[Federal Register: September 8, 2003 (Volume 68, Number 173)]
[Rules and Regulations]
[Page 52985-53007]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08se03-13]
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Part III
Department of the Treasury
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Internal Revenue Service
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26 CFR Part 1
Special Depreciation Allowance; Rule and Proposed Rule
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9091]
RIN 1545-BC19
Special Depreciation Allowance
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains regulations relating to the
depreciation of property subject to section 168 of the Internal Revenue
Code (MACRS property) and the depreciation of computer software subject
to section 167. Specifically, these regulations provide guidance
regarding the additional first year depreciation allowance provided by
sections 168(k) and 1400L(b) for certain MACRS property and computer
software. The regulations reflect changes to the law made by the Job
Creation and Worker Assistance Act of 2002 and the Jobs and Growth Tax
Relief Reconciliation Act of 2003. The text of these temporary
regulations also serves as the text of the proposed regulations set
forth in the notice of proposed rulemaking on this subject in the
Proposed Rules section in this issue of the Federal Register.
DATES: Effective Dates: These regulations are effective September 8,
2003.
Applicability Dates: For dates of applicability, see Sec. Sec.
1.167(a)-14T(e), 1.168(d)-1T(d), 1.168(k)-1T(g), 1.169-3T(g), and
1.1400L(b)-1T(g).
FOR FURTHER INFORMATION CONTACT: Douglas Kim, (202) 622-3110 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to 26 CFR part 1 to provide
regulations under sections 168(k) and 1400L(b) of the Internal Revenue
Code (Code). Sections 168(k) and 1400L(b) were added to the Code by,
respectively, sections 101 and 301(a) of the Job Creation and Worker
Assistance Act of 2002, Public Law 107-147 (116 Stat. 21), and were
modified by section 201 of the Jobs and Growth Tax Relief
Reconciliation Act of 2003, Public Law 108-27 (117 Stat. 752).
Explanation of Provisions
Background
Section 167 allows as a depreciation deduction a reasonable
allowance for the exhaustion, wear, and tear of property used in a
trade or business or held for the production of income. The
depreciation allowable for tangible, depreciable property placed in
service after 1986 generally is determined under section 168 (MACRS
property). The depreciation 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)(1) allows a 30-percent additional first year
depreciation deduction for qualified property acquired after September
10, 2001, and, in most cases, placed in service before January 1, 2005.
Section 168(k)(4) allows a 50-percent additional first year
depreciation deduction for 50-percent bonus depreciation property
acquired after May 5, 2003, and, in most cases, placed in service
before January 1, 2005. Section 1400L(b) allows a 30-percent additional
first year depreciation deduction for qualified New York Liberty Zone
property (Liberty Zone property) acquired after September 10, 2001, and
placed in service before January 1, 2007 (January 1, 2010, in the case
of qualifying nonresidential real property and residential rental
property).
Scope
The regulations provide the requirements that must be met for
depreciable property to qualify for the additional first year
depreciation deduction provided by sections 168(k) and 1400L(b).
Further, the regulations instruct taxpayers how to determine the
additional first year depreciation deduction and the amount of
depreciation otherwise allowable for this property.
Property Eligible for the Additional First Year Depreciation Deduction
The regulations provide that depreciable property must meet four
requirements to be qualified property under section 168(k)(2) (property
for which the 30-percent additional first year depreciation deduction
is allowable) or 50-percent bonus depreciation property under section
168(k)(4) (property for which the 50-percent additional first year
depreciation deduction is allowable). 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 after
September 10, 2001, for qualified property or after May 5, 2003, for
50-percent bonus depreciation property; (3) the depreciable property
must be acquired by the taxpayer within a specified time period; and
(4) the depreciable property must be placed in service by a specified
date. These requirements are more fully discussed below.
Property of a Specified Type
The regulations provide that qualified property or 50-percent bonus
depreciation property must be one of the following: (1) MACRS property
that has a recovery period of 20 years of 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; or (4) qualified leasehold improvement property
depreciated under section 168. Because the additional first year
depreciation deduction applies to MACRS property that is depreciated
under the general depreciation system (GDS) or would be depreciated
under the GDS but for an alternative depreciation system (ADS) election
made by the taxpayer, the regulations provide that for purposes of
determining the eligibility of MACRS property as qualified property or
50-percent bonus depreciation property, the recovery period applicable
for the MACRS property under section 168(c) of the GDS is used
regardless of any election made by the taxpayer to depreciate the class
of property under the ADS of section 168(g). Further, with respect to
qualified leasehold improvement property, the regulations define those
improvements specified in section 168(k)(3)(B) that are not considered
as qualified leasehold improvement property.
The regulations also provide that qualified property or 50-percent
bonus depreciation 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; (3) any
class of property for which the taxpayer elects not to deduct the 30-
percent or 50-percent additional first year depreciation; or (4)
qualified New York Liberty Zone leasehold improvement property as
defined in section 1400L(c).
Property is required to be depreciated under the ADS if the
property is described under section 168(g)(1)(A) through (D) or if
other provisions of the Code require depreciation for the property to
be determined under the ADS (for example, section 263A(e)(2)(A) or
section 280F(b)(1)). Thus, 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
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depreciation deduction (assuming all other requirements are met).
With respect to the election out of the additional first year
depreciation deduction, a taxpayer may elect out of the 30-percent
additional first year depreciation deduction for any class of qualified
property. For any class of 50-percent bonus depreciation property, a
taxpayer may elect either to deduct the 30-percent, instead of the 50-
percent, additional first year depreciation deduction or to deduct no
additional first year depreciation deduction. The regulations provide
the rules for making these elections and also define what is a class of
property for purposes of the elections.
Original Use
Pursuant to section 168(k)(2)(A)(ii), the regulations provide that
qualified property is property the original use of which commences with
the taxpayer after September 10, 2001. Further, pursuant to section
168(k)(4)(B)(i), the regulations provide that 50-percent bonus
depreciation property is property the original use of which commences
with the taxpayer after May 5, 2003. The regulations provide that the
original use generally 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. Thus, new property initially used by a taxpayer for
personal use and then subsequently converted by the taxpayer for use in
its trade or business satisfies the original use requirement. However,
new property acquired by a taxpayer for personal use and then
subsequently acquired by a different taxpayer for use in its trade or
business does not satisfy the original use requirement.
Likewise, additional capital expenditures incurred by a taxpayer to
recondition or rebuild property acquired or owned by the taxpayer
satisfies the original use requirement. However, the cost of
reconditioned or rebuilt property acquired by the taxpayer does not
satisfy the original use requirement. The question of whether property
is reconditioned or rebuilt property is a question of fact. The
regulations provide a safe harbor that property containing 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.
See Rev. Rul. 68-111 (1968-1 C.B. 29).
The regulations also provide special rules for certain sale-
leaseback transactions and syndication transactions. If qualified
property is originally placed in service after September 10, 2001, or
50-percent bonus depreciation property is originally placed in service
after May 5, 2003, by a person and the property is involved in a sale-
leaseback transaction described in section 168(k)(2)(D)(ii), the
taxpayer-lessor is considered the original user of the property.
Likewise, if qualified property is originally placed in service by a
lessor after September 10, 2001, or 50-percent bonus depreciation
property is originally placed in service by a lessor after May 5, 2003,
and 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, and the user of the property does not change during this
three-month period, the purchaser of the property in the last sale is
considered the original user of the property.
The regulations also provide that if in the ordinary course of its
business a taxpayer sells fractional interests in qualified property or
50-percent bonus depreciation property to unrelated third parties, each
first fractional owner of the property is considered as the original
user of its proportionate share of the property. Furthermore, if a
taxpayer uses the qualified property or the 50-percent bonus
depreciation property before all of the fractional interests are sold
and the property continues to be held primarily for sale by the
taxpayer, the original use of any fractional interest sold to an
unrelated third party subsequent to the taxpayer's use begins with the
first purchaser of that interest.
Acquisition of Property
Pursuant to section 168(k)(2)(A)(iii), the regulations provide that
qualified property is property: (1) Acquired by the taxpayer after
September 10, 2001, and before January 1, 2005, but only if no written
binding contract for the acquisition of the property was in effect
before September 11, 2001; or (2) acquired by the taxpayer pursuant to
a written binding contract that was entered into after September 10,
2001, and before January 1, 2005. Further, pursuant to section
168(k)(4)(B)(ii), the regulations provide that 50-percent bonus
depreciation property is property acquired by the taxpayer after May 5,
2003, and before January 1, 2005, but only if no written binding
contract for the acquisition of the property was in effect before May
6, 2003.
The regulations define a binding contract as any contract that is
enforceable under State law against the taxpayer or a predecessor, and
does not limit damages to a specified amount. However, 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. Further, the fact that there will be little or no
damages because the contract price does not significantly differ from
the fair market value will not be taken into account in determining
whether a contract limits damages.
The regulations also provide that a contract is binding even if the
contract is subject to a condition, as long as the condition is not
within the control of either one of the parties or a predecessor.
Further, an option to either acquire or sell property is not treated as
a binding contract.
The regulations also provide that a binding contract does not
include a supply agreement or similar agreement, if the amount and
design specifications of the property to be purchased have not been
specified. In this case, the contract is not treated as a binding
contract until both the amount and design specifications are specified.
With respect to self-constructed property, the regulations provide
that the property acquisition requirement is met if a taxpayer
manufactures, constructs, or produces qualified property or 50-percent
bonus depreciation property for its own use and such manufacturing,
construction, or production began after, respectively, September 10,
2001, or May 5, 2003, and before January 1, 2005. Further, property
that is manufactured, constructed, or produced for the taxpayer by
another person under a written binding contract that is entered into
before the manufacture, construction, or production of the property
begins is considered to be manufactured, constructed, or produced by
the taxpayer.
The regulations also define when construction begins. Construction
of qualified property or 50-percent bonus depreciation 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 has begun depends on the
facts and circumstances. The regulations, however, provide a safe
harbor that physical work of a significant nature has begun when the
taxpayer incurs or pays more than 10 percent of the total cost of the
property (excluding the cost of any land and preliminary activities).
The regulations also provide rules for a contract to acquire, or
for the manufacture, construction, or production of, a component of the
larger self-constructed property. If a binding contract to acquire a
component was in
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effect, or the manufacture, construction, or production of a component
began, before September 11, 2001, for qualified property or before May
6, 2003, for 50-percent bonus depreciation property, the component does
not qualify for the additional first year depreciation deduction.
Similarly, if a binding contract to acquire a component was in effect,
or the manufacture, construction, or production of a component began,
before September 11, 2001, for qualified property or before May 6,
2003, for 50-percent bonus depreciation property, but the manufacture,
construction, or production of the larger self-constructed property
began after September 10, 2001, for qualified property, or after May 5,
2003, for 50-percent bonus depreciation property, and before January 1,
2005, the larger self-constructed property qualifies for the additional
first year depreciation deduction (assuming all other requirements are
met) but the component does not. Additionally, if the manufacture,
construction, or production of the larger self-constructed property
began before September 11, 2001, for qualified property or before May
6, 2003, for 50-percent bonus depreciation property, the larger self-
constructed property and any acquired or self-constructed component
related to the larger self-constructed property do not qualify for the
30-percent or 50-percent additional first year depreciation deduction.
However, if the binding contract to acquire the component was entered
into, or the manufacture, construction, or production of the component
began, after September 10, 2001, for qualified property, or after May
5, 2003, for 50-percent bonus depreciation property, and before January
1, 2005, but the manufacture, construction, or production of the larger
self-constructed property begins after December 31, 2004, the component
qualifies for the additional first year depreciation deduction
(assuming all other requirements are met) but the larger self-
constructed property does not.
The regulations provide rules for when certain acquired or self-
constructed property will not meet the acquisition date requirement
(disqualified transactions). When the user of property as of the date
on which the property was originally placed in service, or a related
party to the user, acquired, or had a written binding contract in
effect for the acquisition of, the property at any time before
September 11, 2001, or before May 6, 2003, as applicable, the property
does not qualify for the 30-percent or 50-percent additional first year
depreciation deduction. Similarly, property manufactured, constructed,
or produced for the taxpayer or a related party does not qualify for
the 30-percent or 50-percent additional first year depreciation
deduction if the manufacture, construction, or production began at any
time before September 11, 2001, or before May 6, 2003, as applicable.
For this purpose, persons are related if they have a relationship
specified in section 267(b) or 707(b).
Placed-in-Service Date
Pursuant to section 168(k)(2)(A)(iv) and 168(k)(4)(B)(iii), the
regulations provide that qualified property or 50-percent bonus
depreciation property is property that is placed in service by the
taxpayer before January 1, 2005. However, the placed in service date of
January 1, 2005, is extended for one year to January 1, 2006, for
property described in section 168(k)(2)(B).
The regulations also provide special rules for sale-leaseback
transactions and syndication transactions. If qualified property is
originally placed in service after September 10, 2001, or 50-percent
bonus depreciation property is originally placed in service after May
5, 2003, by a person and is involved in a sale-leaseback transaction
described in section 168(k)(2)(D)(ii), the property is treated as
originally placed in service by the taxpayer-lessor not earlier than
the date on which the property is used by the lessee under the sale-
leaseback. Likewise, if qualified property is originally placed in
service by a lessor after September 10, 2001, or 50-percent bonus
depreciation property is originally placed in service by a lessor after
May 5, 2003, and 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, and the user of the property does not change
during this three-month period, the property is treated as originally
placed in service not earlier than the date of the last sale by the
purchaser of the property in the last sale.
Special rules also are provided for certain nonrecognition
transactions. In the case of a technical termination of a partnership
under section 708(b)(1)(B), qualified property or 50-percent bonus
depreciation 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 or
the 50-percent bonus depreciation property is contributed by the
terminated partnership to the new partnership. Additionally, qualified
property or 50-percent bonus depreciation property transferred in a
``step-in-the-shoes'' transaction described in section 168(i)(7) in the
taxable year the qualified property or the 50-percent bonus
depreciation property is placed in service by the transferor is treated
as originally placed in service on the date the transferor placed the
qualified property or the 50-percent bonus depreciation property in
service.
