First-year bonus depreciation temp. regs.

• Author: Koppel, Michael D.

Temporary regulations issued in September 2003 clarify the Sec. 168(k) additional first-year depreciation rules. The Job Creation and Worker Assistance Act of 2002, Section 101(a), enacted Sec. 168(k) as 30% bonus depreciation for qualifying property placed in service after Sept. 10, 2001; the Jobs and Growth Tax Relief Reconciliation Act of 2003, Section 201(a), expanded the provision to 50% bonus depreciation for qualifying property placed in service after May 5, 2003.

The temporary regulations provide guidance in a number of areas and retract a previous Service position on the applicability of bonus depreciation to property acquired via a Sec. 1031 or 1033 exchange.

Qualifying Property

According to Temp. Regs. Sec. 1.168(k)-1T(b)(2)(i)(A), "eligible property" includes modified accelerated cost recovery system (MACRS) property with a recovery period of 20 years or less. Such property is eligible for bonus depreciation even if the taxpayer elects to depreciate it over an alternative depreciation system life that exceeds 20 years.

Original Use

Sec. 168(k)(2)(A)(ii) requires that original use begin with the taxpayer. Under Temp. Regs. Sec. 1.168(k)-1T(b)(3)(i), "original use" refers to the first use to which the property is put, regardless of how the taxpayer uses it (i.e., "new" property carries its common meaning).

Temp. Regs. Sec. 1.168(k)-1T(b)(3)(v), Example 2, provides guidance for purchasers of demonstrator automobiles. The first purchaser in the ordinary course of business is deemed the original user.

Rebuilt/reconditioned property: Under a plain reading of Sec. 168(k), the acquisition of rebuilt or reconditioned property does not meet the original-use requirement. However, when the taxpayer acquires used property, then incurs additional costs to recondition or rebuild it, Temp. Regs. Sec. 1.168(k)-1T(b)(3)(i) allows the reconditioning/ rebuilding costs (but not the used property's cost) to meet this requirement.

This rule leads to the potential determination that a self-constructed asset employing some used parts is a rebuilt property partially eligible for bonus depreciation, rather than a completely eligible self-constructed asset under Sec. 168(k)(2)(D)(i). Temp. Regs. Sec. 1.168(k)-1T(b)(3)(i) provides a safe harbor--if the used parts' costs do not exceed 20% of the property's total cost, the asset is not reconditioned or rebuilt.

Conversion to business use: According to Temp. Regs. Sec. 1.168(k)-1T(b)(3)(ii), if a taxpayer...