IRS Clarifies Bonus Depreciation

The Internal Revenue Service and the Treasury Department recently issued the last set of final regulations relating to bonus depreciation.

The Tax Cuts and Jobs Act of 2017 (TCJA) allowed taxpayers to write off the
cost of qualifying business assets as 100 percent bonus depreciation in the year the asset was placed in service.

Bonus depreciation did not originate with TCJA, but Section 13201 of the law made important amendments to the additional first-year depreciation deduction provisions, including:

  • Bonus depreciation increased from 50 to 100 percent. The TCJA allows
    100 percent bonus for qualifying assets placed in service between
    Sept. 27, 2017 and Dec. 31, 2022. The bonus depreciation begins to
    phase out in 2023. It drops each year until the end of 2026.
  • Eligible property was expanded to include certain used depreciable
  • The placed-in-service date was extended from Jan. 1, 2020, to Jan. 1, 2027 for longer production periods or certain aircraft property.

The final regulations clarify the effects of the technical correction in the Coronavirus Aid, Relief, and Economic Security Act (CARES). This made qualified improvement property (QIP) eligible for bonus depreciation after a drafting error in the TCJA.

Taxpayers can now deduct QIP, generally the improvements made to a business building’s interior, when “made by the taxpayer.”

The regulations address pre-existing QIP. When a taxpayer buys a building with pre-existing QIP, those improvements are not eligible for bonus depreciation. Rather, the taxpayer must make, manufacture, or construct the improvement for themselves in order to qualify.

Taxpayers can elect under the new regulations to treat long-term construction projects as components. There are stipulations on what the larger self-constructed property must be.

To see these regulations in their entirety, go to

Source: Mueller Prost