Liberty Zone Property
Generally, the requirements for determining the eligibility of
property for the additional first year depreciation deduction for
Liberty Zone property provided by section 1400L(b) are similar to the
requirements for the 30-percent additional first year depreciation
deduction for qualified property provided by section 168(k)(1). There
are, however, some differences that are discussed below.
The regulations provide that Liberty Zone property includes the
same property that is described as qualified property or 50-percent
bonus depreciation property for purposes of section 168(k). In
addition, Liberty Zone property includes nonresidential real property
or residential rental property to the extent such property
rehabilitates real property damaged, or replaces real property
destroyed or condemned, as a result of the terrorist attacks of
September 11, 2001. Property is treated as replacing destroyed or
condemned property if, as part of an integrated plan, the property
replaces real property that is included in a continuous area that
includes real property destroyed or condemned. Real property is
considered to have been destroyed or condemned only if an entire
building or structure was destroyed or condemned as a result of the
terrorist attacks of September 11, 2001.
While Liberty Zone property includes the same property that is
described as qualified property or 50-percent bonus depreciation
property for purposes of section 168(k), only one additional first year
depreciation deduction is allowable for the property. Thus, pursuant to
section 1400L(b)(2)(C)(i), the regulations provide that if the 30-
percent or 50-percent additional first year depreciation deduction
under section 168(k) applies to the property, it is not Liberty Zone
property.
Pursuant to section 1400L(b)(2)(A)(ii), property is Liberty Zone
property if substantially all of the use of the property is in the
Liberty Zone and the property is used in the active conduct of a
taxpayer's trade or business in the
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Liberty Zone. The regulations provide that the term substantially all
means 80 percent or more.
In addition to the application of the original use rules for
qualified property, the regulations provide that used property will
satisfy the original use requirement for Liberty Zone property if the
used property has not been previously used within the Liberty Zone.
Pursuant to section 1400L(b)(2)(A)(iv), the regulations provide
that Liberty Zone property is property that is acquired by the taxpayer
by purchase after September 10, 2001, but only if no written binding
contract for the acquisition of the property was in effect before
September 10, 2001. The term by purchase is defined in section 179(d)
and Sec. 1.179-4(c). The regulations also provide that the binding
contract rules and the disqualified transactions rules for qualified
property apply to Liberty Zone property. The self-construction rules
for qualified property also apply to self-constructed Liberty Zone
property except that the requirement to begin the manufacture,
construction, or production of the qualified property before January 1,
2005, does not apply to Liberty Zone property.
Finally, the regulations provide that Liberty Zone property
generally must be acquired by a taxpayer after September 10, 2001, and
placed in service by the taxpayer before January 1, 2007. However,
qualifying nonresidential real property and residential rental property
must be acquired by a taxpayer after September 10, 2001, and placed in
service by the taxpayer before January 1, 2010.
Computation of Additional First Year Depreciation Deduction and
Otherwise Allowable Depreciation
The allowable additional first year depreciation deduction for
qualified property or Liberty Zone property is equal to 30 percent of
the unadjusted depreciable basis (as defined in Sec. 1.168(k)-
1T(a)(2)(iii)) of the property. The allowable additional first year
depreciation deduction for 50-percent bonus depreciation property is
equal to 50 percent of the unadjusted depreciable basis (as defined in
Sec. 1.168(k)-1T(a)(2)(iii)) of the property. For qualified property
or 50-percent bonus depreciation property described in section
168(k)(2)(B) (property having a longer production period), the
unadjusted depreciable basis (as defined in Sec. 1.168(k)-
1T(a)(2)(iii)) of the property is limited to the property's basis
attributable to manufacture, construction, or production of the
property before January 1, 2005.
The additional first year depreciation deduction is allowed for
both regular tax and alternative minimum tax purposes. However, for
alternative minimum tax purposes, the amount of the additional first
year depreciation deduction is based on the unadjusted depreciable
basis of the property for alternative minimum tax 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 alternative
minimum tax purposes.
Before determining the amount of depreciation otherwise allowable
for qualified property, 50-percent bonus depreciation property, or
Liberty Zone property, the taxpayer must first reduce the unadjusted
depreciable basis (as defined in Sec. 1.168(k)-1T(a)(2)(iii)) of the
property by the amount of the additional first year depreciation
deduction allowed or allowable, whichever is greater (the remaining
adjusted depreciable basis). Then, the remaining adjusted depreciable
basis is depreciated using the applicable depreciation provisions of
the Code for the property (that is, section 168 for MACRS property and
section 167(f)(1) for computer software). This amount of depreciation
is allowed for both regular tax and alternative minimum tax purposes,
and is affected by a taxable year of less than 12 months. However, for
alternative minimum tax purposes, the amount of depreciation allowed is
determined by calculating the remaining adjusted depreciable basis of
the property for alternative minimum tax 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, 50-percent bonus depreciation
property, or Liberty Zone property that is MACRS property, the
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.
Special Rules
The regulations also provide rules for the following situations:
(1) Qualified property, 50-percent bonus depreciation property, or
Liberty Zone property placed in service and disposed of in the same
taxable year; (2) redetermination of basis of qualified property, 50-
percent bonus depreciation property, or Liberty Zone 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, 50-percent bonus depreciation property, or
Liberty Zone property; (5) like-kind exchanges and involuntary
conversions of qualified property, 50-percent bonus depreciation
property, or Liberty Zone property; (6) a change in use of qualified
property, 50-percent bonus depreciation property, or Liberty Zone
property; (7) the computation of earnings and profits; (8) the increase
in the limitation of the amount of depreciation for passenger
automobiles; and (9) the step-up in basis due to a section 754
election.
With respect to qualified property, 50-percent bonus depreciation
property, or Liberty Zone property placed in service and disposed of in
the same taxable year, the regulations provide that the additional
first year depreciation deduction is not allowed. This rule is
consistent with the general rule in Sec. 1.168(d)-1(b)(3)(ii) for
MACRS property placed in service and disposed of in the same taxable
year. However, as previously discussed, the additional first year
depreciation deduction is allowable for qualified property, 50-percent
bonus depreciation property, or Liberty Zone property placed in service
by a terminated partnership in the same taxable year in which a
technical termination of the partnership occurs. In this case, the new
partnership, and not the terminated partnership, claims the additional
first year depreciation deduction. Similarly, the additional first year
depreciation deduction is allowable for qualified property, 50-percent
bonus depreciation property, or Liberty Zone property placed in service
by a transferor in the same taxable year in which the property is
transferred in a step-in-the-shoes transaction described in section
168(i)(7). In this case, the additional first year depreciation
deduction for the transferor's taxable year in which the property is
placed in service is allocated between the transferor and the
transferee on a monthly basis. The 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.
The regulations also provide rules for a redetermination of basis
of qualified property, 50-percent bonus depreciation property, or
Liberty Zone property (for example, due to a contingent purchase price
or a discharge of indebtedness). If the unadjusted depreciable basis of
the property is redetermined by the date on which the property must be
last placed in service to meet the placed-in-service date requirement
in section 168(k)(2)(A)(iv), 168(k)(4)(B)(iii), or
[[Page 52990]]
1400L(b)(2)(A)(v), the additional first year depreciation deduction
allowable for the property is redetermined. If the redetermination of
basis occurs after that date, the additional first year depreciation
deduction is not redetermined. The regulations instruct taxpayers how
to determine the depreciation adjustment for an increase or decrease in
basis. If there is an increase in basis, the taxpayer claims the
additional first year depreciation deduction attributable to the
increase in the taxable year in which the increase occurs. If there is
a decrease in basis, the taxpayer includes in its income the excess
additional first year depreciation deduction attributable to the
decrease in the taxable year in which the decrease occurs.
Because the additional first year depreciation deduction is not a
ratable method of computing depreciation, the regulations provide that
the additional first year depreciation deduction is not a straight line
method for purposes of section 1250. Thus, the additional first year
depreciation deduction is an accelerated depreciation method for
purposes of determining recapture under section 1250. For purposes of
section 1245, all depreciation deductions are subject to recapture.
With respect to a certified pollution control facility that is
qualified property, 50-percent bonus depreciation property, or Liberty
Zone property, the regulations provide that the additional first year
depreciation deduction is allowable in the facility's placed in service
year even if the taxpayer elects to amortize the basis of the facility
under section 169 in the placed-in-service year. The regulations also
amend the regulations under section 169 to provide that the amortizable
basis under section 169 must be reduced by the additional first year
depreciation deduction allowed or allowable, whichever is greater,
applicable to the facility.
With respect to MACRS property or computer software acquired in a
like-kind exchange under section 1031 or as a result of an involuntary
conversion under section 1033, the regulations provide that the
carryover basis and the excess basis, if any, of the acquired MACRS
property or acquired computer software are eligible for the additional
first year depreciation deduction if the acquired MACRS property or
acquired computer software is qualified property, 50-percent bonus
depreciation property, or Liberty Zone property. However, if qualified
property, 50-percent bonus depreciation property, or Liberty Zone
property is placed in service and then disposed of in an exchange or
involuntary conversion in the same taxable year, the unadjusted
depreciable basis of the exchanged or involuntarily converted property
is not eligible for the additional first year depreciation deduction.
The regulations also provide rules when the use of qualified
property, 50-percent bonus depreciation property, or Liberty Zone
property changes in the hands of the same taxpayer during the placed-
in-service year or a subsequent taxable year. The regulations provide
that no additional first year depreciation deduction is allowed for
qualified property, 50-percent bonus depreciation property, or Liberty
Zone property converted to personal use in the placed-in-service year.
However, property converted to business or income-producing use is
eligible for the additional first year depreciation deduction in the
taxable year the property is converted to business or income-producing
use (assuming all the requirements are met). With respect to a change
in the use of depreciable property subsequent to the placed-in-service
year, the regulations provide that the change in the use will not
affect the determination of whether the property was eligible for the
additional first year depreciation deduction in the taxable year the
property was originally placed-in-service. Thus, if property is not
qualified property in its placed-in-service year and a change in the
use in a subsequent taxable year would result in the property being
qualified property, no additional first year depreciation deduction is
allowed for the property. Likewise, if property is qualified property
in its placed-in-service year and a change in the use in a subsequent
taxable year would result in the property no longer being qualified
property, the additional first year depreciation deduction allowable
for the property in its placed-in-service year is not redetermined.
Furthermore, the regulations provide that the additional first year
depreciation deduction is not allowable for purposes of computing
earnings and profits. Pursuant to section 168(k)(2)(E) and (4)(D), the
regulations also provide the increase in the limitation under section
280F(a)(1) of the amount of depreciation for certain passenger
automobiles that are qualified property or 50-percent bonus
depreciation property. Finally, the regulations provide that any
increase in basis of qualified property, 50-percent bonus depreciation
property, or Liberty Zone property due to a section 754 election
generally is not eligible for the additional first year depreciation
deduction because any such increase in basis of property does not
satisfy the original use requirement.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations and, because
these regulations do not impose on small entities a collection of
information requirement, the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis
is not required. Pursuant to section 7805(f) of the Code, these
temporary regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business.
Drafting Information
The principal author of these regulations is Douglas H. Kim, Office
of Associate Chief Counsel (Passthroughs and Special Industries).
However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.167(a)-14 is amended by:
0
1. Revising paragraphs (b)(1) and (e)(2).
0
2. Revising paragraph heading (e).
0
3. Adding paragraph (e)(3).
The additions and revisions read as follows:
Sec. 1.167(a)-14 Treatment of certain intangible property excluded
from section 197.
* * * * *
(b) * * *
(1) In general. [Reserved]. For further guidance, see Sec.
1.167(a)-14T(b)(1).
* * * * *
(e) Effective dates * * *
(2) Change in method of accounting. [Reserved]. For further
guidance, see Sec. 1.167(a)-14T(e)(2).
[[Page 52991]]
(3) Qualified property, 50-percent bonus depreciation property,
qualified New York Liberty Zone property, or section 179 property.
[Reserved]. For further guidance, see Sec. 1.167(a)-14T(e)(3).
0
Par. 3. Section 1.167(a)-14T is added to read as follows:
Sec. 1.167(a)-14T Treatment of certain intangible property excluded
from section 197 (temporary).
(a) For further guidance, see Sec. 1.167(a)-14(a).
(b) Computer software--(1) In general. The amount of the deduction
for computer software described in section 167(f)(1) and Sec. 1.197-
2(c)(4) is determined by amortizing the cost or other basis of the
computer software using the straight line method described in Sec.
1.167(b)-1 (except that its salvage value is treated as zero) and an
amortization period of 36 months beginning on the first day of the
month that the computer software is placed in service. Before
determining the amortization deduction allowable under this paragraph
(b), the cost or other basis of computer software that is section 179
property, as defined in section 179(d)(1)(A)(ii), must be reduced for
any portion of the basis the taxpayer properly elects to treat as an
expense under section 179. In addition, the cost or other basis of
computer software that is qualified property under section 168(k)(2) or
Sec. 1.168(k)-1T, 50-percent bonus depreciation property under section
168(k)(4) or Sec. 1.168(k)-1T, or qualified New York Liberty Zone
property under section 1400L(b) or Sec. 1.1400L(b)-1T, must be reduced
by the amount of the additional first year depreciation deduction
allowed or allowable, whichever is greater, under section 168(k) or
section 1400L(b) for the computer software. If costs for developing
computer software that the taxpayer properly elects to defer under
section 174(b) result in the development of property subject to the
allowance for depreciation under section 167, the rules of this
paragraph (b) will apply to the unrecovered costs. In addition, this
paragraph (b) applies to the cost of separately acquired computer
software if the cost to acquire the software is separately stated and
the cost is required to be capitalized under section 263(a).
(b)(2) through (e)(1) For further guidance, see Sec. 1.167(a)-
14(b)(2) through (e)(1).
(e)(2) Change in method of accounting. See Sec. 1.197-2(l)(4) for
rules relating to changes in method of accounting for property to which
Sec. 1.167(a)-14T applies. However, see Sec. 1.168(k)-1T(g)(4) or
1.1400L(b)-1T(g)(4) for rules relating to changes in method of
accounting for computer software to which the third sentence in Sec.
1.167(a)-14T(b)(1) applies.
