200,000 multiplied by                                                                   168(k)(2) that is placed in service by the
                                                                                                        but before the reduction in basis for the             taxpayer during or after the taxpayer’s
                                                the annual depreciation rate of 0.20 for
                                                recovery year 1).                                       amount of the rehabilitation credit, of               taxable year that includes the date of
                                                   (iii) For 2024, the equipment is considered          the qualified rehabilitation expenditures             publication of a Treasury decision
                                                as used predominantly outside the United                that are qualified property reduced by                adopting these rules as final regulations
                                                States pursuant to § 1.48–1(g)(1)(i). As a              the additional first year depreciation                in the Federal Register; and
                                                result of this change in use, the adjusted              allowed or allowable, whichever is
                                                depreciable basis of $160,000 for the
                                                                                                                                                                 (ii) A specified plant for which the
                                                                                                        greater.                                              taxpayer properly made an election to
                                                equipment is required to be depreciated                    (ii) Example. The application of this
                                                under the alternative depreciation system of                                                                  apply section 168(k)(5) and that is
                                                                                                        paragraph (f)(9) is illustrated by the
                                                section 168(g) beginning in 2024. However,                                                                    planted, or grafted to a plant that was
                                                                                                        following example:
                                                the additional first year depreciation                                                                        previously planted, by the taxpayer
                                                deduction of $800,000 allowed for the                      Example. (i) Between February 8, 2023,             during or after the taxpayer’s taxable
                                                equipment in 2023 is not redetermined.                  and June 4, 2023, JM, a calendar-year                 year that includes the date of
                                                                                                        taxpayer, incurred qualified rehabilitation
                                                   (7) Earnings and profits. The                        expenditures of $200,000 with respect to a
                                                                                                                                                              publication of a Treasury decision
                                                additional first year depreciation                      qualified rehabilitated building that is              adopting these rules as final regulations
                                                deduction is not allowable for purposes                 nonresidential real property under section            in the Federal Register.
                                                of computing earnings and profits.                      168(e). These qualified rehabilitation                   (2) Early application. A taxpayer may
                                                   (8) Limitation of amount of                          expenditures are qualified property and               rely on the provisions of this section in
                                                depreciation for certain passenger                      qualify for the 20-percent rehabilitation             these proposed regulations for—
                                                automobiles. For a passenger                            credit under section 47(a)(1). JM’s basis in the         (i) Qualified property under section
                                                                                                        qualified rehabilitated building is zero before       168(k)(2) acquired and placed in service
                                                automobile as defined in section                        incurring the qualified rehabilitation
                                                280F(d)(5), the limitation under section                expenditures and JM placed the qualified              after September 27, 2017, by the
                                                280F(a)(1)(A)(i) is increased by $8,000                 rehabilitated building in service in July 2023.       taxpayer during taxable years ending on
                                                for qualified property acquired and                     JM depreciates its nonresidential real                or after September 28, 2017, and ending
                                                placed in service by a taxpayer after                   property placed in service in 2023 under the          before the taxpayer’s taxable year that
                                                September 27, 2017.                                     general depreciation system of section 168(a)         includes the date of publication of a
                                                   (9) Coordination with section 47—(i)                 by using the straight line method of                  Treasury decision adopting these rules
                                                In general. If qualified rehabilitation                 depreciation, a 39-year recovery period, and          as final regulations in the Federal
                                                                                                        the mid-month convention. JM elected to use
                                                expenditures, as defined in section                     the optional depreciation tables to compute
                                                                                                                                                              Register; and
                                                47(c)(2) and § 1.48–12(c), incurred by a                the depreciation allowance for its depreciable           (ii) A specified plant for which the
                                                taxpayer with respect to a qualified                    property placed in service in 2023. Further,          taxpayer properly made an election to
                                                rehabilitated building, as defined in                   for 2023, JM did not make any election under          apply section 168(k)(5) and that is
                                                section 47(c)(1) and § 1.48–12(b), are                  paragraph (e) of this section.                        planted, or grafted to a plant that was
                                                qualified property, the taxpayer may                       (ii) Because JM did not make any election          previously planted, after September 27,
                                                claim the rehabilitation credit provided                under paragraph (e) of this section, JM is            2017, by the taxpayer during taxable
                                                by section 47(a), provided the                          allowed an 80-percent additional first year
                                                                                                                                                              years ending on or after September 28,
                                                                                                        depreciation deduction of $160,000 for the
                                                requirements of section 47 are met—                     qualified rehabilitation expenditures for 2023        2017, and ending before the taxpayer’s
                                                   (A) With respect to the portion of the               (the unadjusted depreciable basis of $200,000         taxable year that includes the date of
                                                basis of the qualified rehabilitated                    (before reduction in basis for the                    publication of a Treasury decision
                                                building that is attributable to the                    rehabilitation credit) multiplied by 0.80). JM        adopting these rules as final regulations
                                                qualified rehabilitation expenditures if                also is allowed to claim a rehabilitation             in the Federal Register.
