In final rules (TD 9874) under IRC Section 168(k), the IRS confirmed that public utilities can claim 100% bonus depreciation for assets placed into service before January 1, 2018, for property acquired after September 27, 2017. In addition, new proposed regulations (REG-106808-19) clarify, among other things, how the bonus rules apply to components of self-constructed assets.

Background

The Tax Cuts and Jobs Act (TCJA) amended IRC Section 168(k) to allow certain businesses to write off 100% of depreciable assets if (i) they are considered qualifying property in the first year they are placed in service and (ii) those items were purchased and placed in service after September 27, 2017.

Under IRC Section 168(k)(9)(A), property acquired by public utilities is not considered qualifying property, so public utilities cannot take this deduction beginning in 2018. Questions remained, however, about whether public utilities could claim the deduction for property placed in service from September 28, 2017, through December 31, 2017.

Final regulations

The final regulations confirm that the property acquired before September 28, 2017, continues to be eligible under the old bonus rules, which allow construction projects that began before September 28, 2017, to continue to be eligible for 50%, 40%, or 30% bonus depreciation under the previous bonus depreciation regime, as applicable. The final regulations also clarify that the 100% bonus depreciation provision does not apply to public utility property placed in service by the taxpayer in any tax year beginning after December 31, 2017. Therefore, the new 100% bonus depreciation rules apply to public utilities for property acquired after September 27, 2017, and placed in service in a tax year beginning before January 1, 2018. For tax years beginning after December 31, 2017, however, public utility property is not considered qualifying property and the 100% bonus depreciation rule does not apply.

In addition, the final regulations bring back the "acquired" rule for self-constructed assets from old bonus rules (e.g., 10% test), instead of the binding contract rule in previous proposed regulations. Under the safe-harbor rule (Reg. Section 1.168(k)-2(d)(3)(ii)(B)), the acquisition date of property is the date the buyer paid or incurred more than 10% of the total cost of the property, excluding the cost of any land and preliminary activities such as planning and designing, securing financing, exploring or researching.

New proposed regulations

The proposed regulations address how the bonus rules apply to self-constructed assets. An election for components of self-constructed property where construction began before September 28, 2017, is available. This rule is similar to the "component" rule applicable to the 100% bonus rules of 2010. For the 100% bonus to apply to the components, however, the utility property must not be ineligible because it was placed in service in a tax year beginning after December 31, 2017.

The proposed regulations at Reg. Section 1.168(k)-2(b)(7)(i)(B) provide the following example:

Facts: BC uses the safe harbor test in Treas. Reg. Section 1.168(k)-1(b)(4)(iii)(B)(2) to determine when physical work of a significant nature begins for the electric generation power plant. Because the turbine that was manufactured by CD for BC is more than 10% of the total cost of the electric generation power plant, physical work of a significant nature for this plant began before September 28, 2017.

None of BC's expenditures for components of the power plant that are acquired or self-constructed after September 27, 2017, are eligible for the election specified in this paragraph (c) because the power plant is described in Section 168(k)(9)(A) and paragraph (b)(2)(ii)(F) of this section and, therefore, are not eligible for the election pursuant to paragraph (c)(2)(ii)(D) of this section. Assuming all requirements are met under Section 168(k)(2) as in effect on the day before the date of the enactment of the TCJA, the unadjusted depreciable basis of the power plant, including all components, attributable to its construction before January 1, 2020, is eligible for the 30% additional first year depreciation deduction pursuant to Section 168(k)(8).

Implications for utility companies

The rules applicable to public utilities in the final regulations are very similar to the previously proposed regulations, so many companies may have filed previous returns consistent with these rules. The clarity provided by these regulations will allow companies to review their tax returns positions taken for 2017 and 2018 to consider whether any changes are warranted. These final regulations apply to tax years that include the date these regulations are published in the Federal Register, but taxpayers may elect to apply these regulations to property placed in service after September 27, 2017. Taxpayers may elect early application of the proposed regulations as well.

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