(3) Qualified property, 50-percent bonus depreciation property,
qualified New York Liberty Zone property, or section 179 property. This
section also applies to computer software that is qualified property
under section 168(k)(2) or qualified New York Liberty Zone property
under section 1400L(b) acquired by a taxpayer after September 10, 2001,
and to computer software that is 50-percent bonus depreciation property
under section 168(k)(4) acquired by a taxpayer after May 5, 2003. This
section also applies to computer software that is section 179 property
placed in service by a taxpayer in a taxable year beginning after 2002
and before 2006. This section expires on September 8, 2006.
0
Par. 4. Section 1.168(d)-1 is amended by:
0
1. Revising paragraph (b)(3)(ii).
0
2. Paragraph heading (d) is revised and the text of paragraph (d) is
redesignated as paragraph (d)(1).
0
3. Adding paragraph (d)(2).
The additions and revisions read as follows:
Sec. 1.168(d)-1 Applicable conventions--half-year and mid-quarter
conventions.
* * * * *
(b) * * *
(3) * * *
(ii) [Reserved]. For further guidance, see Sec. 1.168(d)-
1T(b)(3)(ii).
* * * * *
(d) Effective dates--(1) In general. * * *
(2) Qualified property, 50-percent bonus depreciation property, or
qualified New York Liberty Zone property. [Reserved]. For further
guidance, see Sec. 1.168(d)-1T(d).
0
Par. 5. Section 1.168(d)-1T is added to read as follows:
Sec. 1.168(d)-1T Applicable conventions--half-year and mid-quarter
conventions (temporary).
(a) through (b)(3)(i) For further guidance, see Sec. 1.168(d)-1(a)
through (b)(3)(i).
(b)(3)(ii) The applicable convention, as determined under this
section, applies to all depreciable property (except nonresidential
real property, residential rental property, and any railroad grading or
tunnel bore) placed in service during the taxable year, excluding
property placed in service and disposed of in the same taxable year. No
depreciation deduction is allowed for property placed in service and
disposed of during the same taxable year. However, see Sec. 1.168(k)-
1T(f)(1) for qualified property or 50-percent bonus depreciation
property, and Sec. 1.1400L(b)-1T(f)(1) for qualified New York Liberty
Zone property, that is placed in service 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).
(b)(3)(iii) through (d)(1) For further guidance, see Sec.
1.168(d)-1(b)(3)(iii) through (d)(1).
(d)(2) Qualified property, 50-percent bonus depreciation property,
or qualified New York Liberty Zone property. This section also applies
to qualified property under section 168(k)(2) or qualified New York
Liberty Zone property under section 1400L(b) acquired by a taxpayer
after September 10, 2001, and to 50-percent bonus depreciation property
under section 168(k)(4) acquired by a taxpayer after May 5, 2003. This
section expires on September 8, 2006.
0
Par. 6. Section 1.168(k)-0T is added to read as follows:
Sec. 1.168(k)-0T Table of contents (temporary).
This section lists the headings that appear in Sec. 1.168(k)-1T.
1.168(k)-1T Additional first year depreciation deduction
(temporary).
(a) Scope and definitions.
(1) Scope.
(2) Definitions.
(b) Qualified property or 50-percent bonus depreciation
property.
(1) In general.
(2) Description of qualified property or 50-percent bonus
depreciation property.
(i) In general.
(ii) Property not eligible for additional first year
depreciation deduction.
(A) Property that is not qualified property.
(B) Property that is not 50-percent bonus depreciation property.
(3) Original use.
(i) In general.
(ii) Conversion to business or income-producing use.
(iii) Sale-leaseback and syndication transactions.
(A) Sale-leaseback transaction.
(B) Syndication transaction.
(C) Sale-leaseback transaction followed by a syndication
transaction.
(iv) Fractional interests in property.
(v) Examples.
(4) Acquisition of property.
(i) In general.
(A) Qualified property.
(B) 50-percent bonus depreciation property.
(ii) Definition of binding contract.
(A) In general.
(B) Conditions.
[[Page 52992]]
(C) Options.
(D) Supply agreements.
(E) Components.
(iii) Self-constructed property.
(A) In general.
(B) When does construction begin.
(C) Components of self-constructed property.
(1) Acquired components.
(2) Self-constructed components.
(iv) Disqualified transactions.
(A) In general.
(B) Related party defined.
(v) Examples.
(5) Placed-in-service date.
(i) In general.
(ii) Sale-leaseback and syndication transactions.
(A) Sale-leaseback transaction.
(B) Syndication transaction.
(C) Sale-leaseback transaction followed by a syndication
transaction.
(iii) Technical termination of a partnership.
(iv) Section 168(i)(7) transactions.
(c) Qualified leasehold improvement property.
(1) In general.
(2) Certain improvements not included.
(3) Definitions.
(d) Computation of depreciation deduction for qualified property
or 50-percent bonus depreciation property.
(1) Additional first year depreciation deduction.
(i) In general.
(ii) Property having a longer production period.
(iii) Alternative minimum tax.
(2) Otherwise allowable depreciation deduction.
(i) In general.
(ii) Alternative minimum tax.
(3) Examples.
(e) Election not to deduct additional first year depreciation.
(1) In general.
(i) Qualified property.
(ii) 50-percent bonus depreciation property.
(2) Definition of class of property.
(3) Time and manner for making election.
(i) Time for making election.
(ii) Manner of making election.
(4) Special rules for 2000 or 2001 returns.
(5) Failure to make election.
(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) Definition.
(iv) Examples.
(3) Section 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.
(iv) Sale-leasebacks.
(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) Section 754 election.
(g) Effective date.
(1) In general.
(2) Technical termination of a partnership or section 168(i)(7)
transactions.
(3) Like-kind exchanges and involuntary conversions.
(4) Change in method of accounting.
(i) Special rules for 2000 or 2001 returns.
(ii) Like-kind exchanges and involuntary conversions.
0
Par. 7. Section 1.168(k)-1T is added to read as follows:
Sec. 1.168(k)-1T Additional first year depreciation deduction
(temporary).
(a) Scope and definitions--(1) Scope. This section provides the
rules for determining the 30-percent additional first year depreciation
deduction allowable under section 168(k)(1) for qualified property and
the 50-percent additional first year depreciation deduction allowable
under section 168(k)(4) for 50-percent bonus depreciation property.
(2) Definitions. For purposes of section 168(k) and this section,
the following definitions apply:
(i) Depreciable property is property that is of a character subject
to the allowance for depreciation as determined under section 167 and
the regulations thereunder.
(ii) MACRS property is tangible, depreciable property that is
placed in service after December 31, 1986 (or after July 31, 1986, if
the taxpayer made an election under section 203(a)(1)(B) of the Tax
Reform Act of 1986; 100 Stat. 2143) and subject to section 168, except
for property excluded from the application of section 168 as a result
of section 168(f) or as a result of a transitional rule.
(iii) Unadjusted depreciable basis is the basis of property for
purposes of section 1011 without regard to any adjustments described in
section 1016(a)(2) and (3). This basis reflects the reduction in basis
for the percentage of 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), for any portion of the basis the taxpayer
properly elects to treat as an expense under section 179, and for any
adjustments to basis provided by other provisions of the Internal
Revenue Code and the regulations thereunder (other than section
1016(a)(2) and (3)) (for example, a reduction in basis by the amount of
the disabled access credit pursuant to section 44(d)(7)). For property
subject to a lease, see section 167(c)(2).
(iv) Adjusted depreciable basis is the unadjusted depreciable basis
of the property, as defined in Sec. 1.168(k)-1T(a)(2)(iii), less the
adjustments described in section 1016(a)(2) and (3).
(b) Qualified property or 50-percent bonus depreciation property--
(1) In general. Qualified property or 50-percent bonus depreciation
property is depreciable property that--
(i) Meets the requirements in Sec. 1.168(k)-1T(b)(2) (description
of property);
(ii) Meets the requirements in Sec. 1.168(k)-1T(b)(3) (original
use);
(iii) Meets the requirements in Sec. 1.168(k)-1T(b)(4)
(acquisition of property); and
(iv) Meets the requirements in Sec. 1.168(k)-1T(b)(5) (placed-in-
service date).
(2) Description of qualified property or 50-percent bonus
depreciation 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(k)-1T(a)(2)(ii)) that
has a recovery period of 20 years or less. For purposes of this
paragraph (b)(2)(i)(A) and section 168(k)(2)(B)(i)(II) and
168(k)(4)(C), the recovery period is determined in accordance with
section 168(c) regardless of any election made by the taxpayer under
section 168(g)(7);
(B) Computer software as defined in, and depreciated under, section
167(f)(1) and the regulations thereunder;
(C) Water utility property as defined in section 168(e)(5) and
depreciated under section 168; or
(D) Qualified leasehold improvement property as defined in
paragraph (c) of this section and depreciated under section 168.
(ii) Property not eligible for additional first year depreciation
deduction--(A) Property that is not qualified property. For purposes of
the 30-percent additional first year depreciation deduction,
depreciable property will not meet the requirements of this paragraph
(b)(2) if the property is--
(1) Described in section 168(f);
(2) Required to be depreciated under the alternative depreciation
system of section 168(g) pursuant to section
[[Page 52993]]
168(g)(1)(A) through (D) or other provisions of the Internal Revenue
Code (for example, property described in section 263A(e)(2)(A) or
section 280F(b)(1));
(3) Included in any class of property for which the taxpayer elects
not to deduct the 30-percent additional first year depreciation (for
further guidance, see paragraph (e) of this section); or
(4) Qualified New York Liberty Zone leasehold improvement property
as defined in section 1400L(c)(2).
(B) Property that is not 50-percent bonus depreciation property.
For purposes of the 50-percent additional first year depreciation
deduction, depreciable property will not meet the requirements of this
paragraph (b)(2) if the property is--
(1) Described in paragraph (b)(2)(ii)(A)(1), (2), or (4) of this
section; or
(2) Included in any class of property for which the taxpayer elects
the 30-percent, instead of the 50-percent, additional first year
depreciation deduction or elects not to deduct any additional first
year depreciation (for further guidance, see paragraph (e) of this
section).
(3) Original use--(i) In general. For purposes of the 30-percent
additional first year depreciation deduction, depreciable property will
meet the requirements of this paragraph (b)(3) if the original use of
the property commences with the taxpayer after September 10, 2001. For
purposes of the 50-percent additional first year depreciation
deduction, depreciable property will meet the requirements of this
paragraph (b)(3) if the original use of the property commences with the
taxpayer after May 5, 2003. Except as provided in paragraph (b)(3)(iii)
and (iv) 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. Thus, additional capital expenditures
incurred by a taxpayer to recondition or rebuild property acquired or
owned by the taxpayer satisfies the original use requirement. However,
the cost of reconditioned or rebuilt property acquired by the taxpayer
does not satisfy the original use requirement. The question of whether
property is reconditioned or rebuilt property is a question of fact.
For purposes of this paragraph (b)(3)(i), 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.
(ii) Conversion 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 as 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.
(iii) Sale-leaseback and syndication transactions--(A) Sale-
leaseback transaction. If new property is originally placed in service
by a person after September 10, 2001 (for qualified property), or after
May 5, 2003 (for 50-percent bonus depreciation property), and is sold
to a taxpayer and leased back to the person by the taxpayer within
three months after the date the property was originally placed in
service by the person, the taxpayer-lessor is considered the original
user of the property.
(B) Syndication transaction. If new property is originally placed
in service by a lessor (including by operation of paragraph
(b)(5)(ii)(A) of this section) after September 10, 2001 (for qualified
property), or after May 5, 2003 (for 50-percent bonus depreciation
property), and 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, 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 original user of the property.
(C) Sale-leaseback transaction followed by a syndication
transaction. If a sale-leaseback transaction that satisfies the
requirements in paragraph (b)(3)(iii)(A) of this section is followed by
a syndication transaction that satisfies the requirements in paragraph
(b)(3)(iii)(B) of this section, the original user of the property is
determined in accordance with paragraph (b)(3)(iii)(B) of this section.
(iv) Fractional interests in property. If, in the ordinary course
of its business, a taxpayer sells fractional interests in property to
unrelated third parties, 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 an unrelated third party
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)(iv), persons are not related if they do not have a relationship
described in section 267(b) or 707(b) and the regulations thereunder.
(v) Examples. The application of this paragraph (b)(3) is
illustrated by the following examples:
Example 1. On August 1, 2002, A buys from B for $20,000 a
machine that has been previously used by B in B's trade or business.
On March 1, 2003, A makes a $5,000 capital expenditure to
recondition the machine. The $20,000 purchase price does not qualify
for the additional first year depreciation deduction because the
original use requirement of this paragraph (b)(3) is not met.
However, the $5,000 expenditure satisfies the original use
requirement of this paragraph (b)(3) and, assuming all other
requirements are met, qualifies for the 30-percent 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 September 1, 2002, 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 this paragraph
(b)(3). Assuming all other requirements are met, D's purchase price
of the automobile qualifies for the 30-percent additional first year
depreciation deduction for D, subject to any limitation under
section 280F.
Example 3. On April 1, 2000, E acquires a horse to be used in
E's thoroughbred racing business. On October 1, 2003, F buys the
horse from E and will use the horse in F's horse breeding business.
The use of the horse by E in its racing business prevents the
original use of the horse from commencing with F. Thus, F's purchase
price of the horse does not qualify for the additional first year
depreciation deduction.
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
January 1, 2003, G sells five of the eight fractional interests in
the aircraft to H, an unrelated party, and H begins to use its
proportionate share of the aircraft immediately upon purchase. On
June 1, 2003, G sells to I, an unrelated party to G and H, 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
[[Page 52994]]
its 5/8 fractional interest in the aircraft qualifies for the 30-
percent additional first year depreciation deduction and I's
purchase price for its 3/8 fractional interest in the aircraft
qualifies for the 50-percent additional first year depreciation
deduction.
(4) Acquisition of property--(i) In general--(A) Qualified
property. For purposes of the 30-percent additional first year
depreciation deduction, depreciable property will meet the requirements
of this paragraph (b)(4) if the property is--
(1) Acquired by the taxpayer after September 10, 2001, and before
January 1, 2005, but only if no written binding contract for the
acquisition of the property was in effect before September 11, 2001; or
(2) Acquired by the taxpayer pursuant to a written binding contract
that was entered into after September 10, 2001, and before January 1,
2005.