                                                the taxpayer makes the applicable                       credit of $8,000 for the remaining                    ■ Par. 10. Section 1.169–3 is amended
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                                                election under paragraph (e)(1)(i) of this              rehabilitated basis of $40,000 (the unadjusted        by adding a sentence at the end of
                                                section not to deduct any additional                    depreciable basis (before reduction in basis
                                                                                                                                                              paragraph (a) and adding two sentences
                                                                                                        for the rehabilitation credit) of $200,000 less
                                                first year depreciation for the class of                                                                      at the end of paragraph (g) to read as
                                                                                                        the additional first year depreciation
                                                property that includes the qualified                    deduction of $160,000, multiplied by 0.20 to          follows:
                                                rehabilitation expenditures; or                         calculate the rehabilitation credit). For 2023,
                                                   (B) With respect to the portion of the                                                                     § 1.169–3   Amortizable basis.
                                                                                                        the ratable share of the rehabilitation credit
                                                remaining rehabilitated basis of the                    of $8,000 is $1,600. Further, JM’s                      (a) * * * Further, before computing
                                                qualified rehabilitated building that is                depreciation deduction for 2023 for the               the amortization deduction allowable


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                                                                     Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules                                             39321

                                                under section 169, the adjusted basis for                  (e) Application of § 1.179–4(c)(2)—(1)             in the Federal Register. However, a
                                                purposes of determining gain for a                      In general. Except as provided in                     partnership may rely on the last
                                                facility that is acquired and placed in                 paragraph (e)(2) of this section, the                 sentence in paragraph (b)(2)(iv)(g)(3) of
                                                service after September 27, 2017, and                   provisions of § 1.179–4(c)(2) relating to             this section in these proposed
                                                that is qualified property under section                section 336(e) are applicable on or after             regulations for the partnership’s taxable
                                                168(k), as amended by the Tax Cuts and                  the date of publication of a Treasury                 years ending on or after September 28,
                                                Jobs Act, Public Law 115–97 (131 Stat.                  decision adopting these rules as final                2017, and ending before the
                                                2054 (December 22, 2017)) (the ‘‘Act’’),                regulations in the Federal Register.                  partnership’s taxable year that includes
                                                or § 1.168(k)–2, must be reduced by the                    (2) Early application. A taxpayer may              the date of publication of a Treasury
                                                amount of the additional first year                     rely on the provisions of § 1.179–4(c)(2)             decision adopting these rules as final
                                                depreciation deduction allowed or                       relating to section 336(e) in these                   regulations in the Federal Register.
                                                allowable, whichever is greater, under                  proposed regulations for the taxpayer’s               *     *     *     *      *
                                                section 168(k), as amended by the Act.                  taxable years ending on or after                        (2) * * *
                                                *      *    *      *    *                               September 28, 2017, and ending before                   (iv) * * *
                                                   (g) * * * The last sentence of                       the date of publication of a Treasury                   (g) * * *
                                                paragraph (a) of this section applies to                decision adopting these rules as final                  (3) * * * For purposes of the
                                                a certified pollution control facility that             regulations in the Federal Register.                  preceding sentence, additional first year
                                                is qualified property under section                     ■ Par. 13. Section 1.312–15 is amended                depreciation deduction under section
                                                168(k)(2) and placed in service by a                    by adding a sentence at the end of                    168(k) is not a reasonable method.
