New or Not: It’s a Bonus for Certain Partnership Transactions

A&M Tax Advisor Weekly

On August 3, 2018, the IRS released proposed regulations (REG 104397-18) on the modifications made to additional first-year depreciation deductions as provided by the Tax Cuts and Jobs Act (“TCJA”). TCJA enacted 100 percent bonus depreciation on “qualifying property” with a life of 20 years or less and placed in service after September 27, 2017, and also expanded the definition of qualifying property to include “used” property purchased in an arms-length transaction. The proposed regulations contain several significant provisions for partnerships and real estate businesses.

Key Partnership Provisions in the Proposed Bonus Depreciation Regulations

Before the TCJA, bonus depreciation was not permitted for “used” property. This meant that taxpayers could not claim bonus depreciation on property basis in many common partnership transactions. The TCJA’s expansion of bonus depreciation to include “used” property opened the door for bonus depreciation in many of those transactions.

The Proposed Regulations specifically state that bonus depreciation may be available in §743(b) basis transactions and for the certain contributing partners in a Rev. Rul. 99-5 transaction. In contrast, the Proposed Regulations provide that bonus depreciation does not apply to §734(b) basis transactions, partnership property distributions, and §704(c) remedial allocations.

Section 743(b) Basis Transactions

A basis adjustment under §743(b) is allowed where there is a transfer of a partnership interest by sale or exchange or upon the death of a partner, and the partnership has made an election under §754. The §743 basis adjustment is made with respect to the transferee partner only and is considered a partner specific basis adjustment. Thus, §743 basis is not common basis inside of the partnership. Basis created under §743(b) is allocated among partnership property pursuant to specific rules in the Code and regulations.