(B) 50-percent bonus depreciation property. For purposes of the 50-
percent additional first year depreciation deduction, depreciable
property will meet the requirements of this paragraph (b)(4) if the
property is acquired by the taxpayer after May 5, 2003, and before
January 1, 2005, but only if no written binding contract for the
acquisition of the property was in effect before May 6, 2003.
(ii) 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 contained no 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 by the seller, 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
because 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 insubstantial 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) 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, and the pricing for, the property to be purchased, a
purchase order under the agreement for a specific number of assets is
treated as a binding contract.
(E) 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)(4), the component does not qualify for the 30-percent or
50-percent additional first year depreciation deduction, as applicable.
(iii) 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)(4)(i) of this section are treated as
met for qualified property if the taxpayer begins manufacturing,
constructing, or producing the property after September 10, 2001, and
before January 1, 2005, and for 50-percent bonus depreciation property
if the taxpayer begins manufacturing, constructing, or producing the
property after May 5, 2003, and before January 1, 2005. Property that
is manufactured, constructed, or produced for the taxpayer by another
person under a written binding contract (as defined in paragraph
(b)(4)(ii) 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.
(B) When does construction begin. For purposes of paragraph
(b)(4)(iii) of this section, construction 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 purposes of this paragraph (b)(4)(iii)(B), physical
work of a significant nature will not be considered to begin before 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). 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 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
excation 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 constructed off-site and delivered
to the site where the outlet will be used, construction begings when
physical work of a significant nature commences at the off-site
location.
(C) Components of self-constructed property--(1) Acquired
components. If a binding contract (as defined in paragraph (b)(4)(ii)
of this section) to acquire a component does not satisfy the
requirements of paragraph (b)(4)(i) of this section, the component does
not qualify for the 30-percent or 50-percent additional first year
depreciation deduction, as applicable. A binding contract (as defined
in paragraph (b)(4)(ii) of this section) 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)(4)(iii)(A) of this section. Accordingly, the
unadjusted depreciable basis of the larger self-constructed property
that is eligible for the 30-percent or 50-percent additional first year
depreciation deduction, as applicable (assuming all other requirements
are met), must not include
[[Page 52995]]
the unadjusted depreciable basis of any component that does not satisfy
the requirements of paragraph (b)(4)(i) of this section. If the
manufacture, construction, or production of the larger self-constructed
property begins before September 11, 2001, for qualified property, or
before May 6, 2003, for 50-percent bonus depreciation property, the
larger self-constructed property and any acquired components related to
the larger self-constructed property do not qualify for the 30-percent
or 50-percent additional first year depreciation deduction, as
applicable. If a binding contract to acquire the component is entered
into after September 10, 2001, for qualified property, or after May 5,
2003, for 50-percent bonus depreciation property, and before January 1,
2005, but the manufacture, construction, or production of the larger
self-constructed property does not begin before January 1, 2005, the
component qualifies for the additional first year depreciation
deduction (assuming all other requirements are met) but the larger
self-constructed property does not.
(2) Self-constructed components. If the manufacture, construction,
or production of a component does not satisfy the requirements of
paragraph (b)(4)(iii)(A) of this section, the component does not
qualify for the 30-percent or 50-percent additional first year
depreciation deduction, as applicable. However, if the manufacture,
construction, or production of a component does not satisfy the
requirements of paragraph (b)(4)(iii)(A) of this section, but the
manufacture, construction, or production of the larger self-constructed
property satisfies the requirements of paragraph (b)(4)(iii)(A) of this
section, the larger self-constructed property qualifies for the 30-
percent or 50-percent additional first year depreciation deduction, as
applicable (assuming all other requirements are met) even though the
component does not qualify for the 30-percent or 50-percent additional
first year depreciation deduction. Accordingly, the unadjusted
depreciable basis of the larger self-constructed property that is
eligible for the 30-percent or 50-percent additional first year
depreciation deduction, as applicable (assuming all other requirements
are met), must not include the unadjusted depreciable basis of any
component that does not qualify for the 30-percent or 50-percent
additional first year depreciation deduction. If the manufacture,
construction, or production of the larger self-constructed property
began before September 11, 2001, for qualified property, or before May
6, 2003, for 50-percent bonus depreciation property, the larger self-
constructed property and any self-constructed components related to the
larger self-constructed property do not qualify for the 30-percent or
50-percent additional first year depreciation deduction, as applicable.
If the manufacture, construction, or production of a component begins
after September 10, 2001, for qualified property, or after May 5, 2003,
for 50-percent bonus depreciation property, and before January 1, 2005,
but the manufacture, construction, or production of the larger self-
constructed property does not begin before January 1, 2005, 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) Disqualified transactions--(A) In general. Property does not
satisfy the requirements of this paragraph (b)(4) if the user of the
property as of the date on which the property was originally placed in
service (including by operation of paragraph (b)(5)(ii), (iii), and
(iv) of this section), or a related party to the user, acquired, or had
a written binding contract (as defined in paragraph (b)(4)(ii) of this
section) in effect for the acquisition of, the property at any time
before September 11, 2001 (for qualified property), or before May 6,
2003 (for 50-percent bonus depreciation property). In addition,
property manufactured, constructed, or produced for the taxpayer or a
related party does not satisfy the requirements of this paragraph
(b)(4) if the manufacture, construction, or production of the property
for the taxpayer or a related party began at any time before September
11, 2001 (for qualified property), or before May 6, 2003 (for 50-
percent bonus depreciation property).
(B) Related party defined. For purposes of this paragraph
(b)(4)(iv), persons are related if they have a relationship specified
in section 267(b) or 707(b) and the regulations thereunder.
(v) Examples. The application of this paragraph (b)(4) is
illustrated by the following examples:
Example 1. On September 1, 2001, J, a corporation, entered into
a written agreement with K, 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)(4)(ii)(D) of this section.
Example 2. Same facts as Example 1. On December 1, 2001, J
placed a purchase order with K 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 purchase order
specifies the design of the lamps to be purchased, the purchase
order placed by J with K on December 1, 2001, is a binding contract
pursuant to paragraph (b)(4)(ii)(D) of this section. Accordingly,
the cost of the 20 lamps qualifies for the 30-percent additional
first year depreciation deduction.
Example 3. Same facts as Example 1 except that the written
agreement between J and K 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)(4)(ii)(D)
of this section. Accordingly, because the agreement was entered into
before September 11, 2001, any lamp acquired by J under this
contract does not qualify for the additional first year depreciation
deduction.
Example 4. On September 1, 2001, L began constructing an
electric generation power plant for its own use. On November 1,
2002, L ceases construction of the power plant prior to its
completion. Between September 1, 2001, and November 1, 2002, L
incurred $3,000,000 for the construction of the power plant. On May
6, 2003, L resumed construction of the power plant and completed its
construction on August 31, 2003. Between May 6, 2003, and August 31,
2003, L incurred another $1,600,000 to complete the construction of
the power plant and, on September 1, 2003, L placed the power plant
in service. None of L's total expenditures of $4,600,000 qualify for
the additional first year depreciation deduction because, pursuant
to paragraph (b)(4)(iii)(A) of this section, L began constructing
the power plant before September 11, 2001.
Example 5. Same facts as Example 4 except that L began
constructing the electric generation power plant for its own use on
October 1, 2001. L's total expenditures of $4,600,000 qualify for
the additional first year depreciation deduction because, pursuant
to paragraph (b)(4)(iii)(A) of this section, L began constructing
the power plant after September 10, 2001, and placed the power plant
in service before January 1, 2005. Accordingly, the additional first
year depreciation deduction for the power plant will be $1,380,000,
computed as $4,600,000 multiplied by 30 percent.
Example 6. On August 1, 2001, M entered into a written binding
contract to acquire a new turbine. The new turbine is a component
part of a new electric generation power plant that is being
constructed on M's behalf. The construction of the new electric
generation power plant commenced in November 2001, and the new
electric generation power plant was completed in November 2002.
Because M entered into a written binding contract to acquire a
component part (the new turbine) prior to September 11, 2001,
pursuant to paragraph (b)(4)(iii)(C) of this section, the component
part does not qualify for the additional first year depreciation
deduction. However, pursuant to paragraphs (b)(4)(iii)(A) and (C) of
this section, the new
[[Page 52996]]
plant constructed for M will qualify for the 30-percent additional
first year depreciation deduction because construction of the new
plant began after September 10, 2001, and before May 6, 2003.
Accordingly, the unadjusted depreciable basis of the new plant that
is eligible for the 30-percent additional first year depreciation
deduction must not include the unadjusted depreciable basis of the
new turbine.
Example 7. Same facts as Example 6 except that M entered into
the written binding contract to acquire the new turbine on September
30, 2002, and construction of the new plant commenced on August 1,
2001. Because M began construction of the new plant prior to
September 11, 2001, pursuant to paragraphs (b)(4)(iii)(A) and (C) of
this section, neither the new plant constructed for M nor the
turbine will qualify for the additional first year depreciation
deduction because self-construction of the new plant began prior to
September 11, 2001.
Example 8. On September 1, 2001, N began constructing property
for its own use. On October 1, 2001, N sold its rights to the
property to O, a related party under section 267(b). Pursuant to
paragraph (b)(4)(iv) of this section, the property is not eligible
for the additional first year depreciation deduction because N and O
are related parties and construction of the property by N began
prior to September 11, 2001.
Example 9. On September 1, 2001, P entered into a written
binding contract to acquire property. On October 1, 2001, P sold its
rights to the property to Q, a related party under section 267(b).
Pursuant to paragraph (b)(4)(iv) of this section, the property is
not eligible for the additional first year depreciation deduction
because P and Q are related parties and a written binding contract
for the acquisition of the property was in effect prior to September
11, 2001.
Example 10. Prior to September 11, 2001, R began constructing an
electric generation power plant for its own use. On May 1, 2003,
prior to the completion of the power plant, R transferred the rights
to own and use this power plant to S, an unrelated party, for
$6,000,000. Between May 6, 2003, and June 30, 2003, S, a calendar-
year taxpayer, incurred another $1,200,000 to complete the
construction of the power plant and, on August 1, 2003, S placed the
power plant in service. Because R and S are not related parties, the
transaction between R and S will not be a disqualified transaction
pursuant to paragraph (b)(4)(iv) of this section. Accordingly, S's
total expenditures of $7,200,000 for the power plant qualify for the
additional first year depreciation deduction. S's additional first
year depreciation deduction for the power plant will be $2,400,000,
computed as $6,000,000 multiplied by 30 percent, plus $1,200,000
multiplied by 50 percent. The $6,000,000 portion of the total
$7,200,000 unadjusted depreciable basis qualifies for the 30-percent
additional first year depreciation deduction because that portion of
the total unadjusted depreciable basis was acquired by S after
September 10, 2001, and before May 6, 2003. However, because S began
construction to complete the power plant after May 5, 2003, the
$1,200,000 portion of the total $7,200,000 unadjusted depreciable
basis qualifies for the 50-percent additional first year
depreciation deduction.
Example 11. On September 1, 2001, T acquired and placed in
service equipment. On October 15, 2001, T sells the equipment to U,
an unrelated party, and leases the property back from U in a sale-
leaseback transaction. Pursuant to paragraph (b)(4)(iv) of this
section, the equipment does not qualify for the additional first
year depreciation deduction because T, the user of the equipment,
acquired the equipment prior to September 11, 2001.
(5) Placed-in-service date--(i) In general. Depreciable property
will meet the requirements of this paragraph (b)(5) if the property is
placed in service by the taxpayer before January 1, 2005, or, in the
case of property described in section 168(k)(2)(B), is placed in
service by the taxpayer before January 1, 2006.
(ii) Sale-leaseback and syndication transactions--(A) Sale-
leaseback transaction. If qualified property is originally placed in
service after September 10, 2001, or 50-percent bonus depreciation
property is originally placed in service after May 5, 2003, by a person
and sold to a taxpayer and leased back to the person by the taxpayer
within three months after the date the property was originally placed
in service by the person, the property is treated as originally placed
in service by the taxpayer-lessor not earlier than the date on which
the property is used by the lessee under the leaseback.
(B) Syndication transaction. If qualified property is originally
placed in service after September 10, 2001, or 50-percent bonus
depreciation property is originally placed in service after May 5,
2003, by a lessor (including by operation of paragraph (b)(5)(ii)(A) of
this section) and 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, 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.
(C) Sale-leaseback transaction followed by a syndication
transaction. If a sale-leaseback transaction that satisfies the
requirements in paragraph (b)(5)(ii)(A) of this section is followed by
a syndication transaction that satisfies the requirements in paragraph
(b)(5)(ii)(B) of this section, the placed-in-service date of the
property is determined in accordance with paragraph (b)(5)(ii)(B) of
this section.
(iii) Technical termination of a partnership. For purposes of this
paragraph (b)(5), in the case of a technical termination of a
partnership under section 708(b)(1)(B), qualified property or 50-
percent bonus depreciation 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 or the 50-percent bonus depreciation property is
contributed by the terminated partnership to the new partnership.
(iv) Section 168(i)(7) transactions. For purposes of this paragraph
(b)(5), if qualified property or 50-percent bonus depreciation property
is transferred in a transaction described in section 168(i)(7) in the
same taxable year that the qualified property or the 50-percent bonus
depreciation 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 or the 50-
percent bonus depreciation property, as applicable. In the case of
multiple transfers of qualified property or 50-percent bonus
depreciation 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 or the 50-percent
bonus depreciation property, as applicable.
(c) Qualified leasehold improvement property--(1) In general. For
purposes of section 168(k), qualified leasehold improvement property
means any improvement, which is section 1250 property, to an interior
portion of a building that is nonresidential real property if--
(i) The improvement is made under or pursuant to a lease by the
lessee (or any sublessee) of the interior portion, or by the lessor of
that interior portion;
(ii) The interior portion of the building is to be occupied
exclusively by the lessee (or any sublessee) of that interior portion;
and
(iii) The improvement is placed in service more than 3 years after
the date the building was first placed in service by any person.
(2) Certain improvements not included. Qualified leasehold
improvement property does not include any improvement for which the
expenditure is attributable to:
(i) The enlargement of the building;
(ii) Any elevator or escalator;
(iii) Any structural component benefiting a common area; or
[[Page 52997]]
(iv) The internal structural framework of the building.