                                                taxpayer during or after the taxpayer’s                 paragraph (a)(1) and adding paragraph                 *     *     *     *      *
                                                taxable year that includes the date of                  (e) to read as follows:                               ■ Par. 15. Section 1.704–3 is amended
                                                publication of a Treasury decision                                                                            by:
                                                adopting these rules as final regulations               § 1.312–15 Effect of depreciation on
                                                                                                        earnings and profits.                                 ■ 1. Adding a sentence at the end of
                                                in the Federal Register. However, a                                                                           paragraph (d)(2);
                                                taxpayer may rely on the last sentence                     (a) * * *
                                                                                                           (1) * * * Further, see § 1.168(k)–                 ■ 2. Revising the first sentence in
                                                in paragraph (a) of this section in these                                                                     paragraph (f); and
                                                proposed regulations for a certified                    2(f)(7) with respect to the treatment of
                                                                                                        the additional first year depreciation                ■ 3. Adding two sentences at the end of
                                                pollution control facility that is                                                                            paragraph (f).
                                                qualified property under section                        deduction allowable under section
                                                                                                        168(k), as amended by the Tax Cuts and                  The additions and revision read as
                                                168(k)(2) and acquired and placed in                                                                          follows:
                                                service after September 27, 2017, by the                Jobs Act, Public Law 115–97 (131 Stat.
                                                taxpayer during taxable years ending on                 2054 (December 22, 2017)), for purposes               § 1.704–3   Contributed property.
                                                or after September 28, 2017, and ending                 of computing the earnings and profits of
                                                                                                                                                              *      *     *     *     *
                                                before the taxpayer’s taxable year that                 a corporation.
                                                                                                                                                                 (d) * * *
                                                includes the date of publication of a                   *      *     *     *     *                               (2) * * * However, the additional
                                                Treasury decision adopting these rules                     (e) Applicability date of qualified                first year depreciation deduction under
                                                as final regulations in the Federal                     property. The last sentence of paragraph              section 168(k) is not a permissible
                                                Register.                                               (a) of this section applies to the                    method for purposes of the preceding
                                                ■ Par. 11. Section 1.179–4 is amended                   taxpayer’s taxable years ending on or                 sentence and, if a partnership has
                                                by revising paragraph (c)(2) to read as                 after the date of publication of a                    acquired property in a taxable year for
                                                follows:                                                Treasury decision adopting these rules                which the additional first year
                                                                                                        as final regulations in the Federal                   depreciation deduction under section
                                                § 1.179–4   Definitions.
                                                                                                        Register. However, a taxpayer may rely                168(k) has been used of the same type
                                                *      *     *     *    *                               on the last sentence in paragraph (a) of
                                                   (c) * * *                                                                                                  as the contributed property, the portion
                                                                                                        this section in these proposed                        of the contributed property’s book basis
                                                   (2) Property deemed to have been                     regulations for the taxpayer’s taxable
                                                acquired by a new target corporation as                                                                       that exceeds its adjusted tax basis must
                                                                                                        years ending on or after September 28,                be recovered under a reasonable
                                                a result of a section 338 election                      2017, and ending before the taxpayer’s
                                                (relating to certain stock purchases                                                                          method. See § 1.168(k)–2(b)(3)(iv)(B).
                                                                                                        taxable year that includes the date of
                                                treated as asset acquisitions) or a section             publication of a Treasury decision                    *      *     *     *     *
                                                336(e) election (relating to certain stock              adopting these rules as final regulations                (f) * * * With the exception of
                                                dispositions treated as asset transfers)                in the Federal Register.                              paragraphs (a)(1), (a)(8)(ii) and (iii), and
                                                will be considered acquired by                          ■ Par. 14. Section 1.704–1 is amended
                                                                                                                                                              (a)(10) and (11) of this section, and of
                                                purchase.                                               by adding two sentences at the end of                 the last sentence in paragraph (d)(2) of
                                                *      *     *     *    *                               paragraph (b)(1)(ii)(a) and adding a                  this section, this section applies to
                                                ■ Par. 12. Section 1.179–6 is amended                   sentence at the end of paragraph                      properties contributed to a partnership
                                                by revising the first sentence in                       (b)(2)(iv)(g)(3) to read as follows:                  and to restatements pursuant to § 1.704–
                                                paragraph (a) and adding paragraph (e)                                                                        1(b)(2)(iv)(f) on or after December 21,
                                                to read as follows:                                     § 1.704–1    Partner’s distributive share.            1993. * * * The last sentence of
                                                                                                        *       *   *     *    *                              paragraph (d)(2) of this section applies
                                                § 1.179–6   Effective/applicability dates.                                                                    to property contributed to a partnership
                                                                                                           (b) * * *
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                                                  (a) * * * Except as provided in                          (1) * * *                                          on or after the date of publication of a
                                                paragraphs (b), (c), (d), and (e) of this                  (ii) * * *                                         Treasury decision adopting these rules
                                                section, the provisions of §§ 1.179–1                      (a) * * * The last sentence of                     as final regulations in the Federal
                                                through 1.179–5 apply for property                      paragraph (b)(2)(iv)(g)(3) of this section            Register. However, a taxpayer may rely
                                                placed in service by the taxpayer in                    is applicable for partnership taxable                 on the last sentence in paragraph (d)(2)
                                                taxable years ending after January 25,                  years ending on or after the date of                  of this section in these proposed
                                                1993. * * *                                             publication of a Treasury decision                    regulations for property contributed to a
                                                *     *     *    *      *                               adopting these rules as final regulations             partnership on or after September 28,


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                                                39322                Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules

                                                2017, and ending before the date of                     even if the partnership made the                      service in the same taxable year. In this
                                                publication of a Treasury decision                      election under section 168(k)(7) and                  case, the section 743(b) basis adjustment
                                                adopting these rules as final regulations               § 1.168(k)–2(e)(1) not to deduct the                  must be recovered under a reasonable
                                                in the Federal Register.                                additional first year depreciation for all            method.
