IRS Issues Final Rules on 100% Business Depreciation Deduction

Business can now write off most depreciable assets in the year they are used by the company, according to new rules from the Treasury Department and the Internal Revenue Service.

The IRS released on Sept. 13 final rules implementing its new 100% additional first-year depreciation deduction.

The IRS final regulations implement provisions of the Tax Cuts and Jobs Act, and were first proposed in August 2018.

"The 100% depreciation of the cost of a business' capital investments under TCJA is a big deal, because it allows businesses to deduct the full cost in the year of purchase, thereby reducing the after-tax cost of the investment," former tax attorney Andy Friedman of The Washington Update told ThinkAdvisor.

The IRS noted that the final regulations clarify the increase of the benefit and expand the property that can be depreciated to certain types of used property purchased by a business, as allowed under the Trump administration's tax law.

Previously, qualified property for the depreciation deduction was defined in part as property "the original use of which begins with the taxpayer," not assets that were previously used elsewhere by another entity or owner, the IRS said as part of its final regulations.

The scope of the new rule affects taxpayers who deduct depreciation for qualified property purchased and placed in service after Sept. 27, 2017.

Before the amendment by the Act to Section 168(k) of the Internal Revenue Code, there existed a first-year 50% depreciation deduction for the placed-in-service year on qualified property.

The new regulation with the updated tax law increases it to 100%, the IRS stated. However, a taxpayer can elect to deduct 50% instead of 100% additional first-year depreciation, according to the text of the regulations.

Section 168(k) was first added to the Code by the 2002 Job Creation and Worker Assistance Act.

Property now deemed eligible for the additional first year depreciation deduction includes not only used goods but certain film, television, or live theatrical productions, the IRS noted.

The term "placed in service" is a tax law phrase referring to when an item or asset begins its use for a business, and can be considered for depreciation for purposes or deductions or tax credits.

The IRS regulations offers numerous detailed examples of transactions among a variety of businesses where property would qualify or not qualify for a first year depreciation deduction.

In general, the deduction applied to depreciable property including office equipment, computers furniture, machinery and even race horses and business assets with a recovery period of 20 years or less.

The IRS applies the term depreciable interest as property that is used in a taxpayer's trade or business or it must generate production of income if it is held. The individual or business that made the capital investment in the item or property is the one who can make the depreciation deduction, the agency explained.

Several of the examples describe instances of partnerships where the deduction may or may not be used.

A taxpayer can make a "reasonable allowance" for depreciation, normally referenced as wear and tear, for the exhaustion of property used for income production in a business.

The many taxpayers who have already filed their 2018 returns have six months from their original deadline to file an amended return to deduct the 100% first-year depreciation.

If taxpayers want to opt out of the new 100% depreciation deduction, they must do so in their tax returns, filed in a timely manner, the IRS stated.

The IRS referred taxpayers to Form 4562, Depreciation and Amortization, for more details.

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