(3) Definitions. For purposes of this paragraph (c), the following
definitions apply:
(i) Building has the same meaning as that term is defined in Sec.
1.48-1(e)(1).
(ii) Common area means any portion of a building that is equally
available to all users of the building on the same basis for uses that
are incidental to the primary use of the building. For example,
stairways, hallways, lobbies, common seating areas, interior and
exterior pedestrian walkways and pedestrian bridges, loading docks and
areas, and rest rooms generally are treated as common areas if they are
used by different lessees of a building.
(iii) Elevator and escalator have the same meanings as those terms
are defined in Sec. 1.48-1(m)(2).
(iv) Enlargement has the same meaning as that term is defined in
Sec. 1.48-12(c)(10).
(v) Internal structural framework has the same meaning as that term
is defined in Sec. 1.48-12(b)(3)(i)(D)(iii).
(vi) Lease has the same meaning as that term is defined in section
168(h)(7). In addition, a commitment to enter into a lease is treated
as a lease, and the parties to the commitment are treated as lessor and
lessee. However, a lease between related persons is not considered a
lease. For purposes of the preceding sentence, related persons are--
(A) Members of an affiliated group (as defined in section 1504 and
the regulations thereunder); and
(B) Persons having a relationship described in section 267(b) and
the regulations thereunder. For purposes of applying section 267(b),
the language ``80 percent or more'' is used instead of ``more than 50
percent.''
(vii) Nonresidential real property has the same meaning as that
term is defined in section 168(e)(2)(B).
(viii) Structural component has the same meaning as that term is
defined in Sec. 1.48-1(e)(2).
(d) Computation of depreciation deduction for qualified property or
50-percent bonus depreciation property--(1) Additional first year
depreciation deduction--(i) In general. 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(k)-1T(a)(2)(iii)) of the qualified property by 30 percent. Except
as provided in paragraph (f)(5) of this section, the allowable
additional first year depreciation deduction for 50-percent bonus
depreciation property is determined by multiplying the unadjusted
depreciable basis (as defined in Sec. 1.168(k)-1T(a)(2)(iii)) of the
50-percent bonus depreciation property by 50 percent. Except as
provided in paragraph (f)(1) of this section, the 30-percent or 50-
percent 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 or 50-percent bonus depreciation
property placed in service and disposed of in the same taxable year.
See paragraph (f)(5) of this section for qualified property or 50-
percent bonus depreciation property acquired in a like-kind exchange or
as a result of an involuntary conversion.
(ii) Property having a longer production period. For purposes of
paragraph (d)(1)(i) of this section, the unadjusted depreciable basis
(as defined in Sec. 1.168(k)-1T(a)(2)(iii)) of qualified property or
50-percent bonus depreciation 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
after September 10, 2001 (for qualified property), or May 5, 2003 (for
50-percent bonus depreciation property), and before January 1, 2005.
(iii) Alternative minimum tax. The 30-percent or 50-percent
additional first year depreciation deduction is allowed for alternative
minimum tax purposes for the taxable year in which the qualified
property or the 50-percent bonus depreciation property is placed in
service by the taxpayer. The 30-percent or 50-percent 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.
(2) Otherwise allowable depreciation deduction. (i) In general.
Before determining the amount otherwise allowable as a depreciation
deduction for the qualified property or the 50-percent bonus
depreciation 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 or the 50-percent bonus
depreciation property. This remaining adjusted depreciable basis is
equal to the unadjusted depreciable basis of the qualified property or
the 50-percent bonus depreciation 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 or the 50-percent bonus depreciation property is then
depreciated using the applicable depreciation provisions under the
Internal Revenue Code for the qualified property or the 50-percent
bonus depreciation property. The remaining adjusted depreciable basis
of the qualified property or the 50-percent bonus depreciation 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 or the 50-percent bonus depreciation 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 or the 50-percent bonus
depreciation property is based on the remaining adjusted depreciable
basis for alternative minimum tax purposes. The remaining adjusted
depreciable basis of the qualified property or the 50-percent bonus
depreciable 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 or the 50-percent bonus depreciation
property for regular tax purposes.
(3) Examples. This paragraph (d) is illustrated by the following
examples:
Example 1. On March 1, 2003, V, a calendar-year taxpayer,
purchased and placed in service qualified property that costs $1
million and is 5-year property under section 168(e). V depreciates
its 5-year property placed in service in 2003 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 2003, V is allowed a 30-
percent additional first year depreciation deduction of $300,000
(the unadjusted depreciable basis of $1 million multiplied by .30).
Next, V must reduce the unadjusted depreciable basis of $1 million
by the additional first year depreciation deduction of $300,000 to
determine the remaining adjusted depreciable basis of $700,000.
Then, V's depreciation deduction allowable in 2003 for the remaining
adjusted depreciable basis of $700,000 is $140,000 (the remaining
adjusted depreciable basis of $700,000 multiplied by the annual
depreciation rate of .20 for recovery year 1).
[[Page 52998]]
Example 2. On June 1, 2003, W, a calendar-year taxpayer,
purchased and placed in service 50-percent bonus depreciation
property that costs $126,000. The property qualifies for the
expensing election under section 179 and is 5-year property under
section 168(e). W did not purchase any other section 179 property in
2003. W makes the election under section 179 for the property and
depreciates its 5-year property placed in service in 2003 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 2003, W is
first allowed a $100,000 deduction under section 179. Next, W must
reduce the cost of $126,000 by the section 179 deduction of $100,000
to determine the unadjusted depreciable basis of $26,000. Then, for
2003, W is allowed a 50-percent additional first year depreciation
deduction of $13,000 (the unadjusted depreciable basis of $26,000
multiplied by .50). Next, W must reduce the unadjusted depreciable
basis of $26,000 by the additional first year depreciation deduction
of $13,000 to determine the remaining adjusted depreciable basis of
$13,000. Then, W's depreciation deduction allowable in 2003 for the
remaining adjusted depreciable basis of $13,000 is $2,600 (the
remaining adjusted depreciable basis of $13,000 multiplied by the
annual depreciation rate of .20 for recovery year 1).
(e) Election not to deduct additional first year depreciation--(1)
In general. If a taxpayer makes an election under this paragraph (e),
the election applies to all qualified property or 50-percent bonus
depreciation property, as applicable, that is in the same class of
property and placed in service in the same taxable year. The rules of
this paragraph (e) apply to the following elections provided under
section 168(k):
(i) Qualified property. A taxpayer may make an election not to
deduct the 30-percent 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, no additional first year
depreciation deduction is allowable for the property placed in service
during the taxable year in the class of property.
(ii) 50-percent bonus depreciation property. For any class of
property that is 50-percent bonus depreciation property placed in
service during the taxable year, a taxpayer may make an election--
(A) To deduct the 30-percent, instead of the 50-percent, additional
first year depreciation. If this election is made, the allowable
additional first year depreciation deduction is determined as though
the class of property is qualified property under section 168(k)(2); or
(B) Not to deduct any additional first year depreciation. If this
election is made, no additional first year depreciation deduction is
allowable for the class of property.
(2) Definition of class of property. For purposes of this paragraph
(e), the term class of property means:
(i) Except for the property described in paragraphs (e)(2)(ii) and
(iv) of this section, each class of property described in section
168(e) (for example, 5-year property);
(ii) Water utility property as defined in section 168(e)(5) and
depreciated under section 168;
(iii) Computer software as defined in, and depreciated under,
section 167(f)(1) and the regulations thereunder; or
(iv) Qualified leasehold improvement property as defined in
paragraph (c) of this section and depreciated under section 168.
(3) Time and manner for making election--(i) Time for making
election. Except as provided in paragraph (e)(4) of this section, any
election specified in paragraph (e)(1) 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 or the 50-percent bonus
depreciation property, as applicable, is placed in service by the
taxpayer.
(ii) Manner of making election. Except as provided in paragraph
(e)(4) of this section, any election specified in paragraph (e)(1) 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 or 50-
percent bonus depreciation 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). 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.
(4) Special rules for 2000 or 2001 returns. For the election
specified in paragraph (e)(1)(i) of this section for qualified property
placed in service by the taxpayer during the taxable year that included
September 11, 2001, the taxpayer should refer to the guidance provided
by the Internal Revenue Service for the time and manner of making this
election on the 2000 or 2001 Federal tax return for the taxable year
that included September 11, 2001 (for further guidance, see sections
3.03(3) and 4 of Rev. Proc. 2002-33 (2002-1 C.B. 963), Rev. Proc. 2003-
50 (2003-29 I.R.B. 119), and Sec. 601.601(d)(2)(ii)(b) of this
chapter).
(5) Failure to make election. If a taxpayer does not make the
applicable election specified in paragraph (e)(1) of this section
within the time and in the manner prescribed in paragraph (e)(3) or (4)
of this section, the amount of depreciation allowable for that property
under section 167(f)(1) or under section 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) 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).
(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 or
50-percent bonus depreciation property placed in service and disposed
of during the same taxable year.
(ii) Technical termination of a partnership. In the case of a
technical termination of a partnership under section 708(b)(1)(B), the
additional first year depreciation deduction is allowable for any
qualified property or 50-percent bonus depreciation property placed in
service 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 or the 50-percent bonus depreciation
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 or the 50-percent bonus
depreciation property was contributed by the terminated partnership to
the new partnership. However, if qualified property or 50-percent bonus
depreciation property is both placed in service 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 or
50-percent bonus depreciation property is transferred in a transaction
described in section 168(i)(7) in the same taxable year that the
qualified property or the
[[Page 52999]]
50-percent bonus depreciation property is placed in service by the
transferor, the additional first year depreciation deduction is
allowable for the qualified property or the 50-percent bonus
depreciation property. The allowable additional first year depreciation
deduction for the qualified property or the 50-percent bonus
depreciation property for the transferor's taxable year in which the
property is placed in service 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, if qualified property or 50-percent bonus depreciation
property is both placed in service 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. X and Y are equal partners in Partnership XY, a
general partnership. On February 1, 2002, Partnership XY purchased
and placed in service new equipment at a cost of $30,000. On March
1, 2002, X sells its entire 50 percent interest to Z in a transfer
that terminates the partnership under section 708(b)(1)(B). As a
result, terminated Partnership XY is deemed to have contributed the
equipment to new Partnership XY. Pursuant to paragraph (f)(1)(ii) of
this section, new Partnership XY, not terminated Partnership XY, is
eligible to claim the 30-percent additional first year depreciation
deduction allowable for the equipment for the taxable year 2002
(assuming all other requirements are met).
Example 2. On January 5, 2002, BB purchased and placed in
service new office desks for a total amount of $8,000. On August 20,
2002, BB transferred the office desks to Partnership BC in a
transaction described in section 721. BB and Partnership BC are
calendar-year taxpayers. Because the transaction between BB and
Partnership BC is a transaction described in section 168(i)(7),
pursuant to paragraph (f)(1)(iii) of this section the 30-percent
additional first year depreciation deduction allowable for the desks
is allocated between BB 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 30-percent additional first year depreciation deduction
allowable for the desks for 2002 of $2,400 (the unadjusted
depreciable basis of $8,000 multiplied by .30) is allocated between
BB and Partnership BC based on the number of months that BB and
Partnership BC held the desks in service. Thus, because the desks
were held in service by BB for 7 of 12 months, which includes the
month in which BB placed the desks in service but does not include
the month in which the desks were transferred, BB is allocated
$1,400 (\7/12\ x $2,400 additional first year depreciation
deduction). Partnership BC is allocated $1,000, the remaining \5/12\
of the $2,400 additional first year depreciation deduction allowable
for the desks.
(2) Redetermination of basis. If the unadjusted depreciable basis
(as defined in Sec. 1.168(k)-1T(a)(2)(iii)) of qualified property or
50-percent bonus depreciation property is redetermined (for example,
due to contingent purchase price or discharge of indebtedness) by
January 1, 2005 (or January 1, 2006, for property described in section
168(k)(2)(B)), the additional first year depreciation deduction
allowable for the qualified property or the 50-percent bonus
depreciation property is redetermined as follows:
(i) Increase in basis. For the taxable year in which an increase in
basis of qualified property or 50-percent bonus depreciation 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 30 percent or, for 50-percent
bonus depreciation property, by multiplying the amount of the increase
in basis for this property by 50 percent. For purposes of this
paragraph (f)(2)(i), the 30-percent additional first year depreciation
deduction applies to the increase in basis if the underlying property
is qualified property and the 50-percent additional first year
depreciation deduction applies to the increase in basis if the
underlying property is 50-percent bonus depreciation property. To
determine the amount otherwise allowable as a depreciation deduction
for the increase in basis of qualified property or 50-percent bonus
depreciation property, the amount of the increase in basis of the
qualified property or the 50-percent bonus depreciation 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 or 50-percent bonus depreciation 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 or the 50-percent bonus depreciation property, as applicable,
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 or 50-percent bonus depreciation
property, as applicable, 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 or 50-percent bonus depreciation
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 or 50-percent bonus depreciation property
occurs, the taxpayer shall include in the taxpayer's income the excess
additional first year depreciation deduction previously claimed for the
qualified property or the 50-percent bonus depreciation property. This
excess additional first year depreciation deduction for qualified
property is determined by multiplying the amount of the decrease in
basis for this property by 30 percent. The excess additional first year
depreciation deduction for 50-percent bonus depreciation property is
determined by multiplying the amount of the decrease in basis for this
property by 50 percent. For purposes of this paragraph (f)(2)(ii), the
30-percent additional first year depreciation deduction applies to the
decrease in basis if the underlying property is qualified property and
the 50-percent additional first year depreciation deduction applies to
the decrease in basis if the underlying property is 50-percent bonus
depreciation 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 or the 50-percent bonus depreciation property before
the decrease in basis or if the taxpayer claimed more than the
additional first year depreciation deduction allowable for the
qualified property or the 50-percent bonus depreciation 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 or the 50-
percent bonus depreciation property, as applicable, before the decrease
in basis. To determine the amount includible in the taxpayer's income
for the excess
[[Page 53000]]
depreciation previously claimed (other than the additional first year
depreciation deduction) resulting from the decrease in basis of the
qualified property or the 50-percent bonus depreciation property, the
amount of the decrease in basis of the qualified property or the 50-
percent bonus depreciation property must be adjusted by the excess
additional first year depreciation deduction includible in the
taxpayer's income (as determined under this paragraph) and the
remaining decrease in basis of--
(A) Qualified property or 50-percent bonus depreciation property
(except for computer software described in paragraph (b)(2)(i)(B) of
this section) is included in the taxpayer's income over the recovery
period of the qualified property or the 50-percent bonus depreciation
property, as applicable, 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 or 50-
percent bonus depreciation property, as applicable, that applies in the
taxable year in which the decrease in basis occurs; and
(B) Computer software (as defined in paragraph (b)(2)(i)(B) of this
section) that is qualified property or 50-percent bonus depreciation
property is included in the taxpayer's income 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 decrease in basis occurs.