                                                *     *     *     *     *                               other qualified property of the                       *     *     *     *     *
                                                ■ Par. 16. Section 1.743–1 is amended                   partnership in the same class of                        (l) * * * The last three sentences of
                                                by:                                                     property, as defined in § 1.168(k)–                   paragraph (j)(4)(i)(B)(1) of this section
                                                ■ 1. Adding three sentences to the end                  2(e)(1)(ii)(A) through (F), and placed in             apply to transfers of partnership
                                                of paragraph (j)(4)(i)(B)(1) and adding                 service in the same taxable year,                     interests that occur on or after the date
                                                two sentences at the end of paragraph (l)               provided the section 743(b) basis                     of publication of a Treasury decision
                                                to read as follows:                                     adjustment meets all requirements of                  adopting these rules as final regulations
                                                                                                        section 168(k) and § 1.168(k)–2. Further,             in the Federal Register. However, a
                                                § 1.743–1 Optional adjustment to basis of
                                                partnership property.                                   the partnership may make an election                  partnership may rely on the last three
                                                                                                        under section 168(k)(7) and § 1.168(k)–               sentences in paragraph (j)(4)(i)(B)(1) of
                                                *      *    *     *     *
                                                  (j) * * *                                             2(e)(1) not to deduct the additional first            this section in these proposed
                                                  (4) * * *                                             year depreciation for an increase in the              regulations for transfers of partnership
                                                  (i) * * *                                             basis of qualified property, as defined in            interests that occur on or after
                                                  (B) * * *                                             section 168(k) and § 1.168(k)–2, under                September 28, 2017, and ending before
                                                  (1) * * * Notwithstanding the above,                  section 743(b) in a class of property, as             the date of publication of a Treasury
                                                the partnership is allowed to deduct the                defined in § 1.168(k)–2(e)(1)(ii)(A)                  decision adopting these rules as final
                                                additional first year depreciation under                through (F), and placed in service in the             regulations in the Federal Register.
                                                section 168(k) and § 1.168(k)–2 for an                  same taxable year, even if the
                                                increase in the basis of qualified                      partnership does not make that election               Kirsten Wielobob,
                                                property, as defined in section 168(k)                  for all other qualified property of the               Deputy Commissioner for Services and
                                                and § 1.168(k)–2, under section 743(b)                  partnership in the same class of                      Enforcement.
                                                in a class of property, as defined in                   property, as defined in § 1.168(k)–                   [FR Doc. 2018–16716 Filed 8–3–18; 4:15 pm]
                                                § 1.168(k)–2(e)(1)(ii)(A) through (F),                  2(e)(1)(ii)(A) through (F), and placed in             BILLING CODE 4830–01–P
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Document Created: 2018-08-08 02:05:19
Document Modified: 2018-08-08 02:05:19
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionProposed Rules
ActionNotice of proposed rulemaking.
DatesWritten or electronic comments and requests for a public hearing must be received by October 9, 2018.
ContactConcerning the proposed regulations, Elizabeth R. Binder, (202) 317-7005; concerning submissions of comments or requests for a public hearing, Regina L. Johnson, (202) 317-6901 (not toll-free numbers).
FR Citation83 FR 39292 
RIN Number1545-BO74
CFR AssociatedIncome Taxes and Reporting and Recordkeeping Requirements

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