(iii) Definition. 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, 2002, CC, a cash-basis taxpayer,
purchased and placed in service qualified property that is 5-year
property at a cost of $200,000. In addition to the $200,000, CC
agrees to pay the seller 25 percent of the gross profits from the
operation of the property in 2002. On May 15, 2003, CC paid to the
seller an additional $10,000. CC depreciates the 5-year property
placed in service in 2002 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 2002, CC is allowed a 30-percent additional first year
depreciation deduction of $60,000 (the unadjusted depreciable basis
of $200,000 multiplied by .30). In addition, CC's depreciation
deduction for 2002 for the remaining adjusted depreciable basis of
$140,000 (the unadjusted depreciable basis of $200,000 reduced by
the additional first year depreciation deduction of $60,000) is
$28,000 (the remaining adjusted depreciable basis of $140,000
multiplied by the annual depreciation rate of .20 for recovery year
1).
(iii) For 2003, CC's depreciation deduction for the remaining
adjusted depreciable basis of $140,000 is $44,800 (the remaining
adjusted depreciable basis of $140,000 multiplied by the annual
depreciation rate of .32 for recovery year 2). In addition, pursuant
to paragraph (f)(2)(i) of this section, CC is allowed an additional
first year depreciation deduction for 2003 for the $10,000 increase
in basis of the qualified property. Consequently, CC is allowed an
additional first year depreciation deduction of $3,000 (the increase
in basis of $10,000 multiplied by .30). Also, CC is allowed a
depreciation deduction for 2003 attributable to the remaining
increase in basis of $7,000 (the increase in basis of $10,000
reduced by the additional first year depreciation deduction of
$3,000). The depreciation deduction allowable for 2003 attributable
to the remaining increase in basis of $7,000 is $3,111 (the
remaining increase in basis of $7,000 multiplied by .4444, which is
equal to 1/remaining recovery period of 4.5 years at January 1,
2003, multiplied by 2). Accordingly, for 2003, CC's total
depreciation deduction allowable for the qualified property is
$50,911.
Example 2. (i) On May 15, 2002, CC purchased and placed in
service qualified property that is 5-year property at a cost of
$400,000. To purchase the property, DD borrowed $250,000 from Bank2.
On May 15, 2003, Bank2 forgives $50,000 of the indebtedness. DD
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. DD depreciates the 5-year
property placed in service in 2002 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 2002, DD is allowed a 30-percent additional first year
depreciation deduction of $120,000 (the unadjusted depreciable basis
of $400,000 multiplied by .30). In addition, DD's depreciation
deduction allowable for 2002 for the remaining adjusted depreciable
basis of $280,000 (the unadjusted depreciable basis of $400,000
reduced by the additional first year depreciation deduction of
$120,000) is $56,000 (the remaining adjusted depreciable basis of
$280,000 multiplied by the annual depreciation rate of .20 for
recovery year 1).
(iii) For 2003, DD's deduction for the remaining adjusted
depreciable basis of $280,000 is $89,600 (the remaining adjusted
depreciable basis of $280,000 multiplied by the annual depreciation
rate of .32 for recovery year 2). However, pursuant to paragraph
(f)(2)(ii) of this section, DD must include in its taxable income
for 2003 the excess depreciation previously claimed for the $50,000
decrease in basis of the qualified property. Consequently, DD must
include in its taxable income for 2003 the excess additional first
year depreciation of $4,500 (the decrease in basis of $50,000
multiplied by .30). Also, DD must include in its taxable income for
2003 the excess depreciation attributable to the remaining decrease
in basis of $45,500 (the decrease in basis of $50,000 reduced by the
excess additional first year depreciation of $4,500). The amount
includible in taxable income for 2003 for the remaining decrease in
basis of $45,500 is $20,222 (the remaining decrease in basis of
$45,500 multiplied by .4444, which is equal to 1/remaining recovery
period of 4.5 years at January 1, 2003, multiplied by 2).
Accordingly, for 2003, DD's total depreciation deduction allowable
for the qualified property is $64,878 ($89,600 minus $4,500 minus
$20,222).
(3) Section 1245 and 1250 depreciation recapture. For purposes of
section 1245 and the regulations thereunder, the additional first year
depreciation deduction is an amount allowed or allowable for
depreciation. Further, for purposes of section 1250(b) and the
regulations thereunder, 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 or 50-percent bonus depreciation property,
even if the taxpayer makes the election to amortize the certified
pollution control facility under section 169 and the regulations
thereunder 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 acquired MACRS property or
acquired computer software that is eligible for the additional first
year depreciation deduction under section 168(k) at the time of
replacement provided the time of replacement is after September 10,
2001, and before January 1, 2005, or, in the case of acquired MACRS
property or acquired computer software that is qualified property, or
50-percent bonus depreciation property, described in section
168(k)(2)(B), the time of replacement is after September 10, 2001, and
before January 1, 2006.
(ii) Definitions. For purposes of this paragraph (f)(5), the
following definitions apply:
(A) Acquired MACRS property is MACRS property in the hands of the
acquiring taxpayer that is acquired in a transaction described in
section 1031(a), (b), or (c) for other MACRS property or that is
acquired in connection with an involuntary conversion of other MACRS
[[Page 53001]]
property in a transaction to which section 1033 applies.
(B) Exchanged or involuntarily converted MACRS property is MACRS
property that is transferred by the taxpayer in a transaction described
in section 1031(a), (b), or (c), or that is converted as a result of an
involuntary conversion to which section 1033 applies.
(C) Acquired 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 in a like-kind exchange under section 1031 or
as a result of an involuntary conversion under section 1033.
(D) Exchanged or involuntarily converted computer software is
computer software (as defined in paragraph (b)(2)(i)(B) of this
section) that is transferred by the taxpayer in a like-kind exchange
under section 1031 or that is converted as a result of an involuntary
conversion under section 1033.
(E) Time of disposition is when the disposition of the exchanged or
involuntarily converted MACRS property or the exchanged or
involuntarily converted computer software, as applicable, takes place.
(F) Time of replacement is the later of:
(1) When the property received in the exchange or involuntary
conversion is placed in service; or
(2) The time of disposition of involuntarily converted property.
(G) Carryover basis is the lesser of:
(1) The basis in the acquired MACRS property or acquired computer
software, as applicable and as determined under section 1031(d) or
1033(b) and the regulations thereunder; or
(2) The adjusted depreciable basis of the exchanged or
involuntarily converted MACRS property or the exchanged or
involuntarily converted computer software, as applicable.
(H) Excess basis is any excess of the basis in the acquired MACRS
property or acquired computer software, as applicable and as determined
under section 1031(d) or 1033(b) and the regulations thereunder, over
the carryover basis as determined under paragraph (f)(5)(ii)(G) of this
section.
(I) Remaining carryover basis is the carryover basis as determined
under paragraph (f)(5)(ii)(G) of this section reduced by--
(1) The percentage of 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 thereunder (including section 1016(a)(2) and
(3)) for periods prior to the disposition of the exchanged or
involuntarily converted 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 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; and
(3) Any adjustments to basis provided by other provisions of the
Code and the regulations thereunder.
(iii) Computation--(A) In general. Assuming all other requirements
are met, the remaining carryover basis for the year of replacement and
the remaining excess basis, if any, for the year of replacement for the
acquired MACRS property or the acquired computer software, as
applicable, are eligible for the additional first year depreciation
deduction. The 30-percent additional first year depreciation deduction
applies to the remaining carryover basis and the remaining excess
basis, if any, of the acquired MACRS property or the acquired computer
software if the time of replacement is after September 10, 2001, and
before May 6, 2003, or if the taxpayer made the election provided in
paragraph (e)(1)(ii)(A) of this section. The 50-percent additional
first year depreciation deduction applies to the remaining carryover
basis and the remaining excess basis, if any, of the acquired MACRS
property or the acquired computer software if the time of replacement
is after May 5, 2003, and before January 1, 2005, or before January 1,
2006, for 50-percent bonus depreciation property described in section
168(k)(2)(B). The additional first year depreciation deduction is
computed separately for the remaining carryover basis and the remaining
excess basis. Rules similar to the rules provided in paragraph (d) of
this section apply to property described in section 168(k)(2)(B) and
for alternative minimum tax purposes.
(B) Year of disposition and year of replacement. The additional
first year depreciation deduction is allowable for the acquired MACRS
property or acquired computer software in the year of replacement.
However, the additional first year depreciation deduction is not
allowable for the exchanged or involuntarily converted MACRS property
or the exchanged or involuntarily converted computer software if the
MACRS property or computer software, as applicable, is placed in
service and disposed of in an exchange or involuntary conversion in the
same taxable year.
(iv) Sale-leaseback transaction. For purposes of this paragraph
(f)(5), if MACRS property or computer software is sold to a taxpayer
and leased back to a person by the taxpayer within three months after
the time of disposition of the MACRS property or computer software, as
applicable, the time of replacement for this MACRS property or computer
software, as applicable, shall not be earlier than the date on which
the MACRS property or computer software, as applicable, is used by the
lessee under the leaseback.
(v) Examples. The application of this paragraph (f)(5) is
illustrated by the following examples:
Example 1. (i) In December 2002, EE, 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)(1) and is 5-year property under section 168(e). EE
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. EE elected to use the optional depreciation tables to
compute the depreciation allowance for Canopy V1. On January 1,
2003, Canopy V1 was destroyed in a fire and was no longer usable in
EE's business. On June 1, 2003, in a transaction described in
section 1033(a)(2), EE acquired and placed in service Canopy W1 with
all of the $160,000 of insurance proceeds EE received due to the
loss of Canopy V1. Canopy W1 is 50-percent bonus depreciation
property under section 168(k)(4) and is 5-year property under
section 168(e).
(ii) For 2002, EE is allowed a 30-percent additional first year
depreciation deduction of $60,000 for Canopy V1 (the unadjusted
depreciable basis of $200,000 multiplied by .30), and a regular
MACRS depreciation deduction of $28,000 for Canopy V1 (the remaining
adjusted depreciable basis of $140,000 multiplied by the annual
depreciation rate of .20 for recovery year 1).
(iii) Pursuant to paragraph (f)(5)(iii)(A) of this section, the
additional first year depreciation deduction allowable for Canopy W1
equals $56,000 (.50 of Canopy W1's remaining carryover basis of
$112,000 (Canopy V1's remaining adjusted depreciable basis of
$140,000 minus 2002 regular MACRS depreciation deduction of
$28,000).
Example 2. (i) Same facts as in Example 1, except EE elected not
to deduct the additional first year depreciation for 5-year property
placed in service in 2002. EE deducted the additional first year
depreciation for 5-year property placed in service in 2003.
(ii) For 2002, EE 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 .20 for
recovery year 1).
(iii) Pursuant to paragraph (f)(5)(iii)(A) of this section, the
additional first year
[[Page 53002]]
depreciation deduction allowable for Canopy W1 equals $80,000 (.50
of Canopy W1's remaining carryover basis of $160,000 (Canopy V1's
unadjusted depreciable basis of $200,000 minus 2002 regular MACRS
depreciation deduction of $40,000).
Example 3. (i) In December 2001, FF, a calendar year
corporation, acquired for $10,000 and placed in service Computer X2.
Computer X2 is qualified property under section 168(k)(1) and is 5-
year property under section 168(e). FF 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. FF elected to use the optional
depreciation tables to compute the depreciation allowance for
Computer X2. On January 1, 2002, FF acquired Computer Y2 by
exchanging Computer X2 and $1,000 cash in a transaction described in
section 1031(a). Computer Y2 is qualified property under section
168(k)(1) and is 5-year property under section 168(e).
(ii) For 2001, FF is allowed a 30-percent additional first year
depreciation deduction of $3,000 for Computer X2 (unadjusted basis
of $10,000 multiplied by .30), and a regular MACRS depreciation
deduction of $1,400 for Computer X2 (the remaining adjusted
depreciable basis of $7,000 multiplied by the annual depreciation
rate of .20 for recovery year 1).
(iii) Pursuant to paragraph (f)(5)(iii)(A) of this section, the
30-percent additional first year depreciation deduction for Computer
Y2 is allowable for the remaining carryover basis of $5,600
(Computer X2's unadjusted depreciable basis of $10,000 minus
additional first year depreciation deduction allowable of $3,000
minus 2001 regular MACRS depreciation deduction of $1,400) and for
the remaining excess basis of $1,000 (cash paid for Computer Y2).
Thus, the 30-percent additional first year depreciation deduction
for the remaining carryover basis equals $1,680 ($5,600 multiplied
by .30) and for the remaining excess basis equals $300 ($1,000
multiplied by .30), which totals $1,980.
Example 4. (i) In September 2002, GG, a June 30 year-end
corporation, acquired for $20,000 and placed in service Equipment
X3. Equipment X3 is qualified property under section 168(k)(1) and
is 5-year property under section 168(e). GG 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. GG elected to use the
optional depreciation tables to compute the depreciation allowance
for Equipment X3. In December 2002, GG acquired Equipment Y3 by
exchanging Equipment X3 and $5,000 cash in a transaction described
in section 1031(a). Equipment Y3 is qualified property under section
168(k)(1) and is 5-year property under section 168(e).
(ii) Pursuant to paragraph (f)(5)(iii)(B) of this section, no
additional first year depreciation deduction is allowable for
Equipment X3 and, pursuant to Sec. 1.168(d)-1T(b)(3)(ii), no
regular depreciation deduction is allowable for Equipment X3.
(iii) Pursuant to paragraph (f)(5)(iii)(A) of this section, the
30-percent additional first year depreciation deduction for
Equipment Y3 is allowable for the remaining carryover basis of
$20,000 (Equipment X3's unadjusted depreciable basis of $20,000) and
for the remaining excess basis of $5,000 (cash paid for Equipment
Y3). Thus, the 30-percent additional first year depreciation
deduction for the remaining carryover basis equals $6,000 ($20,000
multiplied by .30) and for the remaining excess basis equals $1,500
($5,000 multiplied by .30), which totals $7,500.
Example 5. (i) Same facts as in Example 4. GG depreciated
Equipment Y3 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. GG elected to
use the optional depreciation tables to compute the depreciation
allowance for Equipment Y3. On July 1, 2003, GG acquired Equipment
Z1 by exchanging Equipment Y3 in a transaction described in section
1031(a). Equipment Z1 is 50-percent bonus depreciation property
under section 168(k)(4) and is 5-year property under section 168(e).
(ii) For the taxable year ending June 30, 2003, the regular
MACRS depreciation deduction allowable for the remaining carryover
basis of Equipment Y3 is $2,800 (the remaining carryover basis of
$14,000 multiplied by the annual depreciation rate of .20 for
recovery year 1) and for the remaining excess basis of Equipment Y3
is $700 (the remaining excess basis of $3,500 multiplied by the
annual depreciation rate of .20 for recovery year 1), which totals
$3,500.
(iii) For the taxable year ending June 30, 2004, pursuant to
paragraph (f)(5)(iii)(A) of this section, the 50-percent additional
first year depreciation deduction allowable for Equipment Z1 is
$7,000 (.50 of Equipment Z1's remaining carryover basis of $14,000
(Equipment Y3's total unadjusted depreciable basis of $25,000 minus
the total additional first year depreciation deduction of $7,500
minus the total regular MACRS depreciation deduction of $3,500).
(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 regulations thereunder.
(ii) Conversion to personal use. If qualified property or 50-
percent bonus depreciation 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 10, 2001 (for
qualified property), or after May 5, 2003 (for 50-percent bonus
depreciation property), and converted by the taxpayer from personal use
to business or income-producing use by January 1, 2005. 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 or 50-percent bonus
depreciation property changes in the hands of the same taxpayer
subsequent to the taxable year the qualified property or the 50-percent
bonus depreciation property, as applicable, is placed in service and,
as a result of the change in use, the property is no longer qualified
property or 50-percent bonus depreciation property, as applicable, the
additional first year depreciation deduction allowable for the
qualified property or the 50-percent bonus depreciation property, as
applicable, is not redetermined.
(B) If depreciable property is not qualified property or 50-percent
bonus depreciation 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 or 50-
percent bonus depreciation property in the taxable year of the change
in use.
[[Page 53003]]
(v) Examples. The application of this paragraph (f)(6) is
illustrated by the following examples:
Example 1. (i) On January 1, 2002, HH, a calendar year
corporation, purchased and placed in service several new computers
at a total cost of $100,000. HH used these computers within the
United States for 3 months in 2002 and then moved and used the
computers outside the United States for the remainder of 2002. On
January 1, 2003, HH permanently returns the computers to the United
States for use in its business.
(ii) For 2002, the computers are considered as used
predominantly outside the United States in 2002 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)(A)2) of this section, the
computers are not qualified property in 2002, the placed-in-service
year. Thus, pursuant to (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 2003.
Example 2. (i) On February 8, 2002, II, 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 168(e) and is qualified property under
section 168(k). II depreciates its 5-year property placed in service
in 2002 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, 2003, due to changes in II's business circumstances, II
permanently moves the equipment to its plant in Mexico.
(ii) For 2002, II is allowed a 30-percent additional first year
depreciation deduction of $300,000 (the adjusted depreciable basis
of $1,000,000 multiplied by .30). In addition, II's depreciation
deduction allowable in 2002 for the remaining adjusted depreciable
basis of $700,000 (the unadjusted depreciable basis of $1,000,000
reduced by the additional first year depreciation deduction of
$300,000) is $140,000 (the remaining adjusted depreciable basis of
$700,000 multiplied by the annual depreciation rate of .20 for
recovery year 1).
(iii) For 2003, 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 $560,000 for the equipment is required to be
depreciated under the alternative depreciation system of section
168(g) beginning in 2003. However, the additional first year
depreciation deduction of $300,000 allowed for the equipment in 2002
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--
(i) $4,600 for qualified property acquired by a taxpayer after
September 10, 2001, and before May 6, 2003; and
(ii) $7,650 for qualified property or 50-percent bonus depreciation
property acquired by a taxpayer after May 5, 2003.
(9) Section 754 election. In general, for purposes of section
168(k) any increase in basis of qualified property or 50-percent bonus
depreciation property due to a section 754 election is not eligible for
the additional first year depreciation deduction. However, if qualified
property or 50-percent bonus depreciation property is placed in service
by a partnership in the taxable year the partnership terminates under
section 708(b)(1)(B), any increase in basis of the qualified property
or the 50-percent bonus depreciation property due to a section 754
election is eligible for the additional first year depreciation
deduction.
(g) Effective date--(1) In general. Except as provided in
paragraphs (g)(2) and (3) of this section, this section applies to
qualified property under section 168(k)(2) acquired by a taxpayer after
September 10, 2001, and to 50-percent bonus depreciation property under
section 168(k)(4) acquired by a taxpayer after May 5, 2003. This
section expires on September 8, 2006.
(2) Technical termination of a partnership or section 168(i)(7)
transactions. If qualified property or 50 percent bonus depreciation
property is transferred in a technical termination of a partnership
under section 708(b)(1)(B) or in a transaction described in section
168(i)(7) for a taxable year ending on or before September 8, 2003, and
the additional first year depreciation deduction allowable for the
property was not determined in accordance with paragraph (f)(1)(ii) or
(iii) of this section, as applicable, the Internal Revenue Service will
allow any reasonable method of determining the additional first year
depreciation deduction allowable for the property in the year of the
transaction that is consistently applied to the property by all parties
to the transaction.
(3) Like-kind exchanges and involuntary conversions. If a taxpayer
did not claim on a federal tax return for a taxable year ending on or
before September 8, 2003, the additional first year depreciation
deduction for the remaining carryover basis of qualified property or
50-percent bonus depreciation property acquired in a transaction
described in section 1031(a), (b), or (c), or in a transaction to which
section 1033 applies and the taxpayer did not make an election not to
deduct the additional first year depreciation deduction for the class
of property applicable to the remaining carryover basis, the Internal
Revenue Service will treat the taxpayer's method of not claiming the
additional first year depreciation deduction for the remaining
carryover basis as a permissible method of accounting and will treat
the amount of the additional first year depreciation deduction
allowable for the remaining carryover basis as being equal to zero,
provided the taxpayer does not claim the additional first year
depreciation deduction for the remaining carryover basis in accordance
with paragraph (g)(4)(ii) of this section.
(4) Change in method of accounting--(i) Special rules for 2000 or
2001 returns. If a taxpayer did not claim on the Federal tax return for
the taxable year that included September 11, 2001, any additional first
year depreciation deduction for a class of property that is qualified
property and did not make an election not to deduct the additional
first year depreciation deduction for that class of property, the
taxpayer should refer to the guidance provided by the Internal Revenue
Service for the time and manner of claiming the additional first year
depreciation deduction for the class of property (for further guidance,
see section 4 of Rev. Proc. 2002-33 (2002-1 C.B. 963), Rev. Proc. 2003-
50 (2003-29 I.R.B. 119), and Sec. 601.601(d)(2)(ii)(b) of this
chapter).
(ii) Like-kind exchanges and involuntary conversions. If a taxpayer
did not claim on a federal tax return for any taxable year ending on or
before September 8, 2003, the additional first year depreciation
deduction allowable for the remaining carryover basis of qualified
property or 50-percent bonus depreciation property acquired in a
transaction described in section 1031(a), (b), or (c), or in a
transaction to which section 1033 applies and the taxpayer did not make
an election not to deduct the additional first year depreciation
deduction for the class of property applicable to the remaining
carryover basis, the taxpayer may claim the additional first year
depreciation deduction allowable for the remaining carryover basis in
accordance with paragraph (f)(5) of this section either:
(A) By filing an amended return (or a qualified amended return, if
applicable (for further guidance, see Rev. Proc. 94-69 (1994-2 C.B.
804) and Sec. 601.601(d)(2)(ii)(b) of this chapter)) on or before
December 31, 2003, for the year of replacement and any affected
subsequent taxable year; or,
[[Page 53004]]
(B) By following the applicable administrative procedures issued
under Sec. 1.446-1(e)(3)(ii) for obtaining the Commissioner's
automatic consent to a change in method of accounting (for further
guidance, see Rev. Proc. 2002-9 (2002-1 C.B. 327) and Sec.
601.601(d)(2)(ii)(b) of this chapter).
0
Par. 8. Section 1.169-3 is amended by:
0
1. Revising paragraphs (a) and (b)(2).
0
2. Adding paragraph (g).
The additions and revisions read as follows:
Sec. 1.169-3 Amortizable basis.
(a) [Reserved]. For further guidance, see Sec. 1.169-3T(a).
* * * * *
(b) * * *
(2) [Reserved]. For further guidance, see Sec. 1.169-3T(b)(2).
* * * * *
(g) Effective date for qualified property, 50-percent bonus
depreciation property, and qualified New York Liberty Zone property.
[Reserved]. For further guidance, see Sec. 1.169-3T(g).
0
Par. 9. Section 1.169-3T is added to read as follows:
Sec. 1.169-3T Amortizable basis (temporary).
(a) In general. The amortizable basis of a certified pollution
control facility for the purpose of computing the amortization
deduction under section 169 is the adjusted basis of the facility for
purposes of determining gain (see part II (section 1011 and following),
subchapter O, chapter 1 of the Internal Revenue Code), in conjuction
with paragraphs (b), (c), and (d) of this section. The adjusted basis
for purposes of determining gain (computed without regard to paragraphs
(b), (c), and (d) of this section) of a facility that performs a
function in addition to pollution control, or that is used in
connection with more than one plant or other property, or both, is
determined under Sec. 1.169-2(a)(3). For rules as to additions and
improvements to such a facility, see paragraph (f) of this section.
Before computing the amortization deduction allowable under section
169, the adjusted basis for purposes of determining gain for a facility
that is placed in service by a taxpayer after September 10, 2001, and
that is qualified property under section 168(k)(2) or Sec. 1.168(k)-
1T, 50-percent bonus depreciation property under section 168(k)(4) or
Sec. 1.168(k)-1T, or qualified New York Liberty Zone property under
section 1400L(b) or Sec. 1.1400L(b)-1T must be reduced by the amount
of the additional first year depreciation deduction allowed or
allowable, whichever is greater, under section 168(k) or section
1400L(b), as applicable, for the facility.
(b) Limitation on post-1968 construction, reconstruction, or
erection. (1) For further guidance, see Sec. 1.169-3(b)(1).
(2) If the taxpayer elects to begin the 60-month amortization
period with the first month of the taxable year succeeding the taxable
year in which the facility is completed or acquired and a depreciation
deduction is allowable under section 167 (including an additional
first-year depreciation allowance under former section 179; for a
facility that is acquired by the taxpayer after September 10, 2001, and
that is qualified property under section 168(k)(2) or Sec. 1.168(k)-1T
or qualified New York Liberty Zone property under section 1400L(b) or
Sec. 1.1400L(b)-1T, the additional first year depreciation deduction
under section 168(k)(1) or 1400L(b), as applicable; and for a facility
that is acquired by the taxpayer after May 5, 2003, and that is 50-
percent bonus depreciation property under section 168(k)(4) or Sec.
1.168(k)-1T, the additional first year depreciation deduction under
section 168(k)(4)) with respect to the facility for the taxable year in
which it is completed or acquired, the amount determined under
paragraph (b)(1) of this section shall be reduced by an amount equal to
the amount of the depreciation deduction allowed or allowable,
whichever is greater, multiplied by a fraction the numerator of which
is the amount determined under paragraph (b)(1) of this section, and
the denominator of which is the facility's total cost. The additional
first-year allowance for depreciation under former section 179 will be
allowable only for the taxable year in which the facility is completed
or acquired and only if the taxpayer elects to begin the amortization
deduction under section 169 with the taxable year succeeding the
taxable year in which such facility is completed or acquired. For a
facility that is acquired by a taxpayer after September 10, 2001, and
that is qualified property under section 168(k)(2) or Sec. 1.168(k)-1T
or qualified New York Liberty Zone property under section 1400L(b) or
Sec. 1.1400L(b)-1T, see Sec. 1.168(k)-1T(f)(4) or Sec. 1.1400L(b)-
1T(f)(4), as applicable, with respect to when the additional first year
depreciation deduction under section 168(k)(1) or 1400L(b) is
allowable. For a facility that is acquired by a taxpayer after May 5,
2003, and that is 50-percent bonus depreciation property under section
168(k)(4) or Sec. 1.168(k)-1T, see Sec. 1.168(k)-1T(f)(4) with
respect to when the additional first year depreciation deduction under
section 168(k)(4) is allowable.
(c) through (f) For further guidance, see Sec. 1.169-3(c) through
(f).
(g) Effective date for qualified property, 50-percent bonus
depreciation property, and qualified New York Liberty Zone property.
This section applies to a certified pollution control facility. This
section also applies to a certified pollution control facility that is
qualified property under section 168(k)(2) or qualified New York
Liberty Zone property under section 1400L(b) acquired by a taxpayer
after September 10, 2001, and to a certified pollution control facility
that is 50-percent bonus depreciation property under section 168(k)(4)
acquired by a taxpayer after May 5, 2003. This section expires on
September 8, 2003.
0
Par. 10. Section 1.1400L(b)-1T is added to read as follows:
Sec. 1.1400L(b)-1T Additional first year depreciation deduction for
qualified New York Liberty Zone property (temporary).
(a) Scope. This section provides the rules for determining the 30-
percent additional first year depreciation deduction allowable under
section 1400L(b) for qualified New York Liberty Zone property.
(b) Definitions. For purposes of section 1400L(b) and this section,
the definitions of the terms in Sec. 1.168(k)-1T(a)(2) apply and the
following definitions also apply:
(1) Building and structural components have the same meanings as
those terms are defined in Sec. 1.48-1(e).
(2) New York Liberty Zone is the area located on or south of Canal
Street, East Broadway (east of its intersection with Canal Street), or
Grand Street (east of its intersection with East Broadway) in the
Borough of Manhattan in the City of New York, New York.
(3) Nonresidential real property and residential rental property
have the same meanings as those terms are defined in section 168(e)(2).
(4) Real property is a building or its structural components, or
other tangible real property except property described in section
1245(a)(3)(B) (relating to depreciable property used as an integral
part of a specified activity or as a specified facility), section
1245(a)(3)(D) (relating to single purpose agricultural or horticultural
structure), or section 1245(a)(3)(E) (relating to a storage facility
used in connection with the distribution of petroleum or any primary
product of petroleum).
(c) Qualified New York Liberty Zone property--(1) In general.
Qualified New York Liberty Zone property is depreciable property that--
[[Page 53005]]
(i) Meets the requirements in Sec. 1.1400L(b)-1T(c)(2)
(description of property);
(ii) Meets the requirements in Sec. 1.1400L(b)-1T(c)(3)
(substantial use);
(iii) Meets the requirements in Sec. 1.1400L(b)-1T(c)(4) (original
use);
(iv) Meets the requirements in Sec. 1.1400L(b)-1T(c)(5)
(acquisition of property by purchase); and
(v) Meets the requirements in Sec. 1.1400L(b)-1T(c)(6) (placed-in-
service date).
(2) Description of qualified New York Liberty Zone property--(i) In
general. Depreciable property will meet the requirements of this
paragraph (c)(2) if the property is--
(A) Described in Sec. 1.168(k)-1T(b)(2)(i); or
(B) Nonresidential real property or residential rental property
depreciated under section 168, but only to the extent it rehabilitates
real property damaged, or replaces real property destroyed or
condemned, as a result of the terrorist attacks of September 11, 2001.
Property is treated as replacing destroyed or condemned property if, as
part of an integrated plan, the property replaces real property that is
included in a continuous area that includes real property destroyed or
condemned. For purposes of this section, real property is considered as
destroyed or condemned only if an entire building or structure was
destroyed or condemned as a result of the terrorist attacks of
September 11, 2001. Otherwise, the real property is considered damaged
real property. For example, if certain structural components (for
example, walls, floors, and plumbing fixtures) of a building are
damaged or destroyed as a result of the terrorist attacks of September
11, 2001, but the building is not destroyed or condemned, then only
costs related to replacing the damaged or destroyed structural
components qualify under this paragraph (c)(2)(i)(B).
(ii) Property not eligible for additional first year depreciation
deduction. Depreciable property will not meet the requirements of this
paragraph (c)(2) if--
(A) Section 168(k) or Sec. 1.168(k)-1T applies to the property; or
(B) The property is described in section Sec. 1.168(k)-
1T(b)(2)(ii).
(3) Substantial use. Depreciable property will meet the
requirements of this paragraph (c)(3) if substantially all of the use
of the property is in the New York Liberty Zone and is in the active
conduct of a trade or business by the taxpayer in New York Liberty
Zone. For purposes of this paragraph (c)(3), ``substantially all''
means 80 percent or more.
(4) Original use. Depreciable property will meet the requirements
of this paragraph (c)(4) if the original use of the property commences
with the taxpayer in the New York Liberty Zone after September 10,
2001. The original use rules in Sec. 1.168(k)-1T(b)(3) apply for
purposes of this paragraph (c)(4). In addition, used property will
satisfy the original use requirement in this paragraph (c)(4) so long
as the property has not been previously used within the New York
Liberty Zone.
(5) Acquisition of property by purchase--(i) In general.
Depreciable property will meet the requirements of this paragraph
(c)(5) if the property is acquired by the taxpayer by purchase (as
defined in section 179(d) and Sec. 1.179-4(c)) after September 10,
2001, but only if no written binding contract for the acquisition of
the property was in effect before September 11, 2001. For purposes of
this paragraph (c)(5), the rules in Sec. 1.168(k)-1T(b)(4)(ii)
(binding contract), the rules in Sec. 1.168(k)-1T(b)(4)(iii) (self-
constructed property), and the rules in Sec. 1.168(k)-1T(b)(4)(iv)
(disqualified transactions) apply. For purposes of the preceding
sentence, the rules in Sec. 1.168(k)-1T(b)(4)(iii) shall be applied
without regard to `and before January 1, 2005.'
(ii) Exception for certain transactions. For purposes of this
section, the new partnership of a transaction described in Sec.
1.168(k)-1T(f)(1)(ii) (technical termination of a partnership) or the
transferee of a transaction described in Sec. 1.168(k)-1T(f)(1)(iii)
(section 168(i)(7) transactions) is deemed to acquire the depreciable
property by purchase.
(6) Placed-in-service date. Depreciable property will meet the
requirements of this paragraph (c)(6) if the property is placed in
service by the taxpayer on or before December 31, 2006. However,
nonresidential real property and residential rental property described
in paragraph (c)(2)(i)(B) of this section must be placed in service by
the taxpayer on or before December 31, 2009. The rules in Sec.
1.168(k)-1T(b)(5)(ii) (relating to sale-leaseback and syndication
transactions), the rules in Sec. 1.168(k)-1T(b)(5)(iii) (relating to a
technical termination of a partnership under section 708(b)(1)(B)), and
the rules in Sec. 1.168(k)-1T(b)(5)(iv) (relating to section 168(i)(7)
transactions) apply for purposes of this paragraph (c)(6).
(d) Computation of depreciation deduction for qualified New York
Liberty Zone property. The computation of the allowable additional
first year depreciation deduction and the otherwise allowable
depreciation deduction for qualified New York Liberty Zone property is
made in accordance with the rules for qualified property in Sec.
1.168(k)-1T(d)(1)(i) and (2).
(e) Election not to deduct additional first year depreciation--(1)
In general. A taxpayer may make an election not to deduct the 30-
percent additional first year depreciation for any class of property
that is qualified New York Liberty Zone property placed in service
during the taxable year. If a taxpayer makes an election under this
paragraph (e), the election applies to all qualified New York Liberty
Zone 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 class of property.
(2) Definition of class of property. For purposes of this paragraph
(e), the term class of property means--
(i) Except for the property described in paragraphs (e)(2)(ii),
(iv), and (v) of this section, each class of property described in
section 168(e) (for example, 5-year property);
(ii) Water utility property as defined in section 168(e)(5) and
depreciated under section 168;
(iii) Computer software as defined in, and depreciated under,
section 167(f)(1) and the regulations thereunder;
(iv) Nonresidential real property as defined in paragraph (b)(3) of
this section and as described in paragraph (c)(2)(B) of this section;
or
(v) Residential rental property as defined in paragraph (b)(3) of
this section and as described in paragraph (c)(2)(B) of this section
(3) Time and manner for making election--(i) Time for making
election. Except as provided in paragraph (e)(4) of this section, the
election specified in paragraph (e)(1) 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 New York Liberty Zone property is
placed in service by the taxpayer
(ii) Manner of making election. Except as provided in paragraph
(e)(4) of this section, the election specified in paragraph (e)(1) 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 New York Liberty
Zone 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). 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.
[[Page 53006]]
(4) Special rules for 2000 or 2001 returns. For the election
specified in paragraph (e)(1) of this section for qualified New York
Liberty Zone property placed in service by the taxpayer during the
taxable year that included September 11, 2001, the taxpayer should
refer to the guidance provided by the Internal Revenue Service for the
time and manner of making this election on the 2000 or 2001 Federal tax
return for the taxable year that included September 11, 2001 (for
further guidance, see sections 3.03(3) and 4 of Rev. Proc. 2002-33
(2002-1 C.B. 963), Rev. Proc. 2003-50 (2003-29 I.R.B. 119), and Sec.
601.601(d)(2)(ii)(b) of this chapter).
(5) Failure to make election. If a taxpayer does not make the
election specified in paragraph (e)(1) of this section within the time
and in the manner prescribed in paragraph (e)(3) or (e)(4) of this
section, the amount of depreciation allowable for that property under
section 167(f)(1) or under section 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, the election specified in paragraph
(e)(1) 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).
(f) Special rules--(1) Property placed in service and disposed of
in the same taxable year. Rules similar to those provided in Sec.
1.168(k)-1T(f)(1) apply for purposes of this paragraph (f)(1).
(2) Redetermination of basis. If the unadjusted depreciable basis
(as defined in Sec. 1.168(k)-1T(a)(2)(iii)) of qualified New York
Liberty Zone property is redetermined (for example, due to contingent
purchase price or discharge of indebtedness) on or before December 31,
2006 (or on or before December 31, 2009, for nonresidential real
property and residential rental property described in paragraph
(c)(2)(i)(B) of this section), the additional first year depreciation
deduction allowable for the qualified New York Liberty Zone property is
redetermined in accordance with the rules provided in Sec. 1.168(k)-
1T(f)(2).
(3) Section 1245 and 1250 depreciation recapture. The rules
provided in Sec. 1.168(k)-1T(f)(3) apply for purposes of this
paragraph (f)(3).
(4) Coordination with section 169. Rules similar to those provided
in Sec. 1.168(k)-1T(f)(4) apply for purposes of this paragraph (f)(4).
(5) Like-kind exchanges and involuntary conversions. This paragraph
(f)(5) applies to acquired MACRS property (as defined in Sec.
1.168(k)-1T(f)(5)(ii)(A)) or acquired computer software (as defined in
Sec. 1.168(k)-1T(f)(5)(ii)(C)) that is eligible for the additional
first year depreciation deduction under section 1400L(b) at the time of
replacement provided the time of replacement is after September 10,
2001, and on or before December 31, 2006, or in the case of acquired
MACRS property or acquired computer software that is qualified New York
Liberty Zone property described in paragraph (c)(2)(i)(B) of this
section, the time of replacement is after September 10, 2001, and on or
before December 31, 2009. The rules and definitions similar to those
provided in Sec. 1.168(k)-1T(f)(5) apply for purposes of this
paragraph (f)(5).
(6) Change in use. Rules similar to those provided in Sec.
1.168(k)-1T(f)(6) apply for purposes of this paragraph (f)(6).
(7) Earnings and profits. The rule provided in Sec. 1.168(k)-
1T(f)(7) applies for purposes of this paragraph (f)(7).
(8) Section 754 election. Rules similar to those provided in Sec.
1.168(k)-1T(f)(9) apply for purposes of this paragraph (f)(8).
(g) Effective date--(1) In general. Except as provided in
paragraphs (g)(2) and (3) of this section, this section applies to
qualified New York Liberty Zone property acquired by a taxpayer after
September 10, 2001. This section expires on September 8, 2006.
(2) Technical termination of a partnership or section 168(i)(7)
transactions. If qualified New York Liberty Zone property is
transferred in a technical termination of a partnership under section
708(b)(1)(B) or in a transaction described in section 168(i)(7) for a
taxable year ending on or before September 8, 2003, and the additional
first year depreciation deduction allowable for the property was not
determined in accordance with paragraph (f)(1) of this section, the
Internal Revenue Service will allow any reasonable method of
determining the additional first year depreciation deduction allowable
for the property in the year of the transaction that is consistently
applied to the property by all parties to the transaction.
(3) Like-kind exchanges and involuntary conversions. If a taxpayer
did not claim on a federal tax return for a taxable year ending on or
before September 8, 2003, the additional first year depreciation
deduction for the remaining carryover basis of qualified New York
Liberty Zone property acquired in a transaction described in section
1031(a), (b), or (c), or in a transaction to which section 1033 applies
and the taxpayer did not make an election not to deduct the additional
first year depreciation deduction for the class of property applicable
to the remaining carryover basis, the Internal Revenue Service will
treat the taxpayer's method of not claiming the additional first year
depreciation deduction for the remaining carryover basis as a
permissible method of accounting and will treat the amount of the
additional first year depreciation deduction allowable for the
remaining carryover basis as being equal to zero, provided the taxpayer
does not claim the additional first year depreciation deduction for the
remaining carryover basis in accordance with paragraph (g)(4)(ii) of
this section.
(4) Change in method of accounting--(i) Special rules for 2000 or
2001 returns. If a taxpayer did not claim on the federal tax return for
the taxable year that included September 11, 2001, any additional first
year depreciation deduction for a class of property that is qualified
New York Liberty Zone property and did not make an election not to
deduct the additional first year depreciation deduction for that class
of property, the taxpayer should refer to the guidance provided by the
Internal Revenue Service for the time and manner of claiming the
additional first year depreciation deduction for the class of property
(for further guidance, see section 4 of Rev. Proc. 2002-33 (2002-1 C.B.
963), Rev. Proc. 2003-50 (2003-29 I.R.B. 119), and Sec.
601.601(d)(2)(ii)(b) of this chapter).
(ii) Like-kind exchanges and involuntary conversions. If a taxpayer
did not claim on a federal tax return for any taxable year ending on or
before September 8, 2003, the additional first year depreciation
deduction allowable for the remaining carryover basis of qualified New
York Liberty Zone property acquired in a transaction described in
section 1031(a), (b), or (c), or in a transaction to which section 1033
applies and the taxpayer did not make an election not to deduct the
additional first year depreciation deduction for the class of property
applicable to the remaining carryover basis, the taxpayer may claim the
additional first year depreciation deduction allowable for the
remaining carryover basis in accordance with paragraph (f)(5) of this
section either--
(A) By filing an amended return (or a qualified amended return, if
applicable (for further guidance, see Rev. Proc. 94-69 (1994-2 C.B.
804) and Sec. 601.601(d)(2)(ii)(b) of this chapter)) on
[[Page 53007]]
or before December 31, 2003, for the year of replacement and any
affected subsequent taxable year; or,
(B) By following the applicable administrative procedures issued
under Sec. 1.446-1(e)(3)(ii) for obtaining the Commissioner's
automatic consent to a change in method of accounting (for further
guidance, see Rev. Proc. 2002-9 (2002-1 C.B. 327) and Sec.
601.601(d)(2)(ii)(b) of this chapter).
Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.
Approved: August 29, 2003.
Gregory F. Jenner,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 03-22670 Filed 9-5-03; 8:45 am]
BILLING CODE 4